-----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, QUQNYxvtcEHWtp8ANFIoIxLwZIrChXsnOP2RUUJ83ly5Bsig23KaN8p6iat4reiz 0JyQqyzro1pFzUnfYBIGeA== 0000912057-96-022392.txt : 19961010 0000912057-96-022392.hdr.sgml : 19961010 ACCESSION NUMBER: 0000912057-96-022392 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19960630 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19961009 SROS: NASD 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12050 FILM NUMBER: 96641314 BUSINESS ADDRESS: STREET 1: 505 N EUCLID ST STREET 2: PO BOX 3210 CITY: ANAHEIM STATE: CA ZIP: 92803-3210 BUSINESS PHONE: 7147781005 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) SEPTEMBER 27, 1996 SAFEGUARD HEALTH ENTERPRISES, INC. -------------------------------------------------------- (Exact Name of registrant as specified in its charter) DELAWARE 0-12050 52-1528581 -------- ------- ---------- (State or other (Commission (IRS Employer jurisdiction of File Number) Identification No.) incorporation) 505 NORTH EUCLID STREET, P. O. BOX 3210, ANAHEIM, CALIFORNIA 92803-3210 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (714) 778-1005 -------------- ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS On September 27, 1996, Safeguard Health Enterprises, Inc. ("Enterprises" or the "Company"), announced that it had completed the acquisition of all the outstanding shares of both First American Dental Benefits, Inc., dba American Dental Corporation ("First American"), a privately held managed dental care company based in Dallas, Texas, and T.R.C. Agency, Inc., a Texas corporation ("T.R.C."), an affiliated marketing entity, for total consideration of approximately $23.5 Million. (Exhibit "A" attached hereto). Pursuant to the terms of the definitive Stock Purchase Agreement dated as of August 9, 1996 (Exhibit "B" attached hereto), by and among the Company, First American, James L. Davenport, D.D.S. ("Dr. Davenport"), Martin J. Rinker, D.D.S. ("Dr. Rinker"), and William N. Rees, Jr. ("Mr. Rees"), the beneficial and record owners of all of the issued and outstanding capital stock of First American (the "First American Shares"), Enterprises paid Eleven Million Nine Hundred Fifty Thousand Dollars ($11,950,000) for all of the outstanding First American Shares. The Company also paid Mr. Rees an aggregate of Fifty Thousand Dollars ($50,000) as consideration for Mr. Rees entering into a Non-Competition Agreement by and between Mr. Rees and the Company. In addition, the Company will pay Dr. Rinker and Dr. Davenport, the aggregate sum of Three Million Five Hundred Seventy-Six Thousand Dollars ($3,576,000) payable over three (3) years ($1,192,000 per year) and subject to applicable withholding, as consideration for a five (5) year Non-Competition Agreement among the Company, Dr. Davenport, and Dr. Rinker. Pursuant to the terms of the definitive First American Stock Purchase Agreement, First American, Metroplex Dental Group/Irving, L.L.P. ("Metroplex"), Dr. Davenport, and Dr. Rinker, entered into an Assignment and Assumption Agreement dated September 26, 1996, (Exhibit "C" attached hereto) whereby Metroplex assigned to First American, certain dental plan contracts. Metroplex is affiliated through common ownership with First American, in that Metroplex has historically received substantially all of its administrative services from First American, and that certain Metroplex members have received services from dental clinics operated by the owners of First American. First American provides managed dental care services through a network of approximately 490 dental care providers. First American provides managed dental care services to approximately 175,000 members in the State of Texas, adding to the Company's existing business in that state. Pursuant to the terms of the definitive Stock Purchase Agreement dated August 9, 1996 (Exhibit "D" attached hereto), by and among Enterprises, T.R.C., and Dr. Davenport and Dr. Rinker, the beneficial and record owners of all of the issued and outstanding capital stock (the "T.R.C. Shares") of T.R.C., Enterprises paid Eight Million -2- Dollars ($8,000,000) for all of the outstanding T.R.C. Shares. T.R.C. is a marketing entity affiliated with First American. Enterprises financed the acquisition of all of the First American Shares, the T.R.C. Shares, and the Non-Competition Agreements by and between Mr. Rees and the Company, and by and among Dr. Davenport, Dr. Rinker, and the Company, through a credit agreement with Bank of America National Trust and Savings Association. (Exhibit "E" attached hereto). The acquisition of First American and T.R.C. by Enterprises was subject to the Texas Department of Insurance's ("Department") approval of the Company's acquisition of First American. On September 25, 1996, the Commissioner of Insurance of the State of Texas executed an Official Order approving the acquisition of control of First American by Enterprises. (Exhibit "F" attached hereto). ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED The following financial statements of First American for the six (6) months ended June 30, 1996, and the years ended December 31, 1995, 1994, and 1993, and independent auditors' report, are filed as Exhibit "G" attached hereto: 1. Balance sheets as of June 30, 1996, and December 31, 1995, 1994, and 1993; 2. Statement of income for the six months ended June 30, 1996, and for the years ended December 31, 1995, 1994, and 1993; 3. Statement of stockholders' equity for the period ended June 30, 1996, and for the years ended December 31, 1995, 1994, and 1993; 4. Statements of cash flows for six months ended June 30, 1996, and years ended December 31, 1995, 1994, and 1993; and 5. Notes to financial statements for the six months ended June 30, 1996, and the years ended December 31, 1995, 1994, and 1993. The following financial statements of Metroplex for the six (6) months ended June 30, 1996, and the years ended December 31, 1995, 1994, and 1993, and independent auditors' report, are filed as Exhibit "H" attached hereto: 1. Balance sheets as of June 30, 1996, and December 31, 1995, 1994, and 1993; -3- 2. Statements of income for the six months ended June 30, 1996, and the years ended December 31, 1995, 1994, and 1993; 3. Statements of cash flows for the six months ended June 30, 1996, and years ended December 31, 1995, 1994, and 1993; 4. Statements of owners' equity (deficit) for the six months ended June 30, 1996, and the years ended December 31, 1995, 1994, and 1993; and 5. Notes to financial statements for the six months ended June 30, 1996, and the years ended December 31, 1995, 1994, and 1993. The following financial statements of T.R.C. for the six (6) months ended June 30, 1996, and the years ended December 31, 1995, 1994, and 1993, and independent auditors' report, are filed as Exhibit "I" attached hereto: 1. Audited balance sheets as of June 30, 1996, and December 31, 1995, 1994, and 1993; 2. Statements of income for the six months ended June 30, 1996, and the years ended December 31, 1995, 1994, and 1993; 3. Statements of stockholders' equity (deficit) for the six months ended June 30, 1996, and the years ended December 31, 1995, 1994, and 1993; 4. Statements of cash flow for the six months ended June 30, 1996, and the years ended December 31, 1995, 1994, and 1993; and 5. Notes to financial statements for the six months ended June 30, 1996, and the years December 31, 1995, 1994, and 1993. (b) PRO FORMA FINANCIAL INFORMATION The following pro forma financial statements of Enterprises are filed as Exhibit "J" and attached hereto: 1. Unaudited pro forma condensed consolidated financial statements of Enterprises as of and for the six months ended June 30, 1996, and the year ended December 31, 1995; (i) Pro forma consolidated unaudited balance sheet as of June 30, 1996; (ii) Pro forma consolidated unaudited statement of operations for the six months ended June 30, 1996; -4- (iii) Pro forma consolidated unaudited statement of operations for the year ended December 31, 1995; and (iv) Notes to pro forma consolidated unaudited financial statements. (c) EXHIBITS 1. Financial statements of First American Dental Benefits, Inc. for the six months ended June 30, 1996, the years ended December 31, 1995, 1994, and 1993, and independent auditors' report (Exhibit "G" attached hereto); 2. Financial statements of Metroplex Dental Plan for the six months ended June 30, 1996, and the years ended December 31, 1995, 1994, and 1993, and independent auditors' report (Exhibit "H" attached hereto); 3. Financial statements of T.R.C. Agency, Inc., for the six months ended June 30, 1996, and the years ended December 31, 1995, 1994, and 1993, and independent auditors' report (Exhibit "I" attached hereto); and 4. Unaudited pro forma condensed consolidated financial statements of Safeguard Health Enterprises, Inc., for the six months ended June 30, 1996, and the year ended December 31, 1995, and independent auditors' report (Exhibit "J" attached hereto). -5- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. SAFEGUARD HEALTH ENTERPRISES, INC. By: /S/ JOHN E. COX ------------------------------------- JOHN E. COX Executive Vice President and Chief Operating Officer DATE: October 9, 1996 By: /S/ RONALD I. BRENDZEL, J.D. ------------------------------------- RONALD I. BRENDZEL, J.D. Senior Vice President and Secretary -6- EXHIBIT LIST DOCUMENT EXHIBIT - -------- ------- Press Release. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Stock Purchase Agreement dated as of August 9, 1996 between First American and Enterprises [excluding schedules and exhibit](1). . . . B Assignment and Assumption Agreement [excluding schedule](2). . . . . . . . C Stock Purchase Agreement dated as of August 9, 1996 between T.R.C. and Enterprises [excluding schedules and exhibit](1). . . . . . . . D Credit Agreement with Bank of America. . . . . . . . . . . . . . . . . . . E Official Order of the Commissioner of Insurance of the State of Texas. . . F Financial Statements of First American Dental Benefits, Inc. . . . . . . . G - Balance sheets as of June 30, 1996, and December 31, 1995, 1994, and 1993; - Statement of income for the six months ended June 30, 1996, and for the years ended December 31, 1995, 1994, and 1993; - Statement of stockholders' equity for the period ended June 30, 1996, and for the years ended December 31, 1995, 1994, and 1993; - Statements of cash flows for six months ended June 30, 1996, and years ended December 31, 1995, 1994, and 1993; and - Notes to financial statements for the six months ended June 30, 1996, and the years ended December 31, 1995, 1994, and 1993. Financial Statements of Metroplex Dental Group/Irving, L.L.P.. . . . . . . H - Balance sheets as of June 30, 1996, and December 31, 1995, 1994, and 1993; - -------------------------- (1) ENTERPRISES AGREES TO FURNISH A SUPPLEMENTAL COPY OF THE SCHEDULES AND EXHIBIT TO THE SECURITIES AND EXCHANGE COMMISSION UPON REQUEST. (2) ENTERPRISES AGREES TO FURNISH A SUPPLEMENTAL COPY OF THE LIST OF CONTRACTS ASSUMED BY FIRST AMERICAN TO THE SECURITIES AND EXCHANGE COMMISSION UPON REQUEST. -7- DOCUMENT EXHIBIT - -------- ------- - Statements of income for the six months ended June 30, 1996, and the years ended December 31, 1995, 1994, and 1993; - Statements of cash flows for the six months ended June 30, 1996, and years ended December 31, 1995, 1994, and 1993; - Statements of owners' equity (deficit) for the six months ended June 30, 1996, and the years ended December 31, 1995, 1994, and 1993; and - Notes to financial statements for the six months ended June 30, 1996, and the years ended December 31, 1995, 1994, and 1993. Financial Statements of T.R.C. Agency, Inc.. . . . . . . . . . . . . . . . I - Audited balance sheets as of June 30, 1996, and December 31, 1995, 1994, and 1993; - Statements of income for the six months ended June 30, 1996, and the years ended December 31, 1995, 1994, and 1993; - Statements of stockholders' equity (deficit) for the six months ended June 30, 1996, and the years ended December 31, 1995, 1994, and 1993; - Statements of cash flow for the six months ended June 30, 1996, and the years ended December 31, 1995, 1994, and 1993; and - Notes to financial statements for the six months ended June 30, 1996, and the years December 31, 1995, 1994, and 1993. Unaudited pro forma condensed consolidated financial statements of Safeguard Health Enterprises, Inc., for the six (6) months ended June 30, 1996, and the year ended December 31, 1995, and independent auditors' report . . . . . . . . . . . . . . . . . . . . . . . J - Pro forma consolidated unaudited balance sheet as of June 30, 1996; - Pro forma consolidated unaudited statement of operations for the six months ended June 30, 1996; - Pro forma consolidated unaudited statement of operations for the year ended December 31, 1995; and - Notes to pro forma consolidated unaudited financial statements. -8- EX-99.A 2 EXHIBIT 99.A - PRESS RELEASE CONTACTS: Thomas C. Tekulve Chief Financial Officer (714) 758-4381 Gary S. Maier/Roger S. Pondel Pondel Parsons & Wilkinson (310) 207-9300 FOR IMMEDIATE RELEASE SAFEGUARD COMPLETES ACQUISITION OF DENTAL MANAGED CARE COMPANY ANAHEIM, CALIFORNIA--September 27, 1996 -- Safeguard Health Enterprises, Inc. (Nasdaq-NMS:SFGD), Anaheim, California -- today announced it has completed the acquisition of all the outstanding shares of First American Dental Benefits, Inc., dba American Dental Corporation, a privately held managed care company based in Dallas, Texas and an affiliated marketing entity, for a total value of approximately $23.5 million, consisting of both cash and bank debt. The acquisition adds approximately 175,000 members to Safeguard's existing business. The combined Texas operations being acquired currently have annualized revenues of approximately $12 million and have been profitable. "This is the first acquisition made by Safeguard, but it won't be the last." said Steven J. Baileys, D.D.S., chairman and chief executive officer of Safeguard. "We are excited about the growth opportunities afforded by American Dental. It will facilitate our reaching two major milestones - one million members and the $100 million mark in revenues - and it provides an excellent opportunity to offer Safeguard products to an expanded membership base." "Industry observers estimate the dental care industry to be currently over $43 billion, with targets of $59 billion by the year 2000. This acquisition clearly positions Safeguard to exploit the favorable demographics in our strategic market," Baileys said. "The acquisition complements our existing business in Texas. Importantly, it is in keeping with our strategy of becoming the leader in each market we serve. The marketing entity also being acquired provides Safeguard with key contracts and expertise to assist in marketing the company's new and existing products throughout the state of Texas," Baileys added. The former owners have also entered into a non-competition agreement with Safeguard which prohibits them from offering dental managed care services within Texas. Safeguard is a multifaceted specialized health care marketing company providing benefits to members in 14 states, enrolled in various managed dental and vision care programs, indemnity dental and vision programs, and life insurance products. In addition, the company provides administrative and preferred provider organization services and owns and operates 31 dental offices located throughout California. Including this acquisition, Safeguard contracts with more than 4,200 client organizations and provides benefits through nearly 14,000 contracting providers. The company's various products are sold through a network of independent agents and a direct sales force. # # # EX-99.B 3 EXHIBIT 99.B - STOCK PCHS. AGMT. 1ST AM. DENTAL STOCK PURCHASE AGREEMENT BY AND AMONG SAFEGUARD HEALTH ENTERPRISES, INC. (AS BUYER) AND FIRST AMERICAN DENTAL BENEFITS, INC. (THE COMPANY) AND JAMES L. DAVENPORT, D.D.S., MARTIN J. RINKER, D.D.S., AND WILLIAM N. REES, JR. (AS SELLING SHAREHOLDERS) DATED AS OF AUGUST 9, 1996 Stock Purchase Agreement First American Dental OA961970.201 TABLE OF CONTENTS ARTICLE I TRANSFER OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Sale of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Purchase Price and Supplemental Consideration . . . . . . . . . . . . . . . . . 1 (a) Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (b) Payment for Rees Non-Competition Agreement . . . . . . . . . . . . . . . . 1 (c) Payment for Non-Competition Agreement of Dr. Davenport and Dr. Rinker. . . 2 1.3 Payment of Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.4 Shareholders to Deliver Title and Possession. . . . . . . . . . . . . . . . . . 3 1.5 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS . . . . . 3 2.1 Organization and Qualification. . . . . . . . . . . . . . . . . . . . . . . . . 3 2.2 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.3 Voting Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.4 Authority Relative to this Agreement. . . . . . . . . . . . . . . . . . . . . . 4 2.5 No Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.6 Absence of Certain Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.7 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.8 Absence of Undisclosed Liabilities. . . . . . . . . . . . . . . . . . . . . . . 6 2.9 Consents and Approvals; No Violation. . . . . . . . . . . . . . . . . . . . . . 6 2.10 Broker's Commissions or Finder's Fees. . . . . . . . . . . . . . . . . . . . . 7 2.11 Employment and Similar Agreements. . . . . . . . . . . . . . . . . . . . . . . 7 2.12 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.13 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.14 ERISA Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 2.15 Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 2.16 Customers and Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 2.17 Customer List. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 2.18 Interests in Competitors . . . . . . . . . . . . . . . . . . . . . . . . . . .11 2.19 Properties, Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 2.20 Real Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 2.21 Permits; Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . . .11 2.22 Insurance Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 2.23 Environmental Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . .12 2.24 Banking Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 2.25 Minute Books and Stock Records.. . . . . . . . . . . . . . . . . . . . . . . .12 2.26 Consents of Non-Governmental Third Parties . . . . . . . . . . . . . . . . . .13 2.27 Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 2.28 Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 2.29 Trademarks; Tradenames . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 2.30 Transactions with Related Parties. . . . . . . . . . . . . . . . . . . . . . .13 2.31 Compliance with Insurance Laws . . . . . . . . . . . . . . . . . . . . . . . .13 2.32 Probable Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 2.33 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
i Stock Purchase Agreement First American Dental OA961970.201 2.34 Representations and Warranties True. . . . . . . . . . . . . . . . . . . . . .14 ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER. . . . . . . . . . . . . . . . . . .15 3.1 Organization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 3.2 Authority Relative to this Agreement. . . . . . . . . . . . . . . . . . . . . .15 3.3 Consent and Approvals; No Violation . . . . . . . . . . . . . . . . . . . . . .15 3.4 Broker's Commissions or Finder's Fees . . . . . . . . . . . . . . . . . . . . .16 3.5 Investment Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 3.6 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 ARTICLE IV CONDUCT OF BUSINESS BY THE COMPANY PRIOR TO CLOSING . . . . . . . . . . . . .16 4.1 Ordinary Course . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 4.2 Dividends; Changes in Stock . . . . . . . . . . . . . . . . . . . . . . . . . .16 4.3 Issuance or Repurchase of Securities. . . . . . . . . . . . . . . . . . . . . .17 4.4 Governing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 4.5 No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 4.6 No Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 4.7 No Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 4.8 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 4.9 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 4.10 Benefit Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 4.11 Additional Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 ARTICLE V ADDITIONAL COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 5.1 Noncompetition Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . .19 (a) Rees Non-Competition Agreement . . . . . . . . . . . . . . . . . . . . . .19 (b) Davenport and Rinker Non-Competition Agreements. . . . . . . . . . . . . .19 (c) Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 5.2 Earnest Money Escrow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 (a) Return to Buyer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 (b) Forfeiture to Shareholders . . . . . . . . . . . . . . . . . . . . . . . .20 5.3 Confidential Information. . . . . . . . . . . . . . . . . . . . . . . . . . . .20 (a) Nondisclosure by Shareholders. . . . . . . . . . . . . . . . . . . . . . .20 (b) Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 (c) Nondisclosure by Buyer . . . . . . . . . . . . . . . . . . . . . . . . . .21 (d) Return of Information. . . . . . . . . . . . . . . . . . . . . . . . . . .22 5.4 Governmental Filings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 5.5 Legal Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 5.6 Certain Defaults. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 5.7 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 5.8 Access to Information and Diligence Review. . . . . . . . . . . . . . . . . . .23 5.9 Additional Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 5.10 Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 5.11 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 5.12 Further Conveyances, Assurances and Cooperation. . . . . . . . . . . . . . . .28 ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PARTIES. . . . . . . . . . . . . .28 6.1 Conditions to the Obligations of Buyer, the Company and the Shareholders. . . .28 (a) Governmental Approvals . . . . . . . . . . . . . . . . . . . . . . . . . .28 (b) Legal Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 (c) Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
ii (d) Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 (e) Board and Shareholder Approval . . . . . . . . . . . . . . . . . . . . . .29 6.2 Further Conditions to the Obligations of Buyer. . . . . . . . . . . . . . . . .29 (a) Representations and Warranties . . . . . . . . . . . . . . . . . . . . . .29 (b) Performance of Obligations of Other Parties. . . . . . . . . . . . . . . .29 (c) No Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 (d) No Adverse Change. . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 (e) Spousal Consent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 (f) Third-Party Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . .30 (g) Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 (h) Non-Competition Agreements . . . . . . . . . . . . . . . . . . . . . . . .30 (i) Financial Statements Audit . . . . . . . . . . . . . . . . . . . . . . . .30 (j) Financial Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 (k) Lease of Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 (l) Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 (m) American Dental Corporation . . . . . . . . . . . . . . . . . . . . . . .31 (n) Agreement Termination. . . . . . . . . . . . . . . . . . . . . . . . . . .31 (o) Employment Arrangements. . . . . . . . . . . . . . . . . . . . . . . . . .31 (p) Payment and Release of Liens . . . . . . . . . . . . . . . . . . . . . . .31 (q) Retention of Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . .31 6.3 Further Conditions to the Obligations of the Company and the Shareholders . . .31 (a) Representations and Warranties . . . . . . . . . . . . . . . . . . . . . .31 (b) Performance of Obligations of Other Parties. . . . . . . . . . . . . . . .31 (c) Third-Party Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . .32 ARTICLE VII TERMINATION, EXTENSION AND WAIVER. . . . . . . . . . . . . . . . . . . . . .32 7.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 (a) By Mutual Consent. . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 (b) By Any Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 (c) By Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 (d) By the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 7.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 7.3 Extension; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 ARTICLE VIII INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 8.1 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 (a) Indemnification by the Shareholders. . . . . . . . . . . . . . . . . . . .33 (b) Indemnification by Buyer . . . . . . . . . . . . . . . . . . . . . . . . .35 (c) Definition of Losses . . . . . . . . . . . . . . . . . . . . . . . . . . .35 8.2 Third Party Claims Notice and Opportunity to Settle . . . . . . . . . . . . . .36 8.3 Right to Offset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37 8.4 Non-Third Party Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . .37 8.5 Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37 ARTICLE IX DISPUTE RESOLUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38 9.1 Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38 9.2 Arbitrator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38 9.3 Pre-Hearing Conference. . . . . . . . . . . . . . . . . . . . . . . . . . . . .38 9.4 Discovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38 9.5 Briefs and Hearing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38 9.6 Decision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39 9.7 Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
iii ARTICLE X GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39 10.1 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . .39 10.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39 10.3 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40 10.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40 10.5 Integration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40 10.6 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 10.7 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 10.8 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 10.9 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 10.10 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 10.11 Transfer Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
iv STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement") is entered into as of August 9, 1996, by and among SAFEGUARD HEALTH ENTERPRISES, INC., a Delaware corporation ("Buyer"), and FIRST AMERICAN DENTAL BENEFITS, INC., a Texas corporation (the "Company"), and JAMES L. DAVENPORT, D.D.S. ("Dr. Davenport"), MARTIN J. RINKER, D.D.S. ("Dr. Rinker"), and WILLIAM N. REES, JR. ("Mr. Rees"), the beneficial and record owners of all of the outstanding capital stock of the Company (each, a "Shareholder" and collectively, the "Shareholders"). RECITALS WHEREAS, the Shareholders own all of the issued and outstanding shares of capital stock (the "Shares") of the Company; and WHEREAS, the Shareholders desire to sell to Buyer, and Buyer desires to purchase from the Shareholders, the Shares of the Company on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE I TRANSFER OF SHARES 1.1 SALE OF SHARES. Subject to the terms and conditions set forth herein, at the Closing (as defined herein), the Shareholders shall sell, transfer and deliver to Buyer, and Buyer shall purchase and acquire from the Shareholders, all of the Shares of the Company, free and clear of any claims, liens, pledges, options, encumbrances, security interests, trusts or other rights or interests of any person. 1.2 PURCHASE PRICE AND SUPPLEMENTAL CONSIDERATION. (a) PURCHASE PRICE FOR SHARES. The aggregate purchase price to be paid by Buyer for the Shares of the Company, in the manner provided in SECTION 1.3, will equal Eleven Million Nine Hundred and Fifty Thousand Dollars ($11,950,000) (the "Purchase Price"). (b) PAYMENT FOR REES NON-COMPETITION AGREEMENT. Buyer shall pay Mr. Rees an aggregate of Fifty Thousand Dollars ($50,000) as consideration for Mr. Rees entering into a Non-Competition Agreement by and between Mr. Rees and Buyer Stock Purchase Agreement First American Dental OA961970.201 (the "Rees Non-Competition Agreement"). Such payment will be made at Closing in the manner set forth in SECTION 1.3. (c) PAYMENT FOR NON-COMPETITION AGREEMENT OF DR. DAVENPORT AND DR. RINKER. Buyer hereby promises to pay to Dr. Rinker and Dr. Davenport the aggregate sum of Three Million Five Hundred Seventy-Six Thousand Dollars ($3,576,000) payable over three years (the "Payout Period") ($1,192,000 per year), subject to applicable withholding, as consideration for the five-year Non-Competition Agreement to be entered among by Buyer, Dr. Davenport and Dr. Rinker (the "Davenport and Rinker Non-Competition Agreement"). These payments (the "Noncompete Payments") shall be allocated equally to Dr. Davenport and Dr. Rinker. These payments shall bear interest at a per annum rate equal to the base rate in effect from time to time of NationsBank of Texas, N.A. compounded monthly (the "Prime Rate") and principal shall be payable in arrears in equal monthly installments plus accrued interest beginning on the last day of the first month following the Closing. 1.3 PAYMENT OF PURCHASE PRICE. The Purchase Price shall be paid by Buyer to Shareholders as follows: (a) At the Closing, Buyer shall pay to Shareholders the sum of Ten Million Nine Hundred and Fifty Thousand Dollars ($10,950,000) for the Shares of the Company by a wire transfer(s) of immediately available funds in accordance with the written directions of the Shareholders. The Five Hundred Thousand Dollars ($500,000) in escrow (the "Earnest Money Escrow") with Norwest Bank Texas, N.A. (the "Escrow Agent") pursuant to that Escrow Agreement dated July 16, 1996 by and among Buyer, the Shareholders and the Company and certain other parties, including any interest thereon not previously withdrawn by Buyer, shall be released to Buyer at the Closing and, if Buyer so elects, used to pay a portion of the consideration to be paid at Closing. (b) At the Closing, Buyer shall deliver to the Escrow Agent the principal amount of One Million Dollars ($1,000,000) (the "Holdback") to be held in escrow in accordance with the terms of an Escrow Agreement in form and substance acceptable to the parties. The Holdback, plus accrued interest thereon, less any offsets, paid claims or reserves for outstanding or disputed claims, relating to this Agreement or any other agreements by or among the Buyer and certain or all of the Shareholders, shall be paid to the Shareholders on the second anniversary of the date hereof in proportion to their respective ownership interests of common stock in the Company immediately prior to the Closing Date (as defined herein). The Holdback, less offsets, paid claims or reserve for outstanding claims, shall bear interest at the Prime Rate. Any claims against the Holdback shall be made in accordance with Section 8.3 and Article IX of this Agreement. Notwithstanding the foregoing, the existence of the Holdback and any offsets against the Holdback by Buyer will not relieve the Shareholders from liability or limit their liability to Buyer for any breaches hereunder. (c) At the Closing, Buyer shall pay Mr. Rees the sum of Fifty Thousand Dollars ($50,000) as consideration for Mr. Rees entering into the Rees Non- 2 Competition Agreement, such payment to be by delivery of a certified or bank check or by wire transfer of immediately available funds in accordance with the written directions of such Shareholder. 1.4 SHAREHOLDERS TO DELIVER TITLE AND POSSESSION. At the Closing, the Shareholders shall deliver to Buyer endorsed share certificates or executed stock powers and other good and sufficient instruments of transfer as Buyer may reasonably require to vest effectively in Buyer good and valid title to the Shares of the Company, free and clear of any claims, liens, pledges, options, security interests, trusts, encumbrances or other rights or interests of any person, in accordance with the terms hereof. 1.5 CLOSING. The consummation of the transactions contemplated by this Agreement (the "Closing") shall take place on August 30, 1996, or on the fifth (5th) business day following the date on which all conditions precedent to the obligations of the parties hereunder have been satisfied or waived, whichever is the later to occur (the "Closing Date"), at the offices of Gibson, Dunn & Crutcher LLP, Jamboree Center, 4 Park Plaza, Suite 1700, Irvine, California 92614 or at such other date, time and place as may be mutually agreed upon in writing by the parties. All proceedings to take place at the Closing shall take place simultaneously, and no delivery shall be considered to have been made until all such proceedings have been completed. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS The Company, Dr. Davenport and Dr. Rinker jointly and severally represent and warrant (except with respect to the representations and warranties set forth in Sections 2.2 and 2.3, the last sentence of Section 2.4, and the second sentence of Section 2.13(f), which are made by each such Shareholder severally and not jointly), and Mr. Rees severally represents and warrants to the best of Mr. Rees' knowledge (except with respect to the representations and warranties set forth in Section 2.2, the first clause of Section 2.3, the last sentence of Section 2.4, and the second sentence of Section 2.13(f), which are made by such Shareholder without giving effect to such best knowledge qualification), to Buyer as follows: 2.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing in the State of Texas, is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the character of its properties or the nature of its business makes such qualification necessary, except in jurisdictions, if any, where the failure to be so qualified (a) would not result in a Material Adverse Change (as defined below) or (b) would not result in a breach of any of the other representations, warranties or covenants set forth in this Agreement. The Company has the requisite corporate power and authority to own, use or lease its properties and to carry on its business as it is now being conducted and as it is now proposed to be conducted. The Company has made available to Buyer a complete and correct copy of its Articles of Incorporation and Bylaws, each as amended to date, and such Articles of Incorporation and Bylaws as so delivered are in full force and effect. The Company is not in default in any material respect in the performance, observation or fulfillment of any provision of its Articles of Incorporation or 3 Bylaws. For purposes of this Agreement, a "Material Adverse Change" shall mean any event, circumstance, condition, development or occurrence causing, resulting in or having a material adverse effect on the financial condition, business, properties, prospects or results of operations of the Company. 2.2 CAPITALIZATION. The authorized capital stock of the Company consists solely of 900,000 shares of common stock, $0.01 par value, of which, 21,000 shares are issued and outstanding and 100,000 shares of Preferred Stock, par value $10.00 per share, of which, 17,850 shares are issued and outstanding. The Shares of the Company are owned beneficially and of record by the Shareholders as set forth on SCHEDULE 2.2, free and clear of any claims, liens, pledges, options, security interests, trusts, encumbrances or other rights or interests of any person. No agreement or other document grants or imposes on any of the Shares of the Company any right, preference, privilege or restriction with respect to the transaction contemplated hereby (including, without limitation, any rights of first refusal). All of the Shares of the Company have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights created by any agreement to which the Company is bound. The Shares have been issued in full compliance with all federal and state securities laws. There are no options, warrants or other rights, commitments or agreements of any character that call for the issuance of shares of capital stock or other securities of the Company or any securities, instruments or rights convertible into or exchangeable for shares of capital stock or other securities of the Company. The Shareholders have the absolute and unrestricted right, power, authority and capacity to transfer the Shares of the Company to Buyer and upon the Closing, without exception, Buyer will acquire from the Shareholders legal and beneficial ownership of, good and valid title to, and all rights to vote, the Shares of the Company, free from any charge, lien, encumbrance or adverse claim of any kind whatsoever other than those that may arise by virtue of any actions (other than the purchase of shares contemplated hereby), taken by or on behalf of Buyer or its affiliates. 2.3 VOTING AGREEMENTS. Neither the Company nor any Shareholder is a party to or subject to any proxy, agreement or understanding, nor is there, to the knowledge of the Company and the Shareholders, any agreement or understanding between any other persons, that affects or relates to the voting or giving of written consents with respect to any security of the Company or the voting by a director of the Company. 2.4 AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby on the part of the Company have been duly and validly authorized by its Board of Directors and the Shareholders, and no other corporate proceedings on the part of the Company is necessary, as a matter of law or otherwise, to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly and validly executed and delivered by the Company and the Shareholders and, assuming this Agreement constitutes a valid and binding obligation of Buyer, this Agreement constitutes a valid and binding agreement of such persons or entities, enforceable against them in accordance with its terms, except (a) as such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights, and (b) as the remedy of specific performance and injunctive and other forms of 4 equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 2.5 NO SUBSIDIARIES. The Company does not control, directly or indirectly, nor does it have any direct or indirect equity participation or other interest in, any corporation, partnership, trust or other business entity. 2.6 ABSENCE OF CERTAIN CHANGES. Except as set forth on SCHEDULE 2.6, since May 31, 1996, the Company has conducted its business only in, and has not engaged in any transaction other than according to, the ordinary and usual course of its business and, since such date, there has not been (a) any Material Adverse Change; (b) any declaration, setting aside or payment of any dividend or other distribution with respect to the capital stock of the Company; (c) any material change by the Company in accounting principles, practices or methods; (d) any labor dispute or difficulty which is reasonably likely to result in any Material Adverse Change, and to the knowledge of each of the Company and the Shareholders, no such dispute or difficulty is now threatened; (e) any material asset sold or disposed of (except inventory sold in the ordinary course of business), any material asset mortgaged, pledged or subjected to any lien, charge or other encumbrance; (f) any increase in excess of $5,000 in the compensation payable or which could become payable by the Company to its directors, officers, employees, agents, distributors, dealers or sales representatives; (g) any amendment by the Company of any employee benefit plan; (h) any issuance, transfer, sale or pledge by the Company of any shares of stock or other securities or of any commitments, options, rights or privileges under which the Company is or may become obligated to issue any shares of stock or other securities; (i) any indebtedness incurred by the Company, except such as may have been incurred in the ordinary course of business and consistent with past practice; (j) any loan made or agreed to be made by the Company, nor has the Company become liable or agreed to become liable as a guarantor with respect to any loan; (k) any waiver or release by the Company of any right of material value or any payment, direct or indirect, of any material debt, liability or other obligation; (l) any change in or amendment to the Articles of Incorporation or Bylaws of the Company; or (m) any other event or condition that has or might reasonably result in a Material Adverse Change. 2.7 FINANCIAL STATEMENTS. The audited balance sheets of the Company as of December 31, 1995 and the related statements of income and cash flow for the twelve month periods then ended (collectively, the "1995 Financial Statements") are attached hereto as SCHEDULE 2.7. The 1995 Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the period indicated (except as may be noted therein) ("GAAP"), and present fairly the financial position of the Company as of the end of such fiscal year and the results of operations and cash flows for such fiscal year in conformity with GAAP. The interim audited financial statements of the Company as of and for the six (6) months ended June 30, 1996 (also attached hereto as SCHEDULE 2.7) have been prepared in accordance with GAAP consistent with the 1995 Financial Statements, and present fairly the financial position of the Company as of the end of such period and the results of operations and cash flows for such period in conformity with GAAP, except that such interim financial statements may not contain all footnotes or other textual disclosure required by GAAP and are subject to normal recurring year-end audit adjustments. The interim financial statements for the six (6) months ended June 30, 1996 are referred to herein as the "Interim Financial 5 Statements" and the l995 Financial Statements and Interim Financial Statements are collectively referred to herein as the "Financial Statements." 2.8 ABSENCE OF UNDISCLOSED LIABILITIES. (a) Except to the extent reserved against or reflected in the balance sheet of the Company included in the Interim Financial Statements, the Company does not have any material liabilities or obligations (contingent or otherwise) that are required by GAAP to be reflected therein, and since that date the Company has not incurred any material liabilities or obligations that, had they been incurred prior to June 30, 1996, would have been required by GAAP to have been reflected in such balance sheets (except as may be noted therein), except such liabilities or obligations incurred in the ordinary and usual course of business and consistent with past practice. (b) The Company will not be liable for prepayment or other penalties in connection with the early retirement of any indebtedness for borrowed money. 2.9 CONSENTS AND APPROVALS; NO VIOLATION. The execution and delivery of this Agreement by the Company and the Shareholders, the consummation of the transactions contemplated hereby and the performance by the Company and the Shareholders of their obligations hereunder will not: (a) conflict with any provision of the Articles of Incorporation or Bylaws (or other similar charter documents) of the Company; (b) require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, except (i) the Governmental Filings (as defined in SECTION 5.4) (ii) compliance with any applicable requirements of the Securities Act of 1933; (iii) compliance with any applicable requirements of the Securities Exchange Act of 1934; (iv) compliance with any applicable state securities laws; (v) the approval of the Texas Department of Insurance; and (vi) where the failure to obtain such consents, approvals, authorizations or permits or the failure to make such filings or notifications would not result in a Material Adverse Change; (c) conflict with, result in the breach of or constitute a default (or give rise to any right of termination, cancellation or acceleration or guaranteed payments) under any of the terms, conditions or provisions of any note, lease, mortgage, license, agreement or other instrument or obligation to which the Company or any of the Shareholders is a party or by which the Company or any of its Shareholders or any of its assets may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained or which, in the aggregate, would not result in a Material Adverse Change; (d) conflict with or violate the provisions of any order, writ, injunction, judgment, decree, statute, rule or regulation applicable to the Company or any of the Shareholders; or 6 (e) result in the creation of any lien, charge or encumbrance upon any shares of capital stock or assets of the Company under any agreement or instrument to which the Company is a party or by which the Company is bound. 2.10 BROKER'S COMMISSIONS OR FINDER'S FEES. The parties acknowledge that the Company enlisted the services of Ed Reese ("Finder") to act for the Company and the Shareholders in connection with the transactions provided for in this Agreement. The Company and the Shareholders shall be solely responsible for the payment of all finder's fees or other similar fees or commissions due to Finder in connection with this Agreement. 2.11 EMPLOYMENT AND SIMILAR AGREEMENTS. Except as set forth on SCHEDULE 2.11, (a) there are no employment, severance, bonus or indemnification arrangements, agreements, understandings or plans between the Company and any director, officer or employee thereof except those indemnification provisions set forth in the Articles of Incorporation and Bylaws of the Company; (b) there are no agreements of the type described in (a) above (i) the benefits of which are contingent, or the terms of which are altered, upon the occurrence of a transaction involving the Company of the nature of any of the transactions contemplated by this Agreement, (ii) providing any term of employment or compensation guaranty not terminable at any time upon notice of thirty (30) days or less or (iii) providing severance benefits or other benefits (which are conditioned upon a change in control) after the termination of employment of such employee, regardless of the reason for such termination of employment; (c) there are no agreements or plans, any of the benefits of which will be materially increased, or the vesting of benefits of which will be materially accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement; (d) subject to general principles related to wrongful termination of employees, there are no officers or employees of the Company whose employment is not terminable at the will of the Company; (e) the Company is not obligated to compensate any consultants pursuant to any agreement or arrangement which is material to the Company; and (f) the Company is not a party to, nor is it bound by, any collective bargaining agreement or other labor agreement, nor is the Company involved in any labor discussion with any unit or group seeking to become the bargaining unit for any of its employees, nor has any such unit or group notified the Company of an intention to commence any organizational activities among the employees of the Company. True and complete copies of any agreements disclosed in SCHEDULE 2.11 have been delivered or made available to Buyer. 2.12 LITIGATION. Except as set forth on SCHEDULE 2.12, there is no claim, action or proceeding pending or, to the knowledge of the Company or the Shareholders, threatened against or relating to the Company before any court or other competent governmental or regulatory authority or body acting in an adjudicative capacity. To the knowledge of the Company and the Shareholders, there is no reasonable basis for a claim, action or proceeding against or relating to the Company which, if adversely determined, could, individually or in the aggregate, reasonably be expected to result in a Material Adverse Change with respect to the Company. Neither the Company nor any of its respective officers, directors or employees, has been permanently or temporarily enjoined by any order, judgment or decree of any court or any other governmental or regulatory authority from engaging in or continuing any conduct or practice in connection with the business, assets or properties of the Company nor, to the 7 knowledge of the Company or the Shareholders, is any officer, director or employee of the Company under investigation by any governmental or regulatory authority. Except as set forth on SCHEDULE 2.12, there is not in existence any order, judgment or decree of any court or other tribunal or other agency enjoining or requiring the Company to take any action of any kind with respect to its business, assets or properties. 2.13 TAXES. (a) DEFINITIONS. For purposes of this Agreement, the following definitions shall apply: (i) For purposes of this Section 2.13, the term "Company" shall mean, collectively, the Company and any corporation, partnership or other entity as to which the Company is liable for Taxes incurred by such entity as a transferee, or pursuant to Treasury Regulations Sections 1.1502-6, or pursuant to any other provision of federal, state, local or foreign law or regulations. (ii) The term "Tax" or "Taxes" shall mean all taxes, however, denominated, including any interest, penalties or other additions to tax that may become payable in respect thereof, imposed by any federal, state, local or foreign government or any agency or political subdivision of any such government, which taxes shall include, without limiting the generality of the foregoing, all income or profits taxes (including, but not limited to, federal income taxes and state income taxes), real property gains taxes, payroll and employee withholding taxes, unemployment insurance taxes, social security taxes, sales and use taxes, ad valorem taxes, occupation taxes, real and personal property taxes, stamp taxes, environmental taxes, transfer taxes, workers' compensation and other governmental charges, and other obligations of the same or of a similar nature to any of the foregoing, which the Company is required to pay, withhold or collect. (iii) The term "Tax Returns" shall mean all reports, estimates, declarations of estimated tax, information statements and returns, including any and all schedules or attachments thereto, relating to, or required to be filed in connection with, any Taxes, including information returns or reports with respect to backup withholding and other payments to third parties. (b) TAX RETURNS FILED AND TAXES PAID. Except as disclosed on SCHEDULE 2.13, all Tax Returns required to be filed by or on behalf of the Company have been duly filed on a timely basis and such Tax Returns are true, complete and correct. All Taxes shown to be payable on the Tax Returns or on subsequent assessments with respect thereto have been paid in full on a timely basis and no other Taxes are payable by the Company with respect to items or periods covered by such Tax Returns (whether or not shown on or reportable on such Tax Returns) or with respect to any period prior to the date of this Agreement. The Company has withheld and paid over all Taxes required to have been withheld and paid over, and complied with all information reporting and backup withholding requirements, including maintenance of required records with respect thereto, in connection with amounts paid or owing to any employee, creditor, independent 8 contractor, or other third party. There are no liens on any of the assets of the Company with respect to Taxes, other than liens for Taxes not yet due and payable or for Taxes that the Company is contesting in good faith through appropriate proceedings and for which appropriate reserves have been established. (c) TAX RETURNS FURNISHED. Buyer has been furnished by the Company true and complete copies of (i) all relevant portions of income tax examination or audit reports, statements of deficiencies, closing or other agreements received by the Company or on behalf of the Company relating to Taxes, and (ii) all federal and state income or franchise tax returns for the Company for all periods ending on and after January 1, 1991. The Company has never been a member of an affiliated group filing consolidated returns. The Company does no business in nor derives income from any state, local or foreign taxing jurisdiction other than those for which all Tax Returns have been furnished to Buyer. (d) TAX DEFICIENCIES: AUDITS, STATUTES OF LIMITATIONS. Except as specified in SCHEDULE 2.13, the Tax Returns of the Company have never been audited by a government or taxing authority, nor is any such audit in process, pending or threatened; no deficiencies exist or have been asserted or are expected to be asserted with respect to Taxes of the Company, and the Company has not received notice nor expects to receive notice that it has not filed a Tax Return or paid Taxes required to be filed or paid by it; the Company is neither a party to any action or proceeding for assessment or collection of Taxes, nor has such event been asserted or threatened against the Company or any of its assets; and no waiver or extension of any statute of limitations is in effect with respect to Taxes or Tax Returns of the Company. (e) TAX SHARING AGREEMENTS. The Company is not (nor has it ever been) a party to any tax sharing agreement and has not assumed the liability of any other person under contract. (f) TAX ELECTIONS AND SPECIAL TAX STATUS. The Company is not nor has it ever been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code and Buyer is not required to withhold tax on the purchase of the stock of Company by reason of Section 1445 of the Code. No Shareholder is a "foreign person" (as that term is defined in Section 1445 of the Code). The Company is not a "consenting corporation" under Section 341(f) of the Code. The Company has not entered into any compensatory agreements with respect to the performance of services which payment thereunder would result in a nondeductible expense pursuant to Section 280G of the Code or an excise tax to the recipient of such payment pursuant to Section 4999 of the Code. The Company has not agreed, nor is it required to make, any adjustment under Code Section 481(a) by reason of a change in accounting method or otherwise. (g) TAX BASIS AND TAX ATTRIBUTES. The disclosure schedules and other books and records of the Company furnished to Buyer contain accurate and complete descriptions of the Company's basis in its assets, current and accumulated earnings and 9 profits, tax carryovers, and tax elections. The Company has no net operating losses or other tax attributes presently subject to limitation under Code Sections 382, 383, or 384. 2.14 ERISA PLANS. Set forth on SCHEDULE 2.14 is a true and complete list of each employee pension benefit plan, program, agreement or arrangement ("Plan") maintained or contributed to by the Company which is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), if any. The Plans conform in all material respects to, and their administration is in conformity in all material respects with, all applicable federal laws. There are no threatened or pending claims by or on behalf of any Plan, by or on behalf of any employees covered under any Plan, or otherwise involving any Plan, that allege a breach of fiduciary duties or violation of other applicable state or federal law, nor is there, to the knowledge of the Company and the Shareholders, any basis for such a claim. 2.15 CONTRACTS. Set forth on SCHEDULE 2.15 is a true and complete list of (a) each customer contract, whether written or oral, between each of the Company and any party to whom the Company provides goods or services; and (b) each contract, whether written or oral, between each of the Company and any party to whom the Company is obligated to make any payments. The contracts and agreements that are required to be identified in SCHEDULE 2.15 are hereinafter referred to as the "Contracts." The Company has delivered to Buyer (i) with respect to the provider and group contracts of the Company, a standard form of each; and (ii) true and complete written summaries of each oral Contract. The Company has made available to Buyer true and complete copies of each written Contract. Except as set forth on SCHEDULE 2.15: (i) Each of the Contracts is a valid, binding and enforceable agreement of the Company and, to the knowledge of the Company and the Shareholders, will, subject to the satisfaction of the conditions in ARTICLE VI, continue to be valid, binding and enforceable immediately after the Closing; (ii) As of the date hereof, the Company and the Shareholders have no reason to believe that the Company will not be able to fulfill in all material respects all of its obligations under the Contracts that remain to be performed after the date hereof; (iii) To the knowledge of the Company and the Shareholders, there has not occurred any material default (or event which upon provision of notice or lapse of time or both would become such a default) under any of the material Contracts on the part of the Company; and (iv) The Contracts are all of the agreements, promissory notes, contracts and instruments (except employment agreements, which are set forth on SCHEDULE 2.11) that are material to the Company or its business. 2.16 CUSTOMERS AND SALES. Set forth on SCHEDULE 2.16 is a true and complete list of the nineteen (19) largest customers of the Company, together with summaries of the revenues received from such customers during the past three (3) most recent calendar years. Except for the contract between the Company and the Employees Retirement System of Texas effective May 1, 1992 (the "ERS Contract"), none of such customers has given notice to the 10 Company of an intention to cancel, fail to renew or otherwise terminate or materially impair its business relationship with the Company and neither the Company nor its Shareholders have any knowledge of any event that would precipitate the impairment, cancellation or termination of, or the failure to renew, or entitle any such customer to terminate, such business relationship. 2.17 CUSTOMER LIST. The Company has taken all reasonable security measures to protect the secrecy, confidentiality and value of its customer lists. Employees and any other person who, either alone or in concert with others, have knowledge of or access to the customer list, have been put on notice and, if appropriate, have entered into agreements that the customer list is proprietary and not to be divulged or misused. 2.18 INTERESTS IN COMPETITORS. Except as identified in SCHEDULE 2.18, to the knowledge of the Company and the Shareholders, none of the Shareholders, nor any employees, spouses or children of them, has any direct or indirect interest in any competitor, supplier or customer of the Company or in any person or firm from whom or to whom the Company leases any real or personal property, or in any other person with whom the Company is doing business. 2.19 PROPERTIES, LIENS. Except for statutory liens (including mechanics and materialmen's liens) and liens for current taxes not yet delinquent, the Company owns, free and clear of any liens, claims, charges, options or other encumbrances, all of its tangible and intangible property, real and personal, whether or not reflected in the Interim Financial Statements (except property sold or disposed of in the ordinary course of business since December 31, 1995) and all such property acquired since such date that is necessary to conduct its business as it is now being conducted, and to the knowledge of the Company and the Shareholders, there has not been any violation of any law, regulation or ordinance relating to its properties or its business that may reasonably be expected to result in a Material Adverse Change. All plants, structures, equipment, furniture and automobiles owned or leased by the Company and material to the operation of its business are in satisfactory condition (ordinary wear and tear excepted) and repair for the requirements of its business as now being conducted. There are no proceedings affecting any of such properties pending or, to the knowledge of the Company or the Shareholders, threatened which may reasonably be expected to curtail, materially and adversely, the use of such property for the purpose for which it was acquired or the purpose for which it is now used. 2.20 REAL PROPERTY. Set forth on SCHEDULE 2.20 is a complete list of all real property owned and/or leased by the Company, as so designated therein (the "Real Property"). Except as indicated in SCHEDULE 2.20, all leases, easements and other real property interests held by the Company are valid and subsisting and there does not exist any default thereunder or event that with notice or lapse of time, or both, would constitute a default under any of such leases. 2.21 PERMITS; COMPLIANCE WITH LAWS. Except as shown in SCHEDULE 2.21, the Company has all necessary franchises, authorizations, approvals, orders, consents, licenses, certificates, permits, registrations, qualifications or other rights and privileges, including without limitation certificates of authority from the Texas Department of Insurance ("Certificates of Authority") (collectively "Permits"), necessary to permit it to own its properties and to conduct its business as the same are presently conducted and all such Permits are in full force and effect and valid. Except as shown in SCHEDULE 2.21, no Permit is subject to termination as a result of the 11 execution of this Agreement or consummation of the transaction contemplated hereby. Except as shown in such Schedule, the Company is in compliance with all applicable statutes, ordinances, orders, rules and regulations promulgated by any federal, state, municipal or other governmental authority which apply to the conduct of its business. Except as disclosed on SCHEDULE 2.21, since January 1, 1992, the Company has not ever entered into or been subject to any judgment, consent decree, compliance order or administrative order with respect to any environmental or health and safety law or received any request for information, notice, demand letter, administrative or demand letter, administrative inquiry or formal or informal complaint or claim with respect to any environmental or health and safety matter or the enforcement of any such law. 2.22 INSURANCE POLICIES. Set forth on SCHEDULE 2.22 is a true and correct list of all insurance policies of any nature whatsoever maintained by the Company. Such policies are in full force and effect through the Closing Date and, except as otherwise set forth on SCHEDULE 2.22, such policies, or other policies covering the same risks, have been in full force and effect, without gaps, continuously for the past five (5) years. Except as disclosed on SCHEDULE 2.22, there are no claims pending under any of such policies. Copies of all such policies have been made available to Buyer for its inspection. 2.23 ENVIRONMENTAL LIABILITY. The business of the Company has been and is now operated in material compliance with all federal, state and local environmental protection, occupational, health and safety or similar laws, ordinances, restrictions, licenses, rules, regulations and permit conditions, including, but not limited to, the Federal Water Pollution Control Act, Resource Conservation & Recovery Act, Clean Air Act, Comprehensive Environmental Response, Compensation and Liability Act, Emergency Planning and Community Right to Know, and Occupational Safety and Health Act, each as amended ("Environmental Laws"). 2.24 BANKING FACILITIES. Set forth on SCHEDULE 2.24 is a true and complete list of: (a) Each bank, savings and loan or other institution in which the Company has a deposit, custodial, trust or similar account or safety deposit or lock box account and the numbers and types of the accounts or safety deposit boxes maintained by the Company at such financial institutions; and (b) The names of all persons authorized to draw on each such account or to have access to any such safety deposit or lock box facility, together with a description of the authority (and conditions thereof, if any) of each such person with respect thereto. 2.25 MINUTE BOOKS AND STOCK RECORDS. The Company has delivered or made available to Buyer true, correct and complete copies of (a) the minute books of the Company containing all records required to be set forth of all proceedings, consents, actions, and meetings of the shareholders and Board of Directors of the Company, including minutes of meetings for committees of the Board; and (b) all stock record books of the Company setting forth all transfers of capital stock. 12 2.26 CONSENTS OF NON-GOVERNMENTAL THIRD PARTIES. No material consent, waiver or approval of any non-governmental third party is necessary for the consummation by the Company or the Shareholders of the transactions contemplated hereby. 2.27 ACCOUNTS RECEIVABLE. All accounts receivable of the Company shown on the Interim Financial Statements and all accounts receivable of the Company created after June 30, 1996 up to the date hereof arose from valid transactions in the ordinary course of business and such accounts receivable are (except to the extent of the reserves thereon) collectible in the ordinary course of business. 2.28 INVENTORY. The inventory of the Company consists of supplies that are merchantable and fit for the purpose for which they were procured, and none are damaged or defective in any manner. No inventory of the Company has been pledged as collateral. 2.29 TRADEMARKS; TRADENAMES. Except for the name of the Company and the name "American Dental Corporation", there are no trademarks, trade names, service marks or copyrights owned by the Company. The Company has not infringed, nor is it now infringing, on any trade name, trademark, service mark, or copyright belonging to any other person, firm or business. Except as set forth in the Contracts, the Company is not a party to any license, agreement or arrangement, with respect to any trademarks, servicemarks, trade names, or applications for them, or any copyrights. The Company has the right to sell or assign to Buyer the name "American Dental Corporation." The Shareholders hereby grant to Buyer the exclusive right in perpetuity to use the name of the Company and the name "American Dental Corporation" and all derivations thereof. The Shareholders and the Company covenant that they have not granted and will not grant to any other person, firm or corporation the right to use, and will not after the Closing use, such names as part of the corporate or firm name of any other firm, entity, corporation or business. Notwithstanding the foregoing, the use of the name "American Dental Network, Inc." shall remain the exclusive property of American Dental Network, Inc. and Dr. Davenport and Dr. Rinker to be used in connection with their national PPO business. 2.30 TRANSACTIONS WITH RELATED PARTIES. Except as set forth in SCHEDULE 2.30 hereto, there are no loans, leases or other continuing transactions between the Company and any present or former stockholder, director or officer of the Company, or any member of such officer's, director's or stockholder's immediate family, or any business organization controlled by such officer, director or stockholder or his or her immediate family. Except as set forth in SCHEDULE 2.30, no stockholder, director or officer of the Company, or any of the respective spouses or immediate family members, owns directly or indirectly on an individual or joint basis any material interest in, or serves as an officer or director or in another similar capacity of, any competitor or supplier of the Company. 2.31 COMPLIANCE WITH INSURANCE LAWS. Without limiting the representations and warranties contained elsewhere in this Agreement, except as set forth in SCHEDULE 2.31: (a) The Company has since January 1, 1992, made all reports required under applicable insurance statutes. SCHEDULE 2.31 sets forth the licenses held by the Company under all applicable insurance or other similar laws. Other than the licenses 13 listed in SCHEDULE 2.31, the Company is not required to hold any other license, permit or authorization under the insurance laws of any state other than the State of Texas to conduct its business as presently conducted. The Company has all other necessary Permits of and from all insurance regulatory authorities to conduct its business as presently conducted. (b) The dental plan products offered and sold by the Company have been and are offered and sold in compliance with the requirements of all relevant laws and regulations, in each case, and the Company has not received any notification from any insurance regulatory authority to the effect that any additional Permit is needed to be obtained by it. Except as disclosed on SCHEDULE 2.31, the Company has not since January 1, 1992, ever, entered into or been subject to any judgment, consent decree, compliance order or administrative order other than any issued in the ordinary course of business with respect to any insurance or other similar law or, other than in the ordinary course of business, received any request for information, notice, demand letter, administrative inquiry or formal or informal complaint or claim with respect to any insurance or other similar law or the enforcement of any such law. (c) Since January 1, 1992, the Company has not failed to comply with any applicable statute, ordinance, order, rule or regulation, or failed to obtain any Permit in the State of Texas, or, to the best knowledge of the Company, in any jurisdiction other than the State of Texas in which the Company is conducting or has prior to the date hereof conducted any activities including without limitation activities relating to the offer and sale of dental care products, plans or services, the recruitment of dentists or dental offices in connection with the offer and sale of such products, plans or services, the marketing of any such products plans or services to potential purchasers thereof or subscribers thereto, lobbying efforts or similar activities, or any joint venture with any other party relating to the foregoing, except in each case where the failure to comply or obtain any Permit (individually or in the aggregate) could not reasonably be expected to result in a Material Adverse Change. 2.32 PROBABLE SUCCESS. No Shareholder makes any representations or warranties to Buyer regarding the probable success or profitability of the business of the Company, provided that the foregoing statement shall not limit or modify any representation, warranty, covenant, or agreement of the Company or the Shareholders in this Agreement or in any certificate, instrument, or document delivered pursuant hereto or in connection herewith. 2.33 FULL DISCLOSURE. None of the representations and warranties made by the Company or the Shareholders, or made in any certificate or memorandum furnished or to be furnished by any of them or on their behalf, contains or will contain any untrue statement of a material fact, or omits to state any material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading. 2.34 REPRESENTATIONS AND WARRANTIES TRUE. All representations and warranties of the Company and the Shareholders set forth in this Agreement and in any written statements delivered to Buyer by the Company or any Shareholder will also be true and correct as 14 of the Closing Date as if made on that date (except to the extent such representations or warranties speak to a particular date). ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to the Company and the Shareholders as follows: 3.1 ORGANIZATION. Buyer is a corporation duly organized, validly existing and in good standing in the State of Delaware, is duly qualified to do business as a foreign corporation and is in good standing in the State of California. Buyer has the requisite corporate power to own, use or lease its properties and to carry on its business as it is now being conducted. Buyer has made available to the Company a complete and correct copy of its Certificate of Incorporation and Bylaws, each as amended to date, and Buyer's Certificate of Incorporation and Bylaws as so delivered are in full force and effect. Buyer is not in default in any material respect in the performance, observation or fulfillment of any provision of its Certificate of Incorporation or Bylaws. 3.2 AUTHORITY RELATIVE TO THIS AGREEMENT. Buyer has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby on the part of Buyer have been duly and validly authorized by the Board of Directors of Buyer, and no other corporate proceedings on the part of Buyer are necessary, as a matter of law or otherwise, to authorize this agreement or to consummate the transactions so contemplated. This Agreement has been duly and validly executed and delivered by Buyer and, assuming this Agreement constitutes a valid and binding obligation of the Company and the Shareholders, this Agreement constitutes a valid and binding agreement of Buyer, enforceable against it in accordance with its terms, except (a) as such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights, and (b) as the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 3.3 CONSENT AND APPROVALS; NO VIOLATION. The execution and delivery of this Agreement by Buyer, the consummation of the transactions contemplated hereby and the performance by Buyer of its obligations hereunder, will not: (a) conflict with any provision of the Certificate of Incorporation or Bylaws of Buyer; (b) require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, except (i) the filing of the Governmental Filings (as defined in SECTION 5.4) and (ii) where the failure to obtain such consents, approvals, authorizations or permits or the failure to make such filings or 15 notifications would not have a material adverse effect on the financial condition, business, properties or results of operations of Buyer; or (c) conflict with or violate the provisions of any order, writ, injunction, judgment, decree, statute, rule or regulation applicable to Buyer, in such a manner as to result in a material adverse effect on the financial condition, business, properties or results of operations of Buyer. 3.4 BROKER'S COMMISSIONS OR FINDER'S FEES. No person or entity has acted for Buyer in connection with the transactions provided for in this Agreement in any way that would entitle such person to, and no person or entity is entitled to, receive from Buyer any broker's commissions or finder's fees (or other similar fees or commissions) in connection with this Agreement. 3.5 INVESTMENT INTENT. Buyer is acquiring the Shares for its own account for investment and not with a view to, or for sale or other disposition in connection with, any distribution of all or any part thereof, except in compliance with applicable federal and state securities laws. 3.6 LEGAL PROCEEDINGS. There are no legal proceedings pending or, to the best knowledge of Buyer, threatened seeking to restrain, prohibit, or obtain damages or other relief in connection with this Agreement or the transactions contemplated hereby. ARTICLE IV CONDUCT OF BUSINESS BY THE COMPANY PRIOR TO CLOSING From the date of this Agreement and until the Closing Date or the earlier termination of this Agreement, the Company and Shareholders agree (except as expressly contemplated by this Agreement or to the extent that Buyer shall otherwise consent in writing) as follows: 4.1 ORDINARY COURSE. The Company shall carry on its business in the usual, regular and ordinary course, in substantially the same manner as heretofore conducted, and shall use all reasonable efforts consistent with past practice and policies to preserve intact its present business organization, keep available the services of its present officers and key employees (other than employees terminated for cause) and preserve its relationships with customers, suppliers, lessors, lessees and others having business dealings with it to the end that its goodwill and ongoing business shall be unimpaired at the Closing Date. The Company will not adopt any method of accounting that is inconsistent with generally accepted accounting principles. 4.2 DIVIDENDS; CHANGES IN STOCK. The Company shall not (a) declare or pay any dividends on or make other distributions in respect of any Shares, or (b) split, combine or reclassify any Shares or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Shares. 16 4.3 ISSUANCE OR REPURCHASE OF SECURITIES. Except as otherwise expressly contemplated by this Agreement, the Company shall not issue, pledge, deliver, sell, or repurchase any shares of its capital stock of any class, or any options, warrants or other rights exercisable for or securities convertible into or exchangeable for, any such shares. 4.4 GOVERNING DOCUMENTS. The Company shall not adopt any amendment to its Articles of Incorporation or Bylaws. 4.5 NO SOLICITATION. (a) Until the closing of the transaction contemplated hereby or until this Agreement is terminated, neither the Company nor any Shareholder shall directly or indirectly, nor shall any such party authorize or permit any director, officer, employee, stockholder, investment banker, finder, attorney, accountant or other agent or representative to, solicit or encourage submission of any proposal or offer, or participate or cooperate in any discussions or negotiations, or enter into any letter of intent, agreement in principle or other agreement, oral or written, concerning any merger, sale of substantial assets, business combination, joint venture, sale or purchase of shares of capital stock or similar transaction involving the Company (any such proposal or offer being hereinafter referred to as an "Acquisition Proposal"). Notwithstanding the foregoing, in the event this Agreement is terminated, Mr. Rees shall be entitled to sell his interest in the Company. (b) The Company and the Shareholders shall promptly notify Buyer in writing if any such Acquisition Proposal is made, and shall in any such notice, set forth in reasonable detail the identity of the third party, the terms and conditions of any such Proposal and any other information requested of it by the third party or in connection therewith. (c) If (i) Section 4.5(a) of this Agreement is breached, and (ii) on or before July 31, 1997, either the Company and/or the Shareholders consummate an Acquisition Proposal, then the Company and its Shareholders shall pay Buyer a break-up fee in the aggregate amount of Five Hundred Thousand Dollars ($500,000) and reimburse Buyer for any and all reasonable expenses incurred by it in connection with the transactions contemplated hereby. The Company and each of the Shareholders shall be jointly and severally liable for the payment of any such fee. 4.6 NO ACQUISITIONS. The Company shall not acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire or agree to acquire any capital or other assets which are material, individually or in the aggregate, to the Company. 4.7 NO DISPOSITIONS. Except for the sale of inventory in the ordinary course of business and other than pursuant to the requirements of existing Contracts, the Company shall not 17 sell, lease or otherwise dispose of any assets which are material, individually or in the aggregate, to the Company. 4.8 INDEBTEDNESS. (a) The Company shall not incur, become subject to, or agree to incur or become subject to, any obligation or liability (absolute or contingent), except current liabilities incurred, and obligations under contracts entered into, in the ordinary course of business consistent with prior practice, and provided specifically that the Company shall not enter into any material lease or extension of any material lease with respect to any real or personal property or issue or sell, or guaranty the repayment of; any debt securities. (b) The Company shall not pay or be liable for prepayment or other penalties in connection with the early retirement of any of the Company's indebtedness for borrowed money. 4.9 EMPLOYEES. Except as expressly contemplated by this Agreement, the Company shall not make any change in the compensation payable, or to become payable, to any of its officers, directors, employees, agents or consultants, enter into or amend any employment, severance, termination or other agreement; make any loans to any of its officers, directors, employees agents or consultants; or make any change in its existing borrowing or lending arrangements for or on behalf of any of such persons, whether contingent on consummation of the transactions contemplated by this Agreement or otherwise. 4.10 BENEFIT PLANS. The Company shall not (a) pay, agree to pay or make any accrual or arrangement for payment of any pension, retirement allowance or other employee benefit pursuant to any existing plan, agreement or arrangement to any officer, director or employee except in the ordinary course of business and consistent with past practice or as permitted by this Agreement; (b) pay or agree to pay or make any accrual or arrangement for payment to any employees of the Company of any amount relating to unused vacation days; (c) commit itself to adopt or pay, grant, issue or accrue salary or benefits pursuant to any additional pension, profit-sharing, bonus, extra compensation, incentive, deferred compensation, stock purchase, stock option, stock appreciation right, group insurance, severance pay, retirement or other employee benefit plan, agreement or arrangement, or any employment or consulting agreement with or for the benefit of any director, officer, employee, agent or consultant, whether past or present; or (d) amend in any material respect any such existing plan, agreement or arrangement. 4.11 ADDITIONAL MATTERS. The Company shall not: (a) enter into, amend or terminate any agreements, commitments or contracts which, individually or in the aggregate, are material to the financial condition or results of operations of the Company; 18 (b) discharge or satisfy any lien or encumbrance or payment of any obligation or liability (absolute or contingent) other than current liabilities in the ordinary course of business; (c) cancel or agree to cancel any material debts or claims, except in each case in the ordinary course of business; (d) waive any rights of substantial value; (e) otherwise make any material change in the conduct of the business or operations of the Company; (f) settle any tax assessment, litigation or other claims, relinquish any material contract right or make any equity investments in third parties; or (g) agree in writing or otherwise to take any of the foregoing actions or any action which would constitute a Material Adverse Change or make any of the representations and warranties of the Company set forth in this Agreement untrue or incorrect in any material respect. ARTICLE V ADDITIONAL COVENANTS 5.1 NON-COMPETITION AGREEMENTS. (a) REES NON-COMPETITION AGREEMENT. Simultaneously with the Closing, Buyer and Mr. Rees shall enter into the Rees Non-Competition Agreement, such Agreement to be for a term of five (5) years. (b) DAVENPORT AND RINKER NON-COMPETITION AGREEMENT. Simultaneously with the Closing, Buyer and Dr. Davenport and Dr. Rinker shall enter into the Davenport and Rinker Non-Competition Agreement. (c) DEFAULT. In the event of a default by Buyer for nonpayment under the Davenport and Rinker Non-Competition Agreement contemplated by Section 5.1(b) hereof, uncured for a period of ten (10) days after notice is given in accordance with the provisions of SECTION 10.2 hereof, such Non-Competition Agreement shall automatically terminate and be of no further force or effect and all remaining Noncompete Payments thereunder shall automatically accelerate and be due and payable in full without any further notice of any kind whatsoever (unless the nonpayment occurs due to a violation by the Shareholder(s) under the following sentences). In the event of a violation by Dr. Rinker or Dr. Davenport of the provisions of such Non-Competition Agreement during the Payout Period, any amounts due the violating Shareholder under the Davenport and Rinker Non-Competition Agreement would be forfeited by such Shareholder. In the event of a violation of such Non-Competition Agreement after the Payout Period but prior to the end of the five year non-compete period, the violating Shareholder or Shareholders would pay Buyer One Million Dollars ($1,000,000) in the aggregate as liquidated 19 damages. Any disputed violation or default shall be determined by a final arbitration award in accordance with the provisions of Section IX hereof (Dispute Resolution). 5.2 EARNEST MONEY ESCROW. The Shareholders acknowledge that the Earnest Money Escrow amount is $500,000. (a) RETURN TO BUYER. The Earnest Money Escrow shall be returned to Buyer, if prior to the Closing, the proposed transaction is abandoned by mutual consent of the parties hereto, or this Agreement shall have been terminated in accordance with its terms, or the Shareholders shall terminate negotiations and withdraw from the proposed acquisition for any reason whatsoever other than because of a reason specified in Section 5.2 (b) below or Buyer shall terminate negotiations and withdraw from the proposed transaction because of (i) a failure by the Shareholders to perform in any material respect any of their obligations under this Agreement without a prior breach by Buyer, (ii) the failure by the Shareholders to negotiate in good faith with Buyer regarding the proposed acquisition, (iii) the discovery by Buyer that the Shareholders have made a material misrepresentation of fact regarding the Company, or its business, assets, properties, liabilities, or financial condition; (iv) the occurrence or threatened occurrence of a material adverse change after the date hereof in the business, assets, properties, liabilities, or financial condition of the Company, (v) the issuance by a court or governmental agency of competent jurisdiction of an injunction, writ, or temporary restraining order or any other order of any nature directing that the proposed acquisition not be consummated or the institution or threatened institution of any action, suit, or proceeding by or before any court or governmental body in which it is or may be sought to prohibit, substantially delay, or rescind the acquisition contemplated hereby, or to limit in any way Buyer's right to control the Company or any aspect of its business, or to obtain award of damages in connection with the proposed acquisition, or (vi) notice to any of the parties hereto from a federal or state governmental authority or agency that governmental permits or licenses materially necessary to the continuing operation of the Company (and which cannot be obtained by direct application in a reasonable period of time after the Closing Date for consummation of the proposed acquisition), cannot be transferred to Buyer by the Company. (b) FORFEITURE TO SHAREHOLDERS. The $500,000 Earnest Money Escrow shall be forfeited to the Shareholders as liquidated damages, if prior to the Closing, the Shareholders shall terminate negotiations and withdraw from the proposed acquisition because of (i) a material breach or default as described in Section 7.1(d) (other than a breach of default arising as a result of a material breach or default as described in Section 7.1(c)); (ii) the failure by Buyer to negotiate in good faith with the Shareholders regarding the proposed acquisition; or (iii) the termination of the acquisition contemplated hereby due to the failure of Buyer to obtain financing or the failure of Buyer's Board of Directors to approve a definitive agreement reached by the officers of the Buyer after negotiations in good faith by the parties. 5.3 CONFIDENTIAL INFORMATION. (a) NONDISCLOSURE BY SHAREHOLDERS. The Shareholders recognize and acknowledge that they have in the past, currently have, and in the future may possibly have, access to certain confidential information of the Company, such as customer lists, 20 specific information relating to the special needs of particular customers (including knowledge of what products they are using and are likely to use in the future), sales and financial records and related data (including pricing information), information and specifications relating to products proposed by the Company, knowledge of the Company's sales and marketing techniques, and information regarding vendors and suppliers of the Company. Each of the Shareholders agrees that from and after the Closing Date it will not use such confidential information or disclose such confidential information to any person or entity for any purpose or reason whatsoever, except to authorized representatives of Buyer, unless such information becomes known to the public generally through no fault of the Company or the Shareholders, or unless the Shareholders are required by law to disclose such information. If any Shareholder is requested to provide such information pursuant to requirements of applicable law, he shall notify Buyer as promptly as possible and shall allow Buyer the opportunity to oppose such request. In the event of a breach or threatened breach by the Company or a Shareholder of the provisions of this Section, Buyer shall be entitled to an injunction restraining the Company or Shareholder from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting Buyer from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. (b) REMEDIES. The Shareholders acknowledge and agree that, because the legal remedies of Buyer may be inadequate in the event of a breach of any of the covenants set forth in this Section, Buyer may, in its discretion and in addition to obtaining any other remedy or relief available to it (including, without limitation, damages at law), enforce the provisions of this Section by injunction and other equitable relief. (c) NONDISCLOSURE BY BUYER. Buyer agrees that, unless and until the Closing has been consummated, all Confidential Information (as defined below) shall be kept confidential by Buyer as required by this subsection (c); provided, however, that (i) any of such Confidential Information may be disclosed to such directors, officers, employees, and authorized representatives of Buyer (collectively, for purposes of this Section, "Buyer Representatives") as need to know such information for the purpose of evaluating the transactions contemplated hereby (it being understood that such Buyer Representatives shall be informed by Buyer of the confidential nature of such information and shall be required to treat such information confidentially), (ii) any disclosure of Confidential Information may be made to the extent to which the Company and the Shareholders consent in writing, (iii) Confidential Information may be disclosed by Buyer or any Buyer Representative, to the extent that, in the opinion of counsel, Buyer or such Buyer Representative is legally compelled to do so, provided that, prior to making such disclosure and if there is time to do so, Buyer or such Buyer Representative, as the case may be, advises and consults with the Company and the Shareholders regarding such disclosure and provided further that Buyer or such Buyer Representative, as the case may be, discloses only that portion of the Confidential Information as is legally required, and (iv) any of such Confidential Information may be disclosed to any banks or financial institutions or other prospective investors who agree in writing to comply with the provisions of this Section. Buyer agrees that none of the Confidential Information will be used for any purpose other than in connection with the transactions contemplated hereby. 21 The term "Confidential Information", as used herein, means all information obtained by or on behalf of Buyer from the Shareholders or the Company pursuant to this Section and all similar information obtained from the Company or the Shareholders by or on behalf of Buyer prior to the date of this Agreement, other than information which (i) was or becomes generally available to the public other than as a result of disclosure by Buyer or any Buyer Representative, (ii) was or becomes available to Buyer on a nonconfidential basis prior to disclosure to Buyer by the Shareholders or the Company or their respective representatives, or (iii) was or becomes available to Buyer from a source other than the Shareholders or the Company and their respective representatives, provided that such source is not known by Buyer to be bound by a confidentiality agreement with the Shareholders or the Company. The agreement contained in this Section 5.3(c) shall terminate upon the Closing. (d) RETURN OF INFORMATION. If this Agreement is terminated, Buyer shall promptly return or destroy, and shall use its reasonable best efforts to cause all Buyer Representatives to promptly return or destroy, all Confidential Information to the Company without retaining any copies thereof, provided that such portion of the Confidential Information as consists of notes, compilations, analyses, reports, or other documents prepared by Buyer or Buyer Representatives shall be destroyed. 5.4 GOVERNMENTAL FILINGS. Each of Buyer, the Company and the Shareholders agrees to make as promptly as practicable all filings necessary under any applicable federal, state, local and foreign laws and to obtain any required regulatory approvals, clearances or expirations of waiting periods in connection with the transactions contemplated by this Agreement (all such filings required to be made as provided herein are referred to herein collectively as the "Governmental Filings"). Each party shall use its best efforts, and cause its counsel to use their best efforts, to cooperate with the other parties in preparing their respective Governmental Filings and in obtaining all required regulatory approvals, clearances and expirations of waiting periods. 5.5 LEGAL CONDITIONS. Each of Buyer, the Company and the Shareholders will take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on such party with respect to the consummation of the transactions contemplated by this Agreement and will promptly cooperate with and furnish information to such other party or parties in connection with any such requirements as may be imposed upon such other party or parties in connection with the consummation of the transactions contemplated by this Agreement. 5.6 CERTAIN DEFAULTS. The Company will give prompt notice to Buyer of (a) any notice of default received by it subsequent to the date of this Agreement and prior to the Closing Date under any material instrument or material agreement to which it is a party or by which it is bound, which default would, if not remedied, result in a Material Adverse Change or which would render materially incomplete or untrue any representation made herein, and (b) any suit, action or proceeding instituted or, to the knowledge of it, threatened against or affecting it subsequent to the date of this Agreement and prior to the Closing Date which, if adversely determined, would result in a Material Adverse Change or which would render materially incorrect any representation made herein. 22 5.7 EXPENSES. Except as provided in Section 10.10 hereof or as otherwise contemplated herein, whether or not the transactions contemplated by this Agreement are consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense. 5.8 ACCESS TO INFORMATION AND DILIGENCE REVIEW. Between the date of this Agreement and the Closing Date at Buyer's expense the Company shall (i) give Buyer and its authorized representatives reasonable access during normal business hours to all plants, offices, warehouses and other facilities and to all contracts, internal reports, data processing files and records, federal, state, local and foreign tax returns and records, commitments, books, records and affairs of the Company, whether located on the premises of the office facilities for the Company or at another location, including, without limitation, the relationship of the Company to its related employee leasing company; (ii) permit Buyer to make such inspections as it may require, (iii) cause its officers to furnish to Buyer such financial, operating, technical and product data and other information with respect to the business and properties of the Company as Buyer from time to time may request, including without limitation financial statements and schedules, and (iv) assist and cooperate with Buyer in the development of integration plans for implementation by Buyer following the Closing Date; provided, however, that no investigation pursuant to this Section shall affect or be deemed to modify any representation or warranty made by the Company or the Shareholders herein and provided further that the Company shall have the right to have a representative present at all times. 5.9 ADDITIONAL ACTIONS. Subject to the terms and conditions of this Agreement, each of the parties hereto agrees to use all reasonable efforts to take, or cause to be taken, all reasonable action and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement as promptly as reasonably practicable. The Company and the Shareholders shall give prompt notice to Buyer of any material breach of any of their respective covenants hereunder or the occurrence of any event that is reasonably likely to cause any of their respective representations and warranties hereunder to become incomplete or untrue in any material respect. 5.10 TAX MATTERS. (a) PREPARATION OF TAX RETURNS DUE PRIOR TO CLOSING AND PAYMENT OF TAXES. Shareholders shall cause the Company to, and the Company shall, prepare (on a Consistent Basis as that term is defined in Section 5.10(b)(ii) hereof) and timely file all Tax Returns and amendments thereto having a due date (not including extensions) on or before the Closing Date, and all such Tax Returns shall be true, complete and accurate. Any Tax Return having a due date which has been extended to a date following the Closing Date, including but not limited to federal and state income and franchise tax returns for the 1995 calendar year if the due date therefor has been so extended, shall be subject to the foregoing covenant. All Taxes shown to be payable on such Tax Returns shall be paid in full prior to the Closing Date and no other Taxes shall be payable by the Company with respect to items or periods covered by such Tax Returns. 23 (b) PREPARATION OF 1996 TAX RETURNS DUE FOLLOWING CLOSING AND PAYMENT OF TAXES. (i) SHORT PERIOD RETURNS. As used herein the term "Short Period Return" means a Tax Return of the Company that (A) is filed with respect to a less-than-twelve-month period (herein a "Short Period") commencing on January 1, 1996, and ending on or before the Closing Date, (B) pursuant to applicable tax laws and regulations, the Company is either required to file or may file at the election of the Company and (C) has a due date (not including extensions) following the Closing Date. The parties agree that if any such election to file a Short Period Return is available, the party or parties eligible to make such election shall do so. (ii) PREPARATION OF SHORT PERIOD RETURNS FOLLOWING CLOSING DATE AND PAYMENT OF TAXES. Prior to the due date (including extensions) for each Short Period Return, Buyer shall cause to be prepared and shall submit to Shareholders for their review (as described below) such Short Period Return. Each Short Period Return shall be prepared so as to report the Company's income, losses, gains, profits, deductions, credits and other tax items (collectively "Tax Items") consistently with the manner in which equivalent or comparable Tax Items have been reported by the Company in Tax Returns filed with respect to prior years but taking into account any changes to such items heretofore given effect pursuant to amendments to such prior year Tax Returns or pursuant to adjustments related to such prior year Tax Returns resulting from tax audits, tax examinations or other administrative or judicial tax proceedings (collectively "Tax Proceedings") which are final and complete prior to the preparation of such Short Period Return (herein such prior year consistency requirement shall be referred to as preparing and filing 1996 Tax Returns on a "Consistent Basis"). Unless applicable tax laws or regulations require another method for allocating 1996 Tax Items between and among the Short Period and the period following the Closing Date, the Short Period Returns shall be prepared based on a closing of the Company's books as of the Closing Date, with Tax Items attributable to operations, activities, transactions, income, sales, services, accruals and other similar events taking place or otherwise effective on or before the Closing Date being reported and taken into account in the Short Period and those taking place or otherwise effective following the Closing Date being reported and taken into account in the period following the Closing Date (herein a "Closing of the Books"). Each Short Period Return shall be submitted by Buyer to Shareholders on or before the date that is 60 days prior to the due date (including extensions) for the filing of such Short Period Return. Within 30 days following receipt of such Short Period Return, Shareholders shall notify Buyer as to whether Shareholders agree that such Short Period Return has been properly prepared on a Consistent Basis. If the Shareholders approve such Short Period Return, or fail to provide any notice to Buyer within such 30-day review period, Buyer shall file the Short Period Return as furnished to Shareholders. If within such 30-day review period Shareholders shall notify Buyer that they do not agree that such Short Period Return has been properly prepared on a Consistent Basis, the parties shall attempt in good faith to resolve the Shareholders' objections, and if they are unable to resolve such objections the matter shall be resolved pursuant to the dispute resolution provisions of Article IX hereof. Upon resolution of such dispute, and in all events prior to the due date 24 thereof (including extensions), Buyer shall cause such Short Period Return to be filed. Buyer shall cause Company to pay and discharge on a timely basis all Taxes shown to be payable by the Company as reflected on such Short Period Returns as prepared on a Consistent Basis. As used herein the term "1996 SPR Buyer Taxes" shall mean the amount of Tax liability reflected on a Short Period Return prepared on a Consistent Basis and as otherwise required hereunder. Any refunds of such 1996 SPR Buyer Taxes, whether pursuant to amended returns or any Tax Proceeding, shall be paid to and for the benefit of Company. Any Additional 1996 SPR Taxes (as defined herein) shall be paid by Shareholders promptly upon demand therefor by Buyer. As used herein the term "Additional 1996 SPR Taxes" shall mean any additional Taxes (including interest, penalties and other additions to tax) in excess of the 1996 SPR Buyer Taxes reflected on a Short Period Return which as a result of any Tax Proceeding are imposed upon or against or otherwise become payable by the Company with respect to a Short Period. (iii) FULL YEAR RETURN. As used herein the term "Full Year Return" means a Tax Return of the Company that (A) pertains to a particular Tax (herein a "FY Tax") with respect to the 1996 year for which the Company is liable but which, under applicable tax laws and regulations, may not be reported and accounted for by the Company on a Short Period Return, and (B) reports and accounts for the Company's liability for such FY Tax on an aggregate basis covering both the 1996 period ending on the Closing Date (herein the "Pre-Closing Period") and the 1996 period following the Closing Date (herein the "Post-Closing Date). (iv) PREPARATION OF FULL YEAR RETURNS AND PAYMENT OF TAXES. Prior to the due date (including extensions) for any Full Year Return, Buyer shall cause the Company to prepare and timely file each Full Year Return on which all Tax Items attributable to the Pre-Closing Period shall be reported and accounted for on a Consistent Basis, and Buyer shall cause the Company to pay and discharge on a timely basis all Taxes shown to be payable by the Company on such Full Year Return. As used herein the term "1996 PCP Buyer Taxes" shall mean the amount of FY Tax liability that is attributable to a Pre-Closing Period as calculated and determined as if such Pre-Closing Period constituted a Short Period as to which the FY Tax liability were determined on a Short Period Return prepared on a Consistent Basis. Any refunds of such 1996 PCP Buyer Taxes, whether pursuant to amended returns or any Tax Proceeding, shall be paid to and for the benefit of Company. Any Additional 1996 PCP Taxes (as defined herein) shall be paid by Shareholders promptly upon demand therefor by Buyer. As used herein the term "Additional 1996 PCP Taxes" shall mean any additional Taxes (including interest, penalties and other additions to tax) which as a result of any Tax Proceeding are imposed upon or against or otherwise become payable by the Company with respect to a Pre-Closing Period in excess of the 1996 PCP Buyer Taxes with respect to such Pre-Closing Period. The foregoing is intended to implement the parties' agreement that the Shareholders shall be responsible for the payment of any Taxes attributable to the Company's activities and operations during the Pre-Closing Period to the extent that such Taxes (inclusive of interest, penalties and other additions) exceed the amount of Tax liability with respect to a Pre-Closing Period as reported and accounted for on a Consistent Basis. The parties further agree that the Shareholders shall have no liability 25 hereunder with respect to Taxes attributable to the Company's activities and operations in any Post-Closing Period. For such purposes, if the Company is a partner in a partnership which has a tax year that does not end as of the Closing Date, any Tax liability attributable to such partnership's activities shall be allocated among the Pre-Closing Period and the Post-Closing Period on a fair and reasonable basis consistent with the allocation principles underlying this Section 5.10(b). (v) Following the Closing Date, Buyer shall allow Shareholders and their representatives to have access, at reasonable times and places as requested by Shareholders or their representatives, to the Company's books and records reflecting its business operations and Tax Items through to the Closing Date. It is intended that such reasonable access shall be made available in sufficient time to allow Shareholders and their representatives to review the Short Period Returns pursuant to the provisions of the Sections 5.10(b)(ii). (c) TRANSFER TAXES. As used herein the term "Transfer Taxes" shall mean any Taxes imposed on or with respect to the sale of stock as contemplated by this Agreement. The Shareholders shall pay all such Transfer Taxes. (d) ACCESS TO RECORDS FOLLOWING CLOSING. Shareholders agree that so long as any books, records and files retained by Shareholders relating to the business of Company, to the extent they relate to the operations of Company prior to the Closing Date, remain in existence and available, Buyer (at its expense) shall have the right upon prior notice to inspect and to make copies of the same at any time during business hours for any proper purpose. Shareholders shall use reasonable efforts not to destroy or allow the destruction of any such books, records and files without first offering in writing to deliver them to Buyer. (e) REFUNDS. Buyer agrees to pay to the Shareholders, in proportion to their respective ownership interests in the Company, any refund received after the Closing Date by Buyer or the Company, in respect of any Taxes for which the Shareholders are liable under SECTION 8.1(a)(iii) hereof, but only to the extent such has not been reflected as a receivable on the Financial Statements. The Company shall be entitled to any refund in respect of any Taxes for which the Shareholders are not liable under SECTION 8.1(a)(iii) hereof, and if the Shareholders shall receive any such refund they shall pay the same to the Company or to Buyer on behalf of the Company. The parties shall cooperate in order to take all necessary steps to claim any such refund. Any such refund received by a party or its affiliate for the account of the other party shall be turned over to such other party within 10 days after such refund is received. (f) COOPERATION. Within 10 days of receipt, each party will provide, or cause to be provided, to the other party copies of all correspondence received from any taxing authority by such party or any of its affiliates in connection with the liability of the Company for Taxes for any period for which such other party is or may be liable under SECTION 8.1(a)(iii) or otherwise. The parties will, at their own expense, provide each other with such cooperation and information as they may reasonably request of each other in 26 preparing or filing any return, amended return or claim for refund, in determining a liability or a right of refund or in conducting any audit or other Tax Proceeding, including cooperating with respect to reasonable requests from the other party for extending statutes of limitation applicable to any Tax Proceeding, in respect of Taxes for any period for which such other party is or may be liable under SECTION 8.1(a)(iii) OR OTHERWISE. (g) SURVIVAL. Notwithstanding any other provision of this Agreement, the covenants set forth in this Section shall survive until the expiration of the respective statute of limitations applicable to the period to which the Taxes relate. 5.11 CONSENTS AND APPROVALS. (a) DEPARTMENT OF INSURANCE APPROVAL. Not later than five (5) business days after the date hereof, Buyer shall file its completed application for transfer of control of the Company with the Department of Insurance of the State of Texas, together with all documents and information of or concerning itself or any of its affiliates as may be required to be filed in connection therewith under such form or applicable statutes and regulations, shall thereafter promptly provide such additional information such Department shall request from time to time, and otherwise shall prosecute such application diligently and use commercially reasonable efforts to obtain such approval as promptly as practicable. The Company and the Shareholders will use commercially reasonable efforts to cause all conditions to the obligations of Buyer set forth in this Section 5.11 (a) to be satisfied. (b) OTHER CONSENTS AND APPROVALS. The Company and the Shareholders will obtain or cause to be obtained prior to the Closing Date the consents and approvals described in SCHEDULE 5.11(b)(i) attached hereto and will furnish to Buyer executed copies of those consents. The Buyer will obtain or cause to be obtained prior to the Closing Date the consents and approvals described in SCHEDULE 5.11(b)(ii) attached hereto and will furnish to the Shareholders executed copies of those consents. The parties will cooperate in all respects with each other with a view toward obtaining timely satisfaction of conditions to the Closing contained in this Section and in this Agreement, it being understood that all fees and expenses associated with obtaining required consents and approvals shall be paid in accordance with Section 5.7 hereof. (c) INFORMATION. The parties shall, unless prohibited by law, (i) furnish to other party copies of all filings and such necessary information as may be requested by either in connection with any party's preparation of any required filings or submissions to any governmental agency, and (ii) will keep the other party informed of the status of any inquiries made of the Company or the Shareholders by any federal, state or local governmental agency or authority with respect to this Agreement or the transaction contemplated hereby. The parties shall furnish to the other, if applicable, a list of any materials that it is prohibited by law from providing to the other, together with a reference to the source of the prohibition and, if permitted, a brief summary of the content of such materials and the parties thereto. 27 5.12 FURTHER CONVEYANCES, ASSURANCES AND COOPERATION. After the Closing, the Shareholders will, without further consideration of any nature from Buyer, other than reimbursement of expenses reasonably incurred at the request of Buyer, execute and deliver, or cause to be executed and delivered, to Buyer, such additional documentation and instruments as Buyer may reasonably request, to (i) sell, transfer and assign to and fully vest in Buyer ownership of the Shares (ii) allow Buyer to operate the business of the Company, (iii) obtain any consent or approval which was not obtained on or prior to the Closing, (iv) comply with any Tax investigation, audit or inquiry, (v) allow Buyer to use the name of the Company and the name "American Dental Corporation" for business in all states of the United States, whether through a consent to use of name or otherwise, or (vi) otherwise provide information, books, records, evidence, testimony and other reasonable assistance to Buyer in connection with its ownership of the business of the Company. ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PARTIES 6.1 CONDITIONS TO THE OBLIGATIONS OF BUYER, THE COMPANY AND THE SHAREHOLDERS. The respective obligations of Buyer, the Company and the Shareholders set forth in this Agreement shall be subject to the satisfaction on or prior to the Closing Date of the following conditions, unless waived by each such party: (a) GOVERNMENTAL APPROVALS. All material authorizations, consents, orders or approvals of, or declarations or filings with, or expiration of waiting periods imposed by, any federal, state, local or foreign governmental or regulatory authority (including, without limitation, the Texas Department of Insurance) necessary for the consummation of the transactions contemplated by this Agreement shall have been filed, occurred or been obtained, including any and all necessary permits, licenses and certificates. (b) LEGAL ACTION. No temporary restraining order, preliminary injunction or permanent injunction or other order preventing the consummation of the transactions contemplated by this Agreement shall have been issued by any federal, state or foreign court or other governmental or regulatory authority and remain in effect, and no litigation seeking the issuance of such an order or injunction, or seeking substantial damages against Buyer or the Company if the transactions contemplated by this Agreement are consummated, shall be pending which, in the good faith judgment of the Boards of Directors of Buyer or the Company (acting upon advice of their respective counsel) has a reasonable probability of resulting in such order, injunction or substantial damages. In the event any such order or injunction shall have been issued, each party agrees to use its reasonable efforts to have any such injunction lifted. (c) STATUTES. No federal, state, local or foreign statute, rule or regulation shall have been enacted which would make the consummation of the transactions contemplated by this Agreement illegal. 28 (d) FINANCING. Buyer shall have obtained financing in a form and amount reasonably satisfactory to enable Buyer to fulfill its obligations under this Agreement. (e) BOARD AND SHAREHOLDER APPROVAL. The Board of Directors and the Shareholders of the Company shall have approved the form of the definitive purchase agreement and all related agreements and documents and the Shareholders shall provide Buyer with a copy of such resolutions at the Closing. 6.2 FURTHER CONDITIONS TO THE OBLIGATIONS OF BUYER. The obligations of Buyer set forth in this Agreement are subject to the satisfaction on or prior to the Closing Date of the following conditions, unless waived by Buyer: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company and the Shareholders set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made at and as of the Closing Date (except to the extent such representations or warranties speak to a particular date), and Buyer shall have received a certificate signed by the Shareholders and authorized officers of the Company to such effect. (b) PERFORMANCE OF OBLIGATIONS OF OTHER PARTIES. The Company and the Shareholders shall have performed in all material respects all obligations required to be performed by them under this Agreement prior to the Closing Date and Buyer shall have received a certificate signed by the Shareholders and authorized officers of the Company to such effect. (c) NO LITIGATION. Since the date hereof, there shall not have been instituted and be continuing or threatened against the Company any claim, action or proceeding the result of which could reasonably be expected to result in a Material Adverse Change. (d) NO ADVERSE CHANGE. No Material Adverse Change shall have occurred in the business, operations or prospects of the Company. "Material Adverse Change" shall include, without limitation, (i) the loss of any of the 10 leading revenue clients of the Company (including the failure of any such client to consent to the change of control contemplated by these transactions), with the exception of the ERS Contract; (ii) a decrease in revenues exceeding 10% as determined by comparing the average revenues for the two months ended May 31, 1996 and June 30, 1996 against the average for the two months ended July 31, 1996 and August 30, 1996; (iii) a decrease in provider payments exceeding 10% as determined by comparing the average revenues for the two months ended May 31, 1996 and June 30, 1996 against the average for the two months ended July 31, 1996 and August 30, 1996; (iv) a drop in total membership to less than 170,000 members as of the Closing Date; or (v) any adverse change in legislation or regulations applicable to the business of the Company, if such change could reasonably be foreseen to 29 have a material adverse effect on the financial condition, operations or prospects of the Company. (e) SPOUSAL CONSENT. A spousal consent to the transactions contemplated by this Agreement, substantially in the form of EXHIBIT A hereto, shall have been executed and delivered by the spouse of each Shareholder, if applicable. (f) THIRD-PARTY APPROVALS. Any and all consents required from third parties relating to contracts, licenses, leases and other agreements and instruments material to the financial condition or results of operations of the Company shall have been obtained. (g) RESIGNATIONS. The Company shall have delivered to Buyer all resignations of the officers and directors of the Company requested by Buyer, effective as of the Closing Date. (h) NON-COMPETITION AGREEMENTS. Each Shareholder shall have executed and delivered to Buyer a Non-Competition Agreement in form and substance satisfactory to Buyer and the Shareholders. (i) FINANCIAL STATEMENTS AUDIT. At the Company's expense, the Company shall cause its certified independent accountants (the "Company's Accountant") to conduct and complete an independent audit of the Interim Financial Statements (the "Audit") pursuant to generally accepted accounting principles. The Company shall have delivered to Buyer an unqualified opinion of the Company's Accountant, in a form and substance reasonably satisfactory to Buyer, certifying the Audit. (j) FINANCIAL RESULTS. The results of operations (net income) of the Company determined in accordance with generally accepted accounting principles for the period January 1, 1996 through the Closing shall be no worse than break even. (k) LEASE OF EMPLOYEES. Buyer shall have entered into an amendment to the agreement of the Company dated March 6, 1996 (or a new agreement) with American Staff Resources Corp. ("ASR"), the employee leasing service for the Company, with respect to those employees set forth on SCHEDULE 6.2(k) hereto, at rates, for at least two (2) years from the Closing, no less favorable than that currently provided to the Company (2% of compensation plus service costs set forth in the contract), subject to ordinary and customary rate increases provided to all other customers of ASR. Buyer shall have the right to terminate any leased employees, without any further obligation with respect to such terminated employee, upon thirty (30) days written notice to ASR. The current annual compensation rates of the employees to be leased by Buyer are set forth on SCHEDULE 6.2(k) hereto. (l) OPINION OF COUNSEL. Buyer shall have received an opinion dated the Closing Date of Stieber Campbell PC, counsel to the Company, in form and substance acceptable to Buyer. 30 (m) "AMERICAN DENTAL CORPORATION". The Shareholders agree to, at Buyer's option, either change the name of "American Dental Corporation" or to transfer ownership, whether through the issuance of shares or otherwise, of such entity to Buyer. (n) AGREEMENT TERMINATION. The Shareholders shall cause (i) the commission agreements by and among the Company and Dr. Davenport and Dr. Rinker; and (ii) the contract with H&E Data Processing Inc. dated August 1, 1989, to be terminated and to be of no further force and effect on or prior to the Closing Date with no further obligation of the Company to make payments thereunder. (o) EMPLOYMENT ARRANGEMENTS. Other than payment to employees in the ordinary course of business, there will be no obligation on the part of the Company for any amounts due for salary or accrued vacation to any terminating employees of the Company or for salary or accrued vacation to Drs. Davenport and Rinker after the Closing Date. (p) PAYMENT AND RELEASE OF LIENS. All amounts owing under any bank loans, lines of credit or other indebtedness, including the line of credit with Comerica Bank, shall be paid off in full as of the Closing Date and the Shareholders shall provide Buyer either evidence that such lien has been terminated or shall deliver to Buyer a termination statement signed by Comerica on the Closing Date terminating the lien on the property of the Company. (q) RETENTION OF REVENUES. The Shareholders shall cause all premiums received in the month of August to be retained in the Company against payment of the related capitation and commissions due for such contracts. 6.3 FURTHER CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND THE SHAREHOLDERS. The obligations of the Company and the Shareholders set forth in this Agreement are subject to the satisfaction on or prior to the Closing Date of the following conditions, unless waived by the Company and the Shareholders: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Buyer set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made at and as of the Closing Date (except to the extent such representations or warranties speak to a particular date), and the Company and the Shareholders shall have received a certificate signed by authorized officers of Buyer to such effect. (b) PERFORMANCE OF OBLIGATIONS OF OTHER PARTIES. Buyer shall have performed in all material respects all obligations required to be performed by it under this Agreement prior to the Closing Date, and the Company and the Shareholders shall have received a certificate signed by authorized officers of Buyer to such effect. 31 (c) THIRD-PARTY APPROVALS. Any and all consents required by Buyer from third parties in order to consummate the transactions contemplated hereby shall have been obtained. ARTICLE VII TERMINATION, EXTENSION AND WAIVER 7.1 TERMINATION This Agreement may be terminated at any time prior to the Closing Date as follows: (a) BY MUTUAL CONSENT By mutual consent of the Company and Buyer. (b) BY ANY PARTY By any party to this Agreement if: (i) the transactions contemplated by this Agreement shall not have been consummated on or before September 30, 1996; provided that the failure of the transactions to be consummated by such date is not caused by any breach of this Agreement by the party seeking such termination; (ii) a court of competent jurisdiction or other governmental or regulatory authority shall have issued an order, decree or ruling or taken any other action, in each case permanently restraining, enjoining or otherwise prohibiting the consummation of the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and not appealable; (iii) any statute, rule or regulation is enacted, promulgated or deemed applicable to the transactions contemplated by this Agreement by any competent governmental or regulatory authority which makes the consummation of the transactions illegal; or (iv) the Department of Insurance of the State of Texas disapproves in writing the application for transfer of control of the Company and the Department has not withdrawn such disapproval within 20 days after the date on which the Company and/or Buyer receive notice of such written disapproval. (c) BY BUYER. By Buyer if a material default under or a material breach of this Agreement by the Company or the Shareholders, as the case may be, shall have occurred and be continuing ten (10) business days after receipt of notice thereof from Buyer. (d) BY THE COMPANY. By the Company if a material default under or a material breach of this Agreement by Buyer shall have occurred and be continuing ten (10) business days after receipt of notice thereof from the Company. 32 Any action taken to terminate this Agreement pursuant to this Section shall become effective when notice of such termination is delivered by the terminating party to the other party in accordance with the provisions of SECTION 10.2 below. 7.2 EFFECT OF TERMINATION. In the event of the termination of this Agreement pursuant to Section 7.1 by the Shareholders of the Company, on the one hand, or Buyer, on the other, written notice thereof shall be given promptly to the other party specifying the provision hereof pursuant to which such termination is made, and this Agreement shall become void and have no effect, except that the agreements contained in this Section and in Sections 2.10 (Broker's Commissions or Finder's Fees), 4.5 (No Solicitation), 5.2 (Earnest Money Escrow), 5.3 (Confidentiality), 5.7 (Expenses), Article IX (Arbitration), or 10.10 (Attorney's Fees), shall survive the termination hereof for a period of one year, unless a specific claim in writing with respect to these matters shall have been made before such date. Nothing contained in this Section shall relieve any party from liability for damages actually incurred as a result of any breach of this Agreement. 7.3 EXTENSION; WAIVER. At any time prior to the Closing Date, to the extent legally allowed, any party hereto (a) may extend the time for the performance of any of the obligations owed to such party by the other parties hereto, (b) may waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto, and/or (c) may waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid if set forth in an instrument in writing signed on behalf of such party and shall be effective only to the extent set forth in such instrument. No extension or waiver of any single condition, covenant, agreement, representation, warranty, breach, default or other matter hereunder shall be deemed an extension or waiver of such or any other condition, covenant, agreement, representation, warranty, breach, default or other matter theretofore or thereafter occurring. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. The failure of any party to insist upon a strict performance of any of the terms or provisions of this Agreement, or to exercise any option, right or remedy herein contained, shall not be construed as a waiver or as a relinquishment for the future of such term, provision, option, right or remedy, but the same shall continue and remain in full force and effect. ARTICLE VIII INDEMNIFICATION 8.1 INDEMNIFICATION. (a) INDEMNIFICATION BY THE SHAREHOLDERS. Dr. Davenport and Dr. Rinker shall jointly and severally (except with respect to any representations or warranties made by such Shareholders severally (and not jointly) in which case the indemnity provided herein shall be several and not joint), and Mr. Rees shall severally (it being understood and agreed that Mr. Rees's several obligation to indemnify hereunder is in proportion to his pre-Closing ownership interest in the Company), indemnify and hold harmless Buyer and its affiliates from and against any and all Losses (as defined in SECTION 33 8.1(c)) incurred by any of such indemnified parties in any way relating to, arising out of or resulting from: (i) The breach of any of the representations or warranties made by the Company or the Shareholders in this Agreement; (ii) The breach or the failure of performance by the Company or the Shareholders of any of the covenants, promises or agreements that any of them is to perform under this Agreement; (iii) Taxes (including interest, penalties and other additions to tax that may become payable in respect thereof) which are (i) Transfer Taxes (as defined in Section 5.10(c)) imposed on Shareholders that Buyer or the Company pays (in whole or in part) or result in liens or encumbrances on any assets of Buyer or the Company, and/or (ii) imposed on the Company in respect of its income, business, property or operations or for which the Company may otherwise be liable for or with respect to any period ending prior to or on the Closing Date, including but not limited to any Additional 1996 SPR Taxes for which the Shareholders are liable in accordance with the provisions of Section 5.10(b)(ii) hereof and any Additional 1996 PCP Taxes for which the Shareholders are liable in accordance with the provisions of Section 5.10(b)(iv) hereof, except in all cases to the extent such Taxes are adequately reserved for in the Financial Statements; (iv) The death of or injury to any person or damage to property that occurred prior to the Closing and arose out of or in connection with the business or operations of the Company; (v) All employment-related claims and causes of action, and all other claims and causes of action, that have arisen or arise out of or in connection with the business or operations of the Company conducted prior to the Closing; and (vi) The existence prior to the Closing Date of any hazardous or toxic substances, wastes or materials, defined as such or governed by any applicable Environmental Law ("Hazardous Materials") upon, about or beneath any property of the Company or migrating or threatening to migrate from any of such properties, or the existence of a violation of any Environmental Law pertaining to such properties or the operations of the Company (including, but not limited to, violations of laws dealing with the generation, transport, treatment, storage or disposal of hazardous or other regulated material), regardless of whether the existence of such Hazardous Materials or the violation of Environmental Law arose prior to the present ownership or operation of such properties by the Company or was disclosed to Buyer by the Company, the Shareholders or otherwise. 34 (b) INDEMNIFICATION BY BUYER. Buyer shall indemnify and hold harmless the Shareholders and their affiliates from and against any and all Losses incurred by such indemnified parties in any way relating to, arising out of or resulting from: (i) The breach of any of the representations or warranties made by Buyer in this Agreement; (ii) The breach or the failure of performance by Buyer of any of the covenants, promises or agreements that it is to perform under this Agreement; (iii) Taxes (including interest, penalties and other additions to tax that may become payable in respect thereof) which (A) constitute 1996 SPR Buyer Taxes or 1996 PCP Buyer Taxes for which the Shareholders are not liable in accordance with the provisions of Sections 5.10(b) hereof, and/or (B) are imposed on the Shareholders in respect of the Company's income, business, property or operations or for which the Company may otherwise be liable for or with respect to any period following the Closing Date, including such Taxes with respect to the 1996 Post-Closing Period for which the Shareholders are not liable in accordance with the provisions of Section 5.10(b)(iv) hereof; (iv) The death of or injury to any person or damage to property that occurred after the Closing and arose out of or in connection with the business or operations of the Company; (v) All employment-related claims and causes of action, and all other claims and causes of action, that have arisen or arise out of or in connection with the business or operations of the Company conducted after the Closing; and (vi) The existence after the Closing Date of any Hazardous Materials upon, about or beneath any property of the Company or migrating or threatening to migrate from any of such properties, or the existence of a violation of any Environmental Law pertaining to such properties or the operations of the Company (including, but not limited to, violations of laws dealing with the generation, transport, treatment, storage or disposal of hazardous or other regulated material), unless the existence of such Hazardous Materials or the violation of Environmental Law arose prior to the ownership or operation of the Company by the Buyer. (c) DEFINITION OF LOSSES. For purposes of this Article, "Losses" shall mean any and all liabilities, obligations, losses, damages, claims, deficiencies, penalties, taxes, levies, actions, judgments, settlements, suits, costs, legal fees, accountants' fees, disbursements or expenses. Losses shall exclude any amount which any party actually receives under any insurance policy which provides coverage for the liability in question. 35 8.2 THIRD PARTY CLAIMS, NOTICE AND OPPORTUNITY TO SETTLE. (a) Within 30 days after the receipt by the party entitled to indemnity hereunder (the "Indemnified Party") of any claim or demand (including but not limited to, notice of any action, suit or proceeding) by any third party (a "Third Party Claim") against an Indemnified Party which gives rise to a right to indemnification for a Loss hereunder (or, in the case of the receipt of any notice of any examination, claim, adjustment or other proceeding with respect to Taxes for any period for which the Shareholders are liable under SECTION 8.1(a)(iii) or for which Buyer is liable under SECTION 8.1(b)(iii) ("Tax Proceeding"), promptly after the receipt of such notice), the Indemnified Party shall give each party who may be obligated to provide indemnity hereunder (the "Indemnifying Party") written notice of such claim or demand; provided, however, that the failure to give such notice shall not relieve the Indemnifying Party of its obligations hereunder except to the extent that such failure is materially prejudicial to the Indemnifying Party. (b) The Indemnifying Party shall have the right (without prejudice to the right of any Indemnified Party to participate at its own expense through counsel of its own choosing), to defend against such claim or demand (for purposes of this Section, any Tax proceeding shall be considered a "claim or demand") at its expense and through counsel of its own choosing (the choice of such counsel to be subject to the reasonable consent of the affected Indemnified Parties) and to control such defense if it gives written notice of its intention to do so within 15 days of the receipt of the notice referred to in SECTION 8.2(a). If the Indemnifying Party shall decline to assume the defense of such claim or demand, the affected Indemnified Parties shall have the right to assume control of such defense at the expense of the Indemnifying Party. The Indemnified Parties shall cooperate fully in the defense of such claim or demand and shall make available to the Indemnifying Party or its counsel all pertinent information under their control relating thereto. The Indemnifying Party agrees to cooperate with the Indemnified Parties in order to enable their counsel to participate in the defense and to deliver to the Indemnified Parties copies of all pleadings and other information within the Indemnifying Party's knowledge or possession reasonably requested by the Indemnified Parties that is relevant to the defense of any such claim or demand. The Indemnified Parties and their counsel shall maintain confidentiality with respect to all such information consistent with the conduct of a defense hereunder. (c) The Indemnifying Party shall have the right to elect to settle (i) any such claim or demand other than a Tax Proceeding, for monetary damages only and including an unconditional release, or (ii) any Tax Proceeding, subject to the consent of the affected Indemnified Party, provided, however, with respect to any Permissible Settlement (as defined herein), if the affected Indemnified Parties fail to give such consent within 20 days of being requested to do so, the affected Indemnified Parties shall, at their expense, assume the defense of such claim or demand and regardless of the outcome of such matter, the Indemnifying Party's liability hereunder shall be limited to the amount of any such proposed settlement. As used herein the term "Permissible Settlement" shall mean a settlement as to which there is no reasonable likelihood that it will result in the imposition on such affected Indemnified Parties of Taxes for a taxable period for which 36 the Indemnifying Party is not obligated hereunder to indemnify such affected Indemnified Parties. (d) In the event the Indemnifying Party assumes the defense of a claim or demand, the Indemnified Parties shall have the right to assume control of the defense of any claim or demand from the Indemnifying Party at any time and to elect to settle such claim or demand; provided, however, the Indemnifying Party shall have no indemnification obligations with respect to such claim, demand or settlement except for the costs and expenses of such Indemnifying Party incurred prior to the assumption of the defense of the claim or demand by the Indemnified Parties. 8.3 RIGHT TO OFFSET. Buyer shall have the right to offset all or any part of its Losses under this Agreement by notifying the Shareholders in writing that Buyer is reducing the amount owed to the Shareholders under the Holdback; provided, however, that the Shareholders shall have thirty (30) days following receipt of such notification to rectify the cause of any such loss to Buyer before Buyer shall be entitled to exercise its right of offset or recoupment hereunder. Buyer shall offset its Losses against the Holdback until the Holdback is exhausted, at which time the Shareholders shall be personally liable as provided in this Agreement for any remaining and future Losses, whether undisputed or established in accordance with Article IX hereof. Notwithstanding the foregoing, the existence of the Holdback and any offsets thereunder shall not relieve the Shareholders from liability or limit their liability to Buyer for any breaches hereunder. 8.4 NON-THIRD PARTY CLAIMS. In the event any Indemnified Party should have a claim against any Indemnifying Party hereunder which does not involve a Third Party Claim, the Indemnified Party shall transmit to the Indemnifying Party a written notice (the "Indemnity Notice") describing in reasonable detail the nature of the claim, an estimate of the amount of damages attributable to such claim and the basis of the Indemnified Party's request for indemnification under this Agreement. If the Indemnifying Party does not notify the Indemnified Party within 30 days from the Indemnifying Party's receipt of the Indemnity Notice that the Indemnifying Party disputes such claim, the claim specified by the Indemnified Party in the Indemnity Notice shall be deemed a liability of the Indemnifying Party hereunder; provided, however, that, if Buyer asserts a claim that is not a Third Party Claim and the Indemnifying Party does not dispute such claim in a timely manner in accordance with this Section 8.4, Buyer shall have offset and recoup its Losses as provided in SECTION 8.3. 8.5 PAYMENTS. Any timely, disputed non-Third Party Claim shall be submitted to arbitration in accordance with the provisions of Article IX hereof. Payments of all amounts owing by an Indemnifying Party pursuant to this Article relating to a Third Party Claim shall be made within 30 days after the latest of (a) the settlement of such Third Party Claim, (b) the expiration of the period for appeal of a final adjudication of such Third Party Claim or (c) the expiration of the period for appeal of a final adjudication of the Indemnifying Party's liability to the Indemnified Party under this Agreement. Subject to SECTION 8.3, payments of all amounts owing by an Indemnifying Party pursuant to SECTION 8.4 shall be made within 30 days after the later of (i) the expiration of the 30-day Indemnity Notice period or (ii) the expiration of the period 37 for appeal of a final adjudication of the Indemnifying Party's liability to the Indemnified Party under this Agreement. ARTICLE IX DISPUTE RESOLUTION All disputes arising under this Agreement shall be resolved by submission to binding arbitration at the Dallas office of JAMS/Endispute ("JAMS") in accordance with its rules and procedures regarding commercial disputes, except to the extent such rules or procedures vary from the following provisions: 9.1 NOTICE. The party desiring to initiate arbitration can do so by sending written notice of an intention to arbitrate by registered or certified mail to the other parties and to JAMS. The notice must contain a description of the dispute, the amount of money involved, and the remedies sought. 9.2 ARBITRATOR. The parties shall attempt to agree on a retired judge from the JAMS panel to act as the arbitrator hereunder. If the parties are unable to agree, JAMS shall provide a list of three available judges to each party and each party may strike one. The remaining judge shall serve as the arbitrator. The parties agree the arbitration must be initiated within one year after the claimed breach occurred and that the failure to initiate arbitration within the one year period constitutes an absolute bar to the institution of any arbitration or any judicial proceeding on any dispute set forth in the notice of intent to arbitrate. 9.3 PRE-HEARING CONFERENCE. Once an arbitrator is assigned to hear the matter, the arbitrator shall schedule a pre-hearing conference to reach agreement on procedural matters, arrange for the exchange of information, obtain stipulations, and attempt to narrow the issues. 9.4 DISCOVERY. It is the parties' objective to expedite the arbitration proceedings by placing the following limitations on discovery: (a) on a date to be determined at the pre-hearing conference, each party may serve one demand for production of documents and one set of twenty interrogatories (without subparts) upon the other parties (the response to the document demand, the documents to be produced, and the responses to the interrogatories shall be exchanged thirty days later); (b) each party may depose two witnesses. Each deposition must be concluded within eight hours and all depositions must be taken within sixty days of the pre-hearing conference. Any party deposing an opponent's expert must pay the expert's fee for attending the deposition. All discovery disputes shall be decided in the sole discretion of the arbitrator. 9.5 BRIEFS AND HEARING. The parties must file briefs with the arbitrator at least three days before the arbitration hearing, specifying the facts each intends to prove and analyzing the applicable law. The parties have the right to representation by legal counsel throughout the arbitration proceedings. The presentation of evidence at the arbitration hearing shall be governed by the Texas Evidence Code. Within reasonable limitations, both sides at the hearing may call and examine witnesses for relevant testimony, introduce relevant exhibits or other documents, cross- 38 examine or impeach witnesses who shall have testified orally on any matter relevant to the issues, and otherwise rebut evidence, as long as these rights are exercised in an efficient and expeditious manner in the sole discretion of the arbitrator. Oral evidence given at the arbitration hearing shall be given under oath. Any party desiring a stenographic record may secure a court reporter to attend the arbitration proceedings. The party requesting the court reporter must notify the other parties and the arbitrator of the arrangement in advance of the hearing, and must pay for the cost incurred. 9.6 DECISION. The arbitrator's decision shall be based on the evidence introduced at the hearing, including all logical and reasonable inferences therefrom. The arbitrator may grant any remedy or relief which is just and equitable. The award must be made in writing and signed by the arbitrator. It shall contain a concise statement of the reasons in support of the decision. The award must be mailed promptly to the parties, but no later than thirty days from the closing of the hearing. The award can be judicially enforced (confirmed, corrected or vacated) pursuant to Tex. Civ. Prac. & Rem. Code Ann. Section 171 ET SEQ. The award is final and binding and there is no direct appeal from the award on the grounds of error in the application of the law. 9.7 COSTS. Each party to the arbitration must pay its own witness fees. Each party must pay its pro-rata share of the arbitrator's fees. The arbitrator must award to the prevailing party attorneys' fees and costs actually and reasonably incurred. ARTICLE X GENERAL PROVISIONS 10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties contained herein shall survive the Closing and will expire on the fifth anniversary of the Closing Date (the "Survival Date"); unless prior to the Survival Date, a claim specifying a breach of any of the representations or warranties described above is submitted in writing to the indemnifying party and identified as a claim for indemnification pursuant to this Agreement. From and after the Survival Date, no party hereto nor any shareholder, director, officer, employee, or affiliate of such party shall have any indemnity obligation pursuant to Article VIII, except with respect to matters as to which notice has been received in accordance with this Section 10.1. Notwithstanding the foregoing, any representations and warranties made relating to antitrust matters shall not terminate. 10.2 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given upon facsimile transmission (with written or facsimile confirmation of receipt), or delivery by a reputable overnight commercial delivery service (delivery, postage or freight charges prepaid), or on the fourth day following deposit in the United States mail (if sent by registered or certified mail, return receipt requested, delivery, postage or freight charges prepaid), addressed to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): 39 If to Buyer: Safeguard Health Enterprises, Inc. 505 N. Euclid Street Anaheim, California 92801 Attn: Ronald I. Brendzel, Esq. Phone: (714) 758-4329 Fax: (714) 758-4383 With a copy to: Gibson, Dunn & Crutcher LLP 4 Park Plaza, Suite 1800 Irvine, CA 92614 Attn: Walter L. Schindler, Esq. Phone: (714) 451-3800 Fax: (714) 451-4220 If to the Company: First American Dental Benefits, Inc. 14800 Landmark Boulevard, 7th Floor Dallas, Texas 75240 Attn: James L. Davenport, D.D.S. Phone: (214) 661-5848 Fax: (214) 392-0237 With a copy to: Stieber Campbell PC 2828 Routh Street, Suite 760 Dallas, TX 75201 Attn: Drew A. Campbell, Esq. Phone: (214) 979-0902 Fax: (214) 979-0907 If to the Shareholders: James L. Davenport, D.D.S. Martin J. Rinker, D.D.S. William N. Rees, Jr. c/o First American Dental Benefits, Inc. Phone: (214) 661-5848 Fax: (214) 392-0237 10.3 INTERPRETATION. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 10.4 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be an original and all of which together shall be one and the same instrument. 10.5 INTEGRATION. This Agreement and the Exhibits, Schedules, documents, instruments and other agreements among the parties hereto that are referred to herein or any other agreements dated of even date herewith to which Buyer, Dr. Davenport and Dr. Rinker, among 40 others, are parties, constitute the entire agreement of the parties with respect to the subject matter set forth herein or therein and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof or thereof. 10.6 GOVERNING LAW. This Agreement and the rights of the parties hereunder will be interpreted in accordance with the laws of the State of Texas, and all rights and remedies will be governed by such laws without regard to principles of conflict of laws. 10.7 AMENDMENT. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 10.8 ASSIGNMENT. No party hereto shall assign or transfer or permit the assignment or transfer of this Agreement without the prior written consent of the other parties, except that the Buyer may assign its rights and obligations hereunder to any wholly-owned subsidiary. 10.9 SEVERABILITY. If any paragraph, section, sentence, clause or phrase contained in this Agreement will become illegal, null or void or against public policy, for any reason, or will be held by any court of competent jurisdiction to be incapable of being construed or limited in a manner to make it enforceable, or is otherwise held by such court to be illegal, null or void or against public policy, the remaining paragraphs, sections, sentences, clauses or phrases contained in this Agreement will not be affected thereby. 10.10 FEES. If any party to this Agreement shall bring any arbitration or any other action, suit, counterclaim or appeal for any relief against any other party, declaratory or otherwise, to enforce the terms hereof or to declare rights hereunder (collectively, an "Action"), the prevailing party shall be entitled to recover as part of any such Action its reasonable attorneys' fees and costs, including any fees and costs incurred in bringing and prosecuting such Action and/or enforcing any order, judgment, ruling or award granted as part of such Action. "Prevailing party" within the meaning of this section includes, without limitation, a party who agrees to dismiss an Action upon the other party's payment of all or a portion of the sums allegedly due or performance of the covenants allegedly breached, or who obtains substantially the relief sought. 10.11 TRANSFER TAXES. The Shareholders shall bear all transfer, sales, use, income or other taxes, if any, payable in connection with the transfer of Stock contemplated by this Agreement or as a result of the transactions contemplated hereby, and shall be responsible for the payment of any individual taxes levied against them personally as a result of selling their Shares to Buyer. 41 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above.
Company: Buyer: FIRST AMERICAN DENTAL BENEFITS, INC., SAFEGUARD HEALTH ENTERPRISES, INC., a Texas corporation a Delaware corporation By: By: /s/ John E. Cox ----------------------------------- -------------------------------- James L. Davenport, D.D.S. John E. Cox Chairman of the Board and Executive Vice President and Chief Executive Officer Chief Operating Officer By: By: /s/ Steven J. Baileys --------------------------------- -------------------------------- Gary P. Downey Steven J. Baileys, D.D.S. President Chairman of the Board, President and Chief Executive Officer
Shareholders: - ------------------------------- JAMES L. DAVENPORT, D.D.S. - ------------------------------- MARTIN J. RINKER, D.D.S. - ------------------------------ WILLIAM N. REES, JR. OA961970.201/-1+ 43 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above.
Company: Buyer: FIRST AMERICAN DENTAL BENEFITS, INC., SAFEGUARD HEALTH ENTERPRISES, INC., a Texas corporation a Delaware corporation By: /s/ James L. Davenport By: ----------------------------------- -------------------------------- James L. Davenport, D.D.S. John E. Cox Chairman of the Board and Executive Vice President and Chief Executive Officer Chief Operating Officer By: /s/ Gary P. Downey By: --------------------------------- -------------------------------- Gary P. Downey Steven J. Baileys, D.D.S. President Chairman of the Board, President and Chief Executive Officer
Shareholders: /s/ James L. Davenport - ------------------------------- JAMES L. DAVENPORT, D.D.S. /s/ Martin J. Rinker - ------------------------------- MARTIN J. RINKER, D.D.S. /s/ William N. Rees - ------------------------------ WILLIAM N. REES, JR. Stock Purchase Agreement First American Dental EX-99.C 4 EXHIBIT 99.C ASSIGNMENT AND ASSUMPTION AGREEMENT ASSIGNMENT AND ASSUMPTION AGREEMENT THIS ASSIGNMENT AND ASSUMPTION AGREEMENT is entered into this 26th day of September, 1996, by and among First American Dental Benefits, Inc., a Texas corporation ("AMERICAN DENTAL"), D & R Dental Services Group (for itself and on behalf of Metroplex Dental Group/Irving L.L.P. and its affiliates) ("METROPLEX"), James L. Davenport, D.D.S. ("DR. DAVENPORT") and Martin J. Rinker, D.D.S. ("DR. RINKER"). WHEREAS, Safeguard Health Enterprises, Inc., a Delaware corporation ("SAFEGUARD"), American Dental, Dr. Davenport, Dr. Rinker, and William N. Rees, Jr., have entered into a Stock Purchase Agreement, dated as of August 9, 1996 ("STOCK PURCHASE AGREEMENT"; capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Stock Purchase Agreement), pursuant to which, among other things, Safeguard has agreed to purchase the stock of American Dental; WHEREAS, Safeguard, American Dental, Dr. Davenport, Dr. Rinker, William N. Rees, Jr. and T.R.C. Agency, Inc. have entered into a letter agreement dated as of August 9, 1996 (the "LETTER AGREEMENT") which amends certain provisions of the Stock Purchase Agreement; WHEREAS, pursuant to Section 6.2 of the Stock Purchase Agreement, American Dental, Metroplex, Dr. Davenport and Dr. Rinker are required to execute and deliver this Assignment and Assumption Agreement whereby Metroplex assigns to American Dental and American Dental assumes from Metroplex the Contracts (as defined below) and any and all obligations associated with the Contracts that arise out of the ownership of the Contracts after the closing (other than as provided herein); NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Metroplex hereby assigns to American Dental all its right, title and interest in and to the contracts (the "CONTRACTS") set forth on Exhibit A hereto. 2. American Dental hereby undertakes and agrees from and after the Closing, subject to the limitations contained herein, to assume and to pay, perform and discharge when due the liabilities (the "LIABILITIES") arising out of American Dental's ownership of the Contracts after the Closing. American Dental shall discharge in a timely manner or make adequate provision for all of such Liabilities, PROVIDED that American Dental shall have no responsibility or liability for any Liabilities for which the related revenues attributable to such Contracts have not been retained for the payment of the corresponding capitation and commission payments due thereafter; and PROVIDED further, the ability to contest in good faith, any such claim of liability asserted in respect thereof. 3. Except for the Liabilities assumed in paragraph 2. above, American Dental shall not assume by this Assignment and Assumption Agreement or by virtue of the transactions contemplated by the Stock Purchase Agreement, and shall have no liability for any liabilities arising prior to the Closing Date with respect to the Contracts or the business of Metroplex, or for commissions or capitation owing in connection with the Contracts for which the related revenues have not been retained for payment against such liability (collectively, the "EXCLUDED LIABILITIES"). Metroplex shall pay, perform and discharge, when due, all of the Excluded Liabilities. 4. No persons other than American Dental, Metroplex, Dr. Davenport and Dr. Rinker, their successors and assigns shall have any rights under this Assignment and Assumption Agreement of the provisions contained herein. 5. This Assignment and Assumption Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. 6. This Assignment and Assumption Agreement shall be governed by and construed in accordance with the laws of the State of Texas applicable to a contract executed and performed in such State without giving effect to the applicable conflicts of laws principles thereof. 7. The terms of the Stock Purchase Agreement and Letter Agreement shall be incorporated by reference in their entirety into this Assignment and Assumption Agreement, as if such terms were expressly set forth herein. In the event of any conflict between the provisions of this Agreement and the Stock Purchase Agreement or Letter Agreement with respect to the matters contained herein, the terms of this Agreement shall control. 2 IN WITNESS WHEREOF, the parties have caused this Assignment and Assumption Agreement to be entered into as of the date first written above. D AND R DENTAL SERVICES GROUP (METROPLEX DENTAL GROUP/IRVING L.L.P.) By: American Dental Benefits Group, Inc. Title: Sole General Partner By: JAMES L. DAVENPORT, D.D.S ---------------------------------- Name: James L. Davenport, D.D.S. Title: President and Secretary FIRST AMERICAN DENTAL BENEFITS, INC. By: JAMES L. DAVENPORT, D.D.S --------------------------------------- Name: James L. Davenport, D.D.S. Title: Chairman of the Board and Chief Executive Officer By: Martin J. Rinker,D.D.S. --------------------------------------- Name: MARTIN J. RINKER, D.D.S. Title: Vice President and Secretary/Treasurer By: JAMES L. DAVENPORT, D.D.S. ----------------------------------- JAMES L. DAVENPORT, D.D.S. By: MARTIN J. RINKER,D.D.S. ----------------------------------- MARTIN J. RINKER, D.D.S. 3 EX-99.D 5 EXHIBIT 99.D - STOCK PCHS. AGMT. T.R.C. AGNECY INC EXECUTION COPY STOCK PURCHASE AGREEMENT BY AND AMONG SAFEGUARD HEALTH ENTERPRISES, INC. (AS BUYER) AND T.R.C. AGENCY, INC. (THE COMPANY) AND JAMES L. DAVENPORT, D.D.S., AND MARTIN J. RINKER, D.D.S., (AS SELLING SHAREHOLDERS) DATED AS OF AUGUST 9, 1996 TABLE OF CONTENTS ARTICLE I TRANSFER OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 1.1 Sale of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 1.2 Purchase Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 1.3 Payment of Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 1.4 Shareholders to Deliver Title and Possession. . . . . . . . . . . . . . . . . . .2 1.5 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS . . . . . .2 2.1 Organization and Qualification. . . . . . . . . . . . . . . . . . . . . . . . . .2 2.2 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 2.3 Voting Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 2.4 Authority Relative to this Agreement. . . . . . . . . . . . . . . . . . . . . . .3 2.5 No Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 2.6 Absence of Certain Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . .4 2.7 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 2.8 Absence of Undisclosed Liabilities. . . . . . . . . . . . . . . . . . . . . . . .4 2.9 Consents and Approvals; No Violation. . . . . . . . . . . . . . . . . . . . . . .5 2.10 Broker's Commissions or Finder's Fees. . . . . . . . . . . . . . . . . . . . . .5 2.11 Employment and Similar Agreements. . . . . . . . . . . . . . . . . . . . . . . .6 2.12 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 2.13 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 2.14 ERISA Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 2.15 Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 2.16 Commission Arrangements and Sales. . . . . . . . . . . . . . . . . . . . . . . .10 2.17 Customer List. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 2.18 Interests in Competitors . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 2.19 Properties, Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 2.20 Real Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 2.21 Permits; Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . . . .11 2.22 Insurance Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 2.23 Environmental Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 2.24 Banking Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 2.25 Minute Books and Stock Records.. . . . . . . . . . . . . . . . . . . . . . . . .12 2.26 Consents of Non-Governmental Third Parties . . . . . . . . . . . . . . . . . . .12 2.27 Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 2.28 Trademarks; Tradenames . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 2.29 Probable Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 2.30 Transactions with Related Parties. . . . . . . . . . . . . . . . . . . . . . . .12 2.31 Compliance with Insurance Laws . . . . . . . . . . . . . . . . . . . . . . . . .13 2.32 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 2.33 Representations and Warranties True. . . . . . . . . . . . . . . . . . . . . . .13
i Stock Purchase Agreement TRC Agency OA962220.090 ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER. . . . . . . . . . . . . . . . . . . .14 3.1 Organization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 3.2 Authority Relative to this Agreement. . . . . . . . . . . . . . . . . . . . . . .14 3.3 Consent and Approvals; No Violation . . . . . . . . . . . . . . . . . . . . . . .14 3.4 Broker's Commissions or Finder's Fees . . . . . . . . . . . . . . . . . . . . . .15 3.5 Investment Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 3.6 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 ARTICLE IV CONDUCT OF BUSINESS BY THE COMPANY PRIOR TO CLOSING . . . . . . . . . . . . . .15 4.1 Ordinary Course . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 4.2 Dividends; Changes in Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .15 4.3 Issuance or Repurchase of Securities. . . . . . . . . . . . . . . . . . . . . . .15 4.4 Governing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 4.5 No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 4.6 No Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 4.7 No Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 4.8 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 4.9 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 4.10 Benefit Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 4.11 Additional Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 ARTICLE V ADDITIONAL COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 5.1 Confidential Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 (a) Nondisclosure by Shareholders. . . . . . . . . . . . . . . . . . . . . . . .18 (b) Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 (c) Nondisclosure by Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . .19 (d) Return of Information. . . . . . . . . . . . . . . . . . . . . . . . . . . .19 5.2 Governmental Filings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 5.3 Legal Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 5.4 Certain Defaults. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 5.5 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 5.6 Access to Information and Diligence Review. . . . . . . . . . . . . . . . . . . .20 5.7 Additional Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 5.8 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 5.9 Further Conveyances, Assurances and Cooperation . . . . . . . . . . . . . . . . .24 ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PARTIES. . . . . . . . . . . . . . .25 6.1 Conditions to the Obligations of Buyer, the Company and the Shareholders. . . . .25 (a) Governmental Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . .25 (b) Legal Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 (c) Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 (d) Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 (e) Satisfaction of American Dental Conditions . . . . . . . . . . . . . . . . .25 6.2 Further Conditions to the Obligations of Buyer. . . . . . . . . . . . . . . . . .26 (a) Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . .26 (b) Performance of Obligations of Other Parties. . . . . . . . . . . . . . . . .26 (c) No Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 (d) No Adverse Change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 (e) Spousal Consent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 (f) Third-Party Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . . .26 (g) Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 (h) Board and Shareholder Approval . . . . . . . . . . . . . . . . . . . . . . .26
ii (i) Financial Statements Audit . . . . . . . . . . . . . . . . . . . . . . . . .26 (j) Financial Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 (k) Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 (l) Agreement Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . .27 (m) Employment Arrangements. . . . . . . . . . . . . . . . . . . . . . . . . . .27 (n) Payment and Release of Liens . . . . . . . . . . . . . . . . . . . . . . . .27 6.3 Further Conditions to the Obligations of the Company and the Shareholders . . . .27 (a) Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . .27 (b) Performance of Obligations of Other Parties. . . . . . . . . . . . . . . . .28 (c) Third-Party Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . . .28 ARTICLE VII TERMINATION, EXTENSION AND WAIVER. . . . . . . . . . . . . . . . . . . . . . .28 7.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 (a) By Mutual Consent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 (b) By Any Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 (c) By Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 (d) By the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 7.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 7.3 Extension; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 ARTICLE VIII INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 8.1 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 (a) Indemnification by the Shareholders. . . . . . . . . . . . . . . . . . . . .29 (b) Indemnification by Buyer . . . . . . . . . . . . . . . . . . . . . . . . . .30 (c) Definition of Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 8.2 Third Party Claims Notice and Opportunity to Settle . . . . . . . . . . . . . . .31 8.3 Right to Offset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 8.4 Non-Third Party Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 8.5 Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 ARTICLE IX DISPUTE RESOLUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 9.1 Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 9.2 Arbitrator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 9.3 Pre-Hearing Conference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 9.4 Discovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 9.5 Briefs and Hearing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 9.6 Decision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 9.7 Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 ARTICLE X GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 10.1 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . .35 10.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 10.3 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 10.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 10.5 Integration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 10.6 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 10.7 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 10.8 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 10.9 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 10.10 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37 10.11 Transfer Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
iii STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement") is entered into as of August 9, 1996, by and among SAFEGUARD HEALTH ENTERPRISES, INC., a Delaware corporation ("Buyer"), and T.R.C. AGENCY, INC., a Texas corporation (the "Company"), and JAMES L. DAVENPORT, D.D.S. ("Dr. Davenport") and MARTIN J. RINKER, D.D.S. ("Dr. Rinker"), the beneficial and record owners of all of the outstanding capital stock of the Company (each, a "Shareholder" and collectively, the "Shareholders"). RECITALS WHEREAS, the Shareholders own all of the issued and outstanding shares of capital stock (the "Shares") of the Company; WHEREAS, the Shareholders desire to sell to Buyer, and Buyer desires to purchase from the Shareholders, the Shares of the Company on the terms and conditions set forth herein; WHEREAS, the Shareholders are also party to that certain Stock Purchase Agreement (the "American Stock Purchase Agreement") by and among First American Dental Benefits, Inc. ("American Dental"), the Shareholders, William N. Rees, Jr. and Buyer dated August 9, 1996; and WHEREAS, the sale of the Company and American Dental are to occur simultaneously, with each as a condition precedent to the other. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE I TRANSFER OF SHARES 1.1 SALE OF SHARES. Subject to the terms and conditions set forth herein, at the Closing (as defined herein), the Shareholders shall sell, transfer and deliver to Buyer, and Buyer shall purchase and acquire from the Shareholders, all of the Shares of the Company, free and clear of any claims, liens, pledges, options, encumbrances, security interests, trusts or other rights or interests of any person. 1.2 PURCHASE PRICE. The aggregate purchase price to be paid by Buyer for the Shares of the Company, in the manner provided in SECTION 1.3, will equal Eight Million Dollars ($8,000,000) (the "Purchase Price"). Stock Purchase Agreement TRC Agency OA962220.090 1.3 PAYMENT OF PURCHASE PRICE. The Purchase Price shall be paid by Buyer to Shareholders in equal amounts at the Closing. 1.4 SHAREHOLDERS TO DELIVER TITLE AND POSSESSION. At the Closing, the Shareholders shall deliver to Buyer endorsed share certificates or executed stock powers and other good and sufficient instruments of transfer as Buyer may reasonably require to vest effectively in Buyer good and valid title to the Shares of the Company, free and clear of any claims, liens, pledges, options, security interests, trusts, encumbrances or other rights or interests of any person, in accordance with the terms hereof. 1.5 CLOSING. The consummation of the transactions contemplated by this Agreement (the "Closing") shall take place on August 30, 1996, or on the fifth (5th) business day following the date on which all conditions precedent to the obligations of the parties hereunder and under the American Stock Purchase Agreement have been satisfied or waived, whichever is the later to occur (the "Closing Date"), at the offices of Gibson, Dunn & Crutcher LLP, Jamboree Center, 4 Park Plaza, Suite 1700, Irvine, California 92614 or at such other date, time and place as may be mutually agreed upon in writing by the parties. All proceedings to take place at the Closing shall take place simultaneously, and no delivery shall be considered to have been made until all such proceedings have been completed. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS The Company, Dr. Davenport and Dr. Rinker jointly and severally represent and warrant (except with respect to the representations and warranties set forth in Sections 2.2 and 2.3, the last sentence of Section 2.4, and the second sentence of Section 2.13(f), which are made by each such Shareholder severally and not jointly) to Buyer as follows: 2.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing in the State of Texas, is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the character of its properties or the nature of its business makes such qualification necessary, except in jurisdictions, if any, where the failure to be so qualified (a) would not result in a Material Adverse Change (as defined below) or (b) would not result in a breach of any of the other representations, warranties or covenants set forth in this Agreement. The Company has the requisite corporate power and authority to own, use or lease its properties and to carry on its business as it is now being conducted and as it is now proposed to be conducted. The Company has made available to Buyer a complete and correct copy of its Articles of Incorporation and Bylaws, each as amended to date, and such Articles of Incorporation and Bylaws as so delivered are in full force and effect. The Company is not in default in any material respect in the performance, observation or fulfillment of any provision of its Articles of Incorporation or Bylaws. For purposes of this Agreement, a "Material Adverse Change" shall mean any event, circumstance, condition, development or occurrence causing, resulting in or having a material adverse effect on the financial condition, business, properties, prospects or results of operations of the Company. 2 2.2 CAPITALIZATION. The authorized capital stock of the Company consists solely of 100,000 shares of common stock, $1.00 par value, of which, 1,000 shares are issued and outstanding. The Shares of the Company are owned beneficially and of record by the Shareholders as set forth on SCHEDULE 2.2, free and clear of any claims, liens, pledges, options, security interests, trusts, encumbrances or other rights or interests of any person. No agreement or other document grants or imposes on any of the Shares of the Company any right, preference, privilege or restriction with respect to the transaction contemplated hereby (including, without limitation, any rights of first refusal). All of the Shares of the Company have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights created by any agreement to which the Company is bound. The Shares have been issued in full compliance with all federal and state securities laws. There are no options, warrants or other rights, commitments or agreements of any character that call for the issuance of shares of capital stock or other securities of the Company or any securities, instruments or rights convertible into or exchangeable for shares of capital stock or other securities of the Company. The Shareholders have the absolute and unrestricted right, power, authority and capacity to transfer the Shares of the Company to Buyer and upon the Closing, without exception, Buyer will acquire from the Shareholders legal and beneficial ownership of, good and valid title to, and all rights to vote, the Shares of the Company, free from any charge, lien, encumbrance or adverse claim of any kind whatsoever other than those that may arise by virtue of any actions (other than the purchase of shares contemplated hereby), taken by or on behalf of Buyer or its affiliates. 2.3 VOTING AGREEMENTS. Neither the Company nor any Shareholder is a party to or subject to any proxy, agreement or understanding, nor is there, to the knowledge of the Company and the Shareholders, any agreement or understanding between any other persons, that affects or relates to the voting or giving of written consents with respect to any security of the Company or the voting by a director of the Company. 2.4 AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby on the part of the Company have been duly and validly authorized by its Board of Directors and the Shareholders, and no other corporate proceedings on the part of the Company is necessary, as a matter of law or otherwise, to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly and validly executed and delivered by the Company and the Shareholders and, assuming this Agreement constitutes a valid and binding obligation of Buyer, this Agreement constitutes a valid and binding agreement of such persons or entities, enforceable against them in accordance with its terms, except (a) as such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights, and (b) as the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 2.5 NO SUBSIDIARIES. The Company does not control, directly or indirectly, nor does it have any direct or indirect equity participation or other interest in, any corporation, partnership, trust or other business entity. 3 2.6 ABSENCE OF CERTAIN CHANGES. Since May 31, 1996, the Company has conducted its business only in, and has not engaged in any transaction other than according to, the ordinary and usual course of its business and, since such date, there has not been (a) any Material Adverse Change; (b) any declaration, setting aside or payment of any dividend or other distribution with respect to the capital stock of the Company; (c) any material change by the Company in accounting principles, practices or methods; (d) any labor dispute or difficulty which is reasonably likely to result in any Material Adverse Change, and to the knowledge of each of the Company and the Shareholders, no such dispute or difficulty is now threatened; (e) any material asset sold or disposed of (except inventory sold in the ordinary course of business), any material asset mortgaged, pledged or subjected to any lien, charge or other encumbrance; (f) any increase in excess of $5,000 in the compensation payable or which could become payable by the Company to its directors, officers, employees, agents, distributors, dealers or sales representatives; (g) any amendment by the Company of any employee benefit plan; (h) any issuance, transfer, sale or pledge by the Company of any shares of stock or other securities or of any commitments, options, rights or privileges under which the Company is or may become obligated to issue any shares of stock or other securities; (i) any indebtedness incurred by the Company, except such as may have been incurred in the ordinary course of business and consistent with past practice; (j) any loan made or agreed to be made by the Company, nor has the Company become liable or agreed to become liable as a guarantor with respect to any loan; (k) any waiver or release by the Company of any right of material value or any payment, direct or indirect, of any material debt, liability or other obligation; (l) any change in or amendment to the Articles of Incorporation or Bylaws of the Company; or (m) any other event or condition that has or might reasonably result in a Material Adverse Change. 2.7 FINANCIAL STATEMENTS. The audited balance sheets of the Company as of December 31, 1995 and the related statements of income and cash flow for the twelve month periods then ended (collectively, the "1995 Financial Statements") are attached hereto as SCHEDULE 2.7. The 1995 Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the period indicated (except as may be noted therein) ("GAAP"), and present fairly the financial position of the Company as of the end of such fiscal year and the results of operations and cash flows for such fiscal year in conformity with GAAP. The interim audited financial statements of the Company as of and for the six (6) months ended June 30, 1996 (also attached hereto as SCHEDULE 2.7) have been prepared in accordance with GAAP consistent with the 1995 Financial Statements, and present fairly the financial position of the Company as of the end of such period and the results of operations and cash flows for such period in conformity with GAAP, except that such interim financial statements may not contain all footnotes or other textual disclosure required by GAAP and are subject to normal recurring year-end audit adjustments. The interim financial statements for the six (6) months ended June 30, 1996 are referred to herein as the "Interim Financial Statements" and the l995 Financial Statements and Interim Financial Statements are collectively referred to herein as the "Financial Statements." 2.8 ABSENCE OF UNDISCLOSED LIABILITIES. (a) Except to the extent reserved against or reflected in the balance sheet of the Company included in the Interim Financial Statements, the Company does not 4 have any material liabilities or obligations (contingent or otherwise) that are required by GAAP to be reflected therein, and since that date the Company has not incurred any material liabilities or obligations that, had they been incurred prior to June 30, 1996, would have been required by GAAP to have been reflected in such balance sheets (except as may be noted therein), except such liabilities or obligations incurred in the ordinary and usual course of business and consistent with past practice. (b) The Company will not be liable for prepayment or other penalties in connection with the early retirement of any indebtedness for borrowed money. 2.9 CONSENTS AND APPROVALS; NO VIOLATION. The execution and delivery of this Agreement by the Company and the Shareholders, the consummation of the transactions contemplated hereby and the performance by the Company and the Shareholders of their obligations hereunder will not: (a) conflict with any provision of the Articles of Incorporation or Bylaws (or other similar charter documents) of the Company; (b) require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, except (i) the Governmental Filings (as defined in SECTION 5.2) (ii) compliance with any applicable requirements of the Securities Act of 1933; (iii) compliance with any applicable requirements of the Securities Exchange Act of 1934; (iv) compliance with any applicable state securities laws; and (v) where the failure to obtain such consents, approvals, authorizations or permits or the failure to make such filings or notifications would not result in a Material Adverse Change; (c) conflict with, result in the breach of or constitute a default (or give rise to any right of termination, cancellation or acceleration or guaranteed payments) under any of the terms, conditions or provisions of any note, lease, mortgage, license, agreement or other instrument or obligation to which the Company or any of the Shareholders is a party or by which the Company or any of its Shareholders or any of its assets may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained or which, in the aggregate, would not result in a Material Adverse Change; (d) conflict with or violate the provisions of any order, writ, injunction, judgment, decree, statute, rule or regulation applicable to the Company or any of the Shareholders; or (e) result in the creation of any lien, charge or encumbrance upon any shares of capital stock or assets of the Company under any agreement or instrument to which the Company is a party or by which the Company is bound. 2.10 BROKER'S COMMISSIONS OR FINDER'S FEES. The parties acknowledge that the Company enlisted the services of Ed Reese ("Finder") to act for the Company and the 5 Shareholders in connection with the transactions provided for in this Agreement. The Company and the Shareholders shall be solely responsible for the payment of all finder's fees or other similar fees or commissions due to Finder in connection with this Agreement. 2.11 EMPLOYMENT AND SIMILAR AGREEMENTS. There are (a) no employment, severance, bonus or indemnification arrangements, agreements, understandings or plans between the Company and any director, officer or employee thereof except those indemnification provisions set forth in the Articles of Incorporation and Bylaws of the Company; (b) no agreements of the type described in (a) above (i) providing benefits which are contingent, or the terms of which are altered, upon the occurrence of a transaction involving the Company of the nature of any of the transactions contemplated by this Agreement, (ii) providing any term of employment or compensation guaranty not terminable at any time upon notice of thirty (30) days or less or (iii) providing severance benefits or other benefits (which are conditioned upon a change in control) after the termination of employment of such employee, regardless of the reason for such termination of employment; (c) no agreements or plans, any of the benefits of which will be materially increased, or the vesting of benefits of which will be materially accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement; (d) subject to general principles related to wrongful termination of employees, no officers or employees of the Company whose employment is not terminable at the will of the Company. The Company (a) is not obligated to compensate any consultants pursuant to any agreement or arrangement which is material to the Company; (b) is not a party to, nor is it bound by, any collective bargaining agreement or other labor agreement; (c) is not involved in any labor discussion with any unit or group seeking to become the bargaining unit for any of its employees; and (d) has not been notified by any such unit or group of an intention to commence any organizational activities among the employees of the Company. 2.12 LITIGATION. Except as set forth on SCHEDULE 2.12, there is no claim, action or proceeding pending or, to the knowledge of the Company or the Shareholders, threatened against or relating to the Company before any court or other competent governmental or regulatory authority or body acting in an adjudicative capacity. To the knowledge of the Company and the Shareholders, there is no reasonable basis for a claim, action or proceeding against or relating to the Company which, if adversely determined, could, individually or in the aggregate, reasonably be expected to result in a Material Adverse Change with respect to the Company. Neither the Company nor any of its respective officers, directors or employees, has been permanently or temporarily enjoined by any order, judgment or decree of any court or any other governmental or regulatory authority from engaging in or continuing any conduct or practice in connection with the business, assets or properties of the Company nor, to the knowledge of the Company or the Shareholders, is any officer, director or employee of the Company under investigation by any governmental or regulatory authority. Except as set forth on SCHEDULE 2.12, there is not in existence any order, judgment or decree of any court or other tribunal or other agency enjoining or requiring the Company to take any action of any kind with respect to its business, assets or properties. 6 2.13 TAXES. (a) DEFINITIONS. For purposes of this Agreement, the following definitions shall apply: (i) For purposes of this Section 2.13, the term "Company" shall mean, collectively, the Company and any corporation, partnership or other entity as to which the Company is liable for Taxes incurred by such entity as a transferee, or pursuant to Treasury Regulations Sections 1.1502-6, or pursuant to any other provision of federal, state, local or foreign law or regulations. (ii) The term "Tax" or "Taxes" shall mean all taxes, however, denominated, including any interest, penalties or other additions to tax that may become payable in respect thereof, imposed by any federal, state, local or foreign government or any agency or political subdivision of any such government, which taxes shall include, without limiting the generality of the foregoing, all income or profits taxes (including, but not limited to, federal income taxes and state income taxes), real property gains taxes, payroll and employee withholding taxes, unemployment insurance taxes, social security taxes, sales and use taxes, ad valorem taxes, occupation taxes, real and personal property taxes, stamp taxes, environmental taxes, transfer taxes, workers' compensation and other governmental charges, and other obligations of the same or of a similar nature to any of the foregoing, which the Company is required to pay, withhold or collect. (iii) The term "Tax Returns" shall mean all reports, estimates, declarations of estimated tax, information statements and returns, including any and all schedules or attachments thereto, relating to, or required to be filed in connection with, any Taxes, including information returns or reports with respect to backup withholding and other payments to third parties. (b) TAX RETURNS FILED AND TAXES PAID. Except as disclosed on SCHEDULE 2.13, all Tax Returns required to be filed by or on behalf of the Company have been duly filed on a timely basis and such Tax Returns are true, complete and correct. All Taxes shown to be payable on the Tax Returns or on subsequent assessments with respect thereto have been paid in full on a timely basis and no other Taxes are payable by the Company with respect to items or periods covered by such Tax Returns (whether or not shown on or reportable on such Tax Returns) or with respect to any period prior to the date of this Agreement. The Company has withheld and paid over all Taxes required to have been withheld and paid over, and complied with all information reporting and backup withholding requirements, including maintenance of required records with respect thereto, in connection with amounts paid or owing to any employee, creditor, independent contractor, or other third party. There are no liens on any of the assets of the Company with respect to Taxes, other than liens for Taxes not yet due and payable or for Taxes that the Company is contesting in good faith through appropriate proceedings and for which appropriate reserves have been established. 7 (c) TAX RETURNS FURNISHED. Buyer has been furnished by the Company true and complete copies of (i) all relevant portions of income tax examination or audit reports, statements of deficiencies, closing or other agreements received by the Company or on behalf of the Company relating to Taxes, and (ii) all federal and state income or franchise tax returns for the Company for all periods ending on and after January 1, 1991. The Company has never been a member of an affiliated group filing consolidated returns. The Company does no business in nor derives income from any state, local or foreign taxing jurisdiction other than those for which all Tax Returns have been furnished to Buyer. (d) TAX DEFICIENCIES: AUDITS, STATUTES OF LIMITATIONS. Except as specified in SCHEDULE 2.13, the Tax Returns of the Company have never been audited by a government or taxing authority, nor is any such audit in process, pending or threatened; no deficiencies exist or have been asserted or are expected to be asserted with respect to Taxes of the Company, and the Company has not received notice nor expects to receive notice that it has not filed a Tax Return or paid Taxes required to be filed or paid by it; the Company is neither a party to any action or proceeding for assessment or collection of Taxes, nor has such event been asserted or threatened against the Company or any of its assets; and no waiver or extension of any statute of limitations is in effect with respect to Taxes or Tax Returns of the Company. (e) TAX SHARING AGREEMENTS. The Company is not (nor has it ever been) a party to any tax sharing agreement and has not assumed the Tax liability of any other person under contract. (f) TAX ELECTIONS AND SPECIAL TAX STATUS. (i) S CORPORATION DEFINED. As used herein the term "S corporation" means, with respect to any specified period, a corporation (A) that has in effect throughout such period a valid election under Section 1362(a) of the Internal Revenue Code of 1986, as amended (the "Code") to be an S corporation which is, and whose shareholders are, subject to the tax treatment provided for under the provisions of Sections 1361 ET SEQ. of the Code, and (B) that remains qualified throughout such period to be, and is treated throughout such period as, an S corporation which is, and whose shareholders are, subject to the tax treatment provided for under Sections 1361 ET SEQ. of the Code. (ii) S CORPORATION STATUS. The taxable year of the Company for federal and state income tax purposes is the calendar year ending each December 31. For the Company's taxable years prior to the 1994 year, for federal tax purposes the Company was not an S corporation. For the 1994 and 1995 taxable years, and for the 1996 period through to the date of this Agreement, the Company was and is an S corporation. For all periods with respect to which the Company has been an S corporation, for federal tax purposes the Company's Tax Returns have been prepared and filed on a basis consistent with its status as an S corporation. 8 (iii) OTHER MATTERS. The Company is not nor has it ever been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code and Buyer is not required to withhold tax on the purchase of the stock of Company by reason of Section 1445 of the Code. No Shareholder is a "foreign person" (as that term is defined in Section 1445 of the Code). The Company is not a "consenting corporation" under Section 341(f) of the Code. The Company has not entered into any compensatory agreements with respect to the performance of services which payment thereunder would result in a nondeductible expense pursuant to Section 280G of the Code or an excise tax to the recipient of such payment pursuant to Section 4999 of the Code. The Company has not agreed, nor is it required to make, any adjustment under Code Section 481(a) by reason of a change in accounting method or otherwise. (g) TAX BASIS AND TAX ATTRIBUTES. The disclosure schedules and other books and records of the Company furnished to Buyer contain accurate and complete descriptions of the Company's basis in its assets, current and accumulated earnings and profits, tax carryovers, and tax elections. The Company has no net operating losses or other tax attributes presently subject to limitation under Code Sections 382, 383, or 384. 2.14 ERISA PLANS. There are no employee pension benefit plans, programs, agreements or arrangements ("Plans") maintained or contributed to by the Company which are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). 2.15 CONTRACTS. Set forth on SCHEDULE 2.15 is a true and complete list of (a) each customer contract, whether written or oral, between each of the Company and any party to whom the Company provides goods or services; and (b) each contract, whether written or oral, between each of the Company and any party to whom the Company is obligated to make any payments. The contracts and agreements that are required to be identified in SCHEDULE 2.15 are hereinafter referred to as the "Contracts." The Company has delivered to Buyer (i) with respect to the agency contracts of the Company, a standard form of such contract; and (ii) true and complete written summaries of each oral Contract. The Company has made available to Buyer true and complete copies of each written Contract. Except as set forth on SCHEDULE 2.15: (i) Each of the Contracts is a valid, binding and enforceable agreement of the Company and, to the knowledge of the Company and the Shareholders, will, subject to the satisfaction of the conditions in ARTICLE VI, continue to be valid, binding and enforceable immediately after the Closing; (ii) As of the date hereof, the Company and the Shareholders have no reason to believe that the Company will not be able to fulfill in all material respects all of its obligations under the Contracts that remain to be performed after the date hereof; (iii) To the knowledge of the Company and the Shareholders, there has not occurred any material default (or event which upon provision of notice or lapse of time or both would become such a default) under any of the material Contracts on the part of the Company; and 9 (iv) The Contracts are all of the agreements, promissory notes, contracts and instruments (except employment agreements, which are set forth on SCHEDULE 2.11) that are material to the Company or its business. 2.16 COMMISSION ARRANGEMENTS AND SALES. Set forth on SCHEDULE 2.16 (such Schedule to be delivered at Closing) is a true and complete list of all of the agents receiving commissions from the Company, together with summaries of the commissions paid such agent during the past two (2) most recent calendar years and through the Closing Date. None of such agents has given notice to the Company of an intention to terminate or materially impair its business relationship with the Company and neither the Company nor its Shareholders have any knowledge of any event that would precipitate the impairment, cancellation or termination of, or the failure to renew, or entitle any such agent to terminate, such business relationship. The Company has paid all commissions due to such agents other than commissions which become due and payable after the Closing Date and for which the related revenues have been retained in American Dental for their payment. 2.17 CUSTOMER LIST. The Company has taken all reasonable security measures to protect the secrecy, confidentiality and value of its customer lists. Employees and any other person who, either alone or in concert with others, have knowledge of or access to the customer list, have been put on notice and, if appropriate, have entered into agreements that the customer list is proprietary and not to be divulged or misused. 2.18 INTERESTS IN COMPETITORS. Except as identified in SCHEDULE 2.18, to the knowledge of the Company and the Shareholders, none of the Shareholders, nor any employees, spouses or children of them, has any direct or indirect interest in any competitor, supplier or customer of the Company or in any person or firm from whom or to whom the Company leases any real or personal property, or in any other person with whom the Company is doing business. 2.19 PROPERTIES, LIENS. Except for statutory liens (including mechanics and materialmen's liens) and liens for current taxes not yet delinquent, the Company owns, free and clear of any liens, claims, charges, options or other encumbrances, all of its tangible and intangible property, real and personal, whether or not reflected in the Interim Financial Statements (except property sold or disposed of in the ordinary course of business since December 31, 1995) and all such property acquired since such date that is necessary to conduct its business as it is now being conducted, and to the knowledge of the Company and the Shareholders, there has not been any violation of any law, regulation or ordinance relating to its properties or its business that may reasonably be expected to result in a Material Adverse Change. All plants, structures, equipment, furniture and automobiles owned or leased by the Company and material to the operation of its business are in satisfactory condition (ordinary wear and tear excepted) and repair for the requirements of its business as now being conducted. There are no proceedings affecting any of such properties pending or, to the knowledge of the Company or the Shareholders, threatened which may reasonably be expected to curtail, materially and adversely, the use of such property for the purpose for which it was acquired or the purpose for which it is now used. 2.20 REAL PROPERTY. There is no real property owned and/or leased by the Company. 10 2.21 PERMITS; COMPLIANCE WITH LAWS. The Company has all necessary franchises, authorizations, approvals, orders, consents, licenses, certificates, permits, registrations, qualifications or other rights and privileges, including without limitation certificates of authority from the Texas Department of Insurance ("Certificates of Authority") (collectively "Permits"), necessary to permit it to own its properties and to conduct its business as the same are presently conducted and all such Permits are in full force and effect and valid. No Permit is subject to termination as a result of the execution of this Agreement or consummation of the transaction contemplated hereby. The Company is in compliance with all applicable statutes, ordinances, orders, rules and regulations promulgated by any federal, state, municipal or other governmental authority which apply to the conduct of its business. Since January 1, 1992, the Company has not ever entered into or been subject to any judgment, consent decree, compliance order or administrative order with respect to any environmental or health and safety law or received any request for information, notice, demand letter, administrative or demand letter, administrative inquiry or formal or informal complaint or claim with respect to any environmental or health and safety matter or the enforcement of any such law. 2.22 INSURANCE POLICIES. Set forth on SCHEDULE 2.22 is a true and correct list of all insurance policies of any nature whatsoever maintained by the Company. Such policies are in full force and effect through the Closing Date and, except as otherwise set forth on SCHEDULE 2.22, such policies, or other policies covering the same risks, have been in full force and effect, without gaps, continuously for the past five (5) years. Except as disclosed on SCHEDULE 2.22, there are no claims pending under any of such policies. Copies of all such policies have been made available to Buyer for its inspection. 2.23 ENVIRONMENTAL LIABILITY. The business of the Company has been and is now operated in material compliance with all federal, state and local environmental protection, occupational, health and safety or similar laws, ordinances, restrictions, licenses, rules, regulations and permit conditions, including, but not limited to, the Federal Water Pollution Control Act, Resource Conservation & Recovery Act, Clean Air Act, Comprehensive Environmental Response, Compensation and Liability Act, Emergency Planning and Community Right to Know, and Occupational Safety and Health Act, each as amended ("Environmental Laws"). 2.24 BANKING FACILITIES. Set forth on SCHEDULE 2.24 is a true and complete list of: (a) Each bank, savings and loan or other institution in which the Company has a deposit, custodial, trust or similar account or safety deposit or lock box account and the numbers and types of the accounts or safety deposit boxes maintained by the Company at such financial institutions; and (b) The names of all persons authorized to draw on each such account or to have access to any such safety deposit or lock box facility, together with a description of the authority (and conditions thereof, if any) of each such person with respect thereto. 11 All of such bank accounts, bonds or other accounts required of an insurance agency in Texas are adequate and in compliance with Texas law. 2.25 MINUTE BOOKS AND STOCK RECORDS. The Company has delivered or made available to Buyer true, correct and complete copies of (a) the minute books of the Company containing all records required to be set forth of all proceedings, consents, actions, and meetings of the shareholders and Board of Directors of the Company, including minutes of meetings for committees of the Board; and (b) all stock record books of the Company setting forth all transfers of capital stock. 2.26 CONSENTS OF NON-GOVERNMENTAL THIRD PARTIES. No material consent, waiver or approval of any non-governmental third party is necessary for the consummation by the Company or the Shareholders of the transactions contemplated hereby. 2.27 ACCOUNTS RECEIVABLE. All accounts receivable of the Company shown on the Interim Financial Statements and all accounts receivable of the Company created after June 30, 1996 up to the date hereof arose from valid transactions in the ordinary course of business and such accounts receivable are (except to the extent of the reserves thereon) collectible in the ordinary course of business. 2.28 TRADEMARKS; TRADENAMES. Except for the name of the Company and the name "American Dental Group Agency, Inc.", the dba of the Company, there are no trademarks, trade names, service marks or copyrights owned by the Company. The Company has not infringed, nor is it now infringing, on any trade name, trademark, service mark, or copyright belonging to any other person, firm or business. Except as set forth in the Contracts, the Company is not a party to any license, agreement or arrangement, with respect to any trademarks, servicemarks, trade names, or applications for them, or any copyrights. The Shareholders covenant that they have not granted and will not grant to any other person, firm or corporation the right to use the Company's name or dba, and will not after the Closing use, such names as part of the corporate or firm name of any other firm, entity, corporation or business. Notwithstanding the foregoing, the use of the name "American Dental Network, Inc." shall remain the exclusive property of American Dental Network, Inc. and Dr. Davenport and Dr. Rinker to be used in connection with their national PPO business. 2.29 PROBABLE SUCCESS. No Shareholder makes any representations or warranties to Buyer regarding the probable success or profitability of the business of the Company, provided that the foregoing statement shall not limit or modify any representation, warranty, covenant, or agreement of the Company or the Shareholders in this Agreement or in any certificate, instrument, or document delivered pursuant hereto or in connection herewith. 2.30 TRANSACTIONS WITH RELATED PARTIES. Except as set forth in SCHEDULE 2.30 hereto, there are no loans, leases or other continuing transactions between the Company and any present or former stockholder, director or officer of the Company, or any member of such officer's, director's or stockholder's immediate family, or any business organization controlled by such officer, director or stockholder or his or her immediate family. Except as set forth in SCHEDULE 2.30, no stockholder, director or officer of the Company, or any of the respective 12 spouses or immediate family members, owns directly or indirectly on an individual or joint basis any material interest in, or serves as an officer or director or in another similar capacity of, any competitor or supplier of the Company. 2.31 COMPLIANCE WITH INSURANCE LAWS. Without limiting the representations and warranties contained elsewhere in this Agreement, except as set forth in SCHEDULE 2.31: (a) The Company has since January 1, 1992, made all reports required under applicable insurance statutes. SCHEDULE 2.31 sets forth the licenses held by the Company under all applicable insurance or other similar laws. Other than the licenses listed in SCHEDULE 2.31, the Company is not required to hold any other license, permit or authorization under the insurance laws of any state other than the State of Texas to conduct its business as presently conducted. The Company has all other necessary Permits of and from all insurance regulatory authorities to conduct its business as presently conducted. (b) To the best of the Shareholders' knowledge, the dental plan products offered and sold by the agents of the Company have been and are offered and sold in compliance with the requirements of all relevant laws and regulations, in each case. The Company has not received any notification from any insurance regulatory authority to the effect that any additional Permit is needed to be obtained by it. The Company has not since January 1, 1992, ever, entered into or been subject to any judgment, consent decree, compliance order or administrative order other than any issued in the ordinary course of business with respect to any insurance or other similar law or, other than in the ordinary course of business, received any request for information, notice, demand letter, administrative inquiry or formal or informal complaint or claim with respect to any insurance or other similar law or the enforcement of any such law. (c) Since January 1, 1992, the Company has not failed to comply with any applicable statute, ordinance, order, rule or regulation, or failed to obtain any Permit in the State of Texas, or, to the best knowledge of the Shareholders, in any jurisdiction other than the State of Texas in which the Company is conducting or has prior to the date hereof conducted any activities. 2.32 FULL DISCLOSURE. None of the representations and warranties made by the Company or the Shareholders, or made in any certificate or memorandum furnished or to be furnished by any of them or on their behalf, contains or will contain any untrue statement of a material fact, or omits to state any material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading. 2.33 REPRESENTATIONS AND WARRANTIES TRUE. All representations and warranties of the Company and the Shareholders set forth in this Agreement and in any written statements delivered to Buyer by the Company or any Shareholder will also be true and correct as of the Closing Date as if made on that date (except to the extent such representations or warranties speak to a particular date). 13 ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to the Company and the Shareholders as follows: 3.1 ORGANIZATION. Buyer is a corporation duly organized, validly existing and in good standing in the State of Delaware, is duly qualified to do business as a foreign corporation and is in good standing in the State of California. Buyer has the requisite corporate power to own, use or lease its properties and to carry on its business as it is now being conducted. Buyer has made available to the Company a complete and correct copy of its Certificate of Incorporation and Bylaws, each as amended to date, and Buyer's Certificate of Incorporation and Bylaws as so delivered are in full force and effect. Buyer is not in default in any material respect in the performance, observation or fulfillment of any provision of its Certificate of Incorporation or Bylaws. 3.2 AUTHORITY RELATIVE TO THIS AGREEMENT. Buyer has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby on the part of Buyer have been duly and validly authorized by the Board of Directors of Buyer, and no other corporate proceedings on the part of Buyer are necessary, as a matter of law or otherwise, to authorize this agreement or to consummate the transactions so contemplated. This Agreement has been duly and validly executed and delivered by Buyer and, assuming this Agreement constitutes a valid and binding obligation of the Company and the Shareholders, this Agreement constitutes a valid and binding agreement of Buyer, enforceable against it in accordance with its terms, except (a) as such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights, and (b) as the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 3.3 CONSENT AND APPROVALS; NO VIOLATION. The execution and delivery of this Agreement by Buyer, the consummation of the transactions contemplated hereby and the performance by Buyer of its obligations hereunder, will not: (a) conflict with any provision of the Certificate of Incorporation or Bylaws of Buyer; (b) require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, except (i) the filing of the Governmental Filings (as defined in SECTION 5.2) and (ii) where the failure to obtain such consents, approvals, authorizations or permits or the failure to make such filings or notifications would not have a material adverse effect on the financial condition, business, properties or results of operations of Buyer; or 14 (c) conflict with or violate the provisions of any order, writ, injunction, judgment, decree, statute, rule or regulation applicable to Buyer, in such a manner as to result in a material adverse effect on the financial condition, business, properties or results of operations of Buyer. 3.4 BROKER'S COMMISSIONS OR FINDER'S FEES. No person or entity has acted for Buyer in connection with the transactions provided for in this Agreement in any way that would entitle such person to, and no person or entity is entitled to, receive from Buyer any broker's commissions or finder's fees (or other similar fees or commissions) in connection with this Agreement. 3.5 INVESTMENT INTENT. Buyer is acquiring the Shares for its own account for investment and not with a view to, or for sale or other disposition in connection with, any distribution of all or any part thereof, except in compliance with applicable federal and state securities laws. 3.6 LEGAL PROCEEDINGS. There are no legal proceedings pending or, to the best knowledge of Buyer, threatened seeking to restrain, prohibit, or obtain damages or other relief in connection with this Agreement or the transactions contemplated hereby. ARTICLE IV CONDUCT OF BUSINESS BY THE COMPANY PRIOR TO CLOSING From the date of this Agreement and until the Closing Date or the earlier termination of this Agreement, the Company and Shareholders agree (except as expressly contemplated by this Agreement or to the extent that Buyer shall otherwise consent in writing) as follows: 4.1 ORDINARY COURSE. The Company shall carry on its business in the usual, regular and ordinary course, in substantially the same manner as heretofore conducted, and shall use all reasonable efforts consistent with past practice and policies to preserve intact its present business organization, keep available the services of its present agents and preserve its relationships with customers and others having business dealings with it to the end that its goodwill and ongoing business shall be unimpaired at the Closing Date. The Company will not adopt any method of accounting that is inconsistent with generally accepted accounting principles. 4.2 DIVIDENDS; CHANGES IN STOCK. The Company shall not (a) declare or pay any dividends on or make other distributions in respect of any Shares, or (b) split, combine or reclassify any Shares or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Shares. 4.3 ISSUANCE OR REPURCHASE OF SECURITIES. Except as otherwise expressly contemplated by this Agreement, the Company shall not issue, pledge, deliver, sell, or repurchase any shares of its capital stock of any class, or any options, warrants or other rights exercisable for or securities convertible into or exchangeable for, any such shares. 15 4.4 GOVERNING DOCUMENTS. The Company shall not adopt any amendment to its Articles of Incorporation or Bylaws. 4.5 NO SOLICITATION. (a) Until the closing of the transaction contemplated hereby or until this Agreement is terminated, neither the Company nor any Shareholder shall directly or indirectly, nor shall any such party authorize or permit any director, officer, employee, stockholder, investment banker, finder, attorney, accountant or other agent or representative to, solicit or encourage submission of any proposal or offer, or participate or cooperate in any discussions or negotiations, or enter into any letter of intent, agreement in principle or other agreement, oral or written, concerning any merger, sale of substantial assets, business combination, joint venture, sale or purchase of shares of capital stock or similar transaction involving the Company (any such proposal or offer being hereinafter referred to as an "Acquisition Proposal"). (b) The Company and the Shareholders shall promptly notify Buyer in writing if any such Acquisition Proposal is made, and shall in any such notice, set forth in reasonable detail the identity of the third party, the terms and conditions of any such Proposal and any other information requested of it by the third party or in connection therewith. (c) If (i) Section 4.5(a) of this Agreement is breached, and (ii) on or before July 31, 1997, either the Company and/or the Shareholders consummate an Acquisition Proposal, then the Company and its Shareholders shall pay Buyer a break-up fee in the aggregate amount of Five Hundred Thousand Dollars ($500,000), less any amounts paid under the American Stock Purchase Agreement for a breach of the analogous Section in such Agreement, and reimburse Buyer for any and all reasonable expenses incurred by it in connection with the transactions contemplated hereby. The Company and each of the Shareholders shall be jointly and severally liable for the payment of any such fee. 4.6 NO ACQUISITIONS. The Company shall not acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire or agree to acquire any capital or other assets which are material, individually or in the aggregate, to the Company. 4.7 NO DISPOSITIONS. Except for the sale of inventory in the ordinary course of business and other than pursuant to the requirements of existing Contracts, the Company shall not sell, lease or otherwise dispose of any assets which are material, individually or in the aggregate, to the Company. 16 4.8 INDEBTEDNESS. (a) The Company shall not incur, become subject to, or agree to incur or become subject to, any obligation or liability (absolute or contingent), except current liabilities incurred, and obligations under contracts entered into, in the ordinary course of business consistent with prior practice, and provided specifically that the Company shall not enter into any material lease or extension of any material lease with respect to any real or personal property or issue or sell, or guaranty the repayment of; any debt securities. (b) The Company shall not pay or be liable for prepayment or other penalties in connection with the early retirement of any of the Company's indebtedness for borrowed money. 4.9 EMPLOYEES. Except as expressly contemplated by this Agreement, the Company shall not make any change in the compensation payable, or to become payable, to any of its officers, directors, employees, agents or consultants, enter into or amend any employment, severance, termination or other agreement; make any loans to any of its officers, directors, employees agents or consultants; or make any change in its existing borrowing or lending arrangements for or on behalf of any of such persons, whether contingent on consummation of the transactions contemplated by this Agreement or otherwise. 4.10 BENEFIT PLANS. The Company shall not (a) pay, agree to pay or make any accrual or arrangement for payment of any pension, retirement allowance or other employee benefit pursuant to any existing plan, agreement or arrangement to any officer, director or employee except in the ordinary course of business and consistent with past practice or as permitted by this Agreement; (b) pay or agree to pay or make any accrual or arrangement for payment to any employees of the Company of any amount relating to unused vacation days; (c) commit itself to adopt or pay, grant, issue or accrue salary or benefits pursuant to any additional pension, profit-sharing, bonus, extra compensation, incentive, deferred compensation, stock purchase, stock option, stock appreciation right, group insurance, severance pay, retirement or other employee benefit plan, agreement or arrangement, or any employment or consulting agreement with or for the benefit of any director, officer, employee, agent or consultant, whether past or present; or (d) amend in any material respect any such existing plan, agreement or arrangement. 4.11 ADDITIONAL MATTERS. The Company shall not: (a) enter into, amend or terminate any agreements, commitments or contracts which, individually or in the aggregate, are material to the financial condition or results of operations of the Company; (b) discharge or satisfy any lien or encumbrance or payment of any obligation or liability (absolute or contingent) other than current liabilities in the ordinary course of business; 17 (c) cancel or agree to cancel any material debts or claims, except in each case in the ordinary course of business; (d) waive any rights of substantial value; (e) otherwise make any material change in the conduct of the business or operations of the Company; (f) settle any tax assessment, litigation or other claims, relinquish any material contract right or make any equity investments in third parties; or (g) agree in writing or otherwise to take any of the foregoing actions or any action which would constitute a Material Adverse Change or make any of the representations and warranties of the Company set forth in this Agreement untrue or incorrect in any material respect. ARTICLE V ADDITIONAL COVENANTS 5.1 CONFIDENTIAL INFORMATION. (a) NONDISCLOSURE BY SHAREHOLDERS. The Shareholders recognize and acknowledge that they have in the past, currently have, and in the future may possibly have, access to certain confidential information of the Company, such as customer lists, specific information relating to the special needs of particular customers (including knowledge of what products they are using and are likely to use in the future), sales and financial records and related data (including pricing information), information and specifications relating to products proposed by the Company, knowledge of the Company's sales and marketing techniques, and information regarding vendors and suppliers of the Company. Each of the Shareholders agrees that from and after the Closing Date it will not use such confidential information or disclose such confidential information to any person or entity for any purpose or reason whatsoever, except to authorized representatives of Buyer, unless such information becomes known to the public generally through no fault of the Company or the Shareholders, or unless the Shareholders are required by law to disclose such information. If any Shareholder is requested to provide such information pursuant to requirements of applicable law, he shall notify Buyer as promptly as possible and shall allow Buyer the opportunity to oppose such request. In the event of a breach or threatened breach by the Company or a Shareholder of the provisions of this Section, Buyer shall be entitled to an injunction restraining the Company or Shareholder from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting Buyer from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. (b) REMEDIES. The Shareholders acknowledge and agree that, because the legal remedies of Buyer may be inadequate in the event of a breach of any of the covenants set forth in this Section, Buyer may, in its discretion and in addition to obtaining 18 any other remedy or relief available to it (including, without limitation, damages at law), enforce the provisions of this Section by injunction and other equitable relief. (c) NONDISCLOSURE BY BUYER. Buyer agrees that, unless and until the Closing has been consummated, all Confidential Information (as defined below) shall be kept confidential by Buyer as required by this subsection (c); provided, however, that (i) any of such Confidential Information may be disclosed to such directors, officers, employees, and authorized representatives of Buyer (collectively, for purposes of this Section, "Buyer Representatives") as need to know such information for the purpose of evaluating the transactions contemplated hereby (it being understood that such Buyer Representatives shall be informed by Buyer of the confidential nature of such information and shall be required to treat such information confidentially), (ii) any disclosure of Confidential Information may be made to the extent to which the Company and the Shareholders consent in writing, (iii) Confidential Information may be disclosed by Buyer or any Buyer Representative, to the extent that, in the opinion of counsel, Buyer or such Buyer Representative is legally compelled to do so, provided that, prior to making such disclosure and if there is time to do so, Buyer or such Buyer Representative, as the case may be, advises and consults with the Company and the Shareholders regarding such disclosure and provided further that Buyer or such Buyer Representative, as the case may be, discloses only that portion of the Confidential Information as is legally required, and (iv) any of such Confidential Information may be disclosed to any banks or financial institutions or other prospective investors who agree in writing to comply with the provisions of this Section. Buyer agrees that none of the Confidential Information will be used for any purpose other than in connection with the transactions contemplated hereby. The term "Confidential Information", as used herein, means all information obtained by or on behalf of Buyer from the Shareholders or the Company pursuant to this Section and all similar information obtained from the Company or the Shareholders by or on behalf of Buyer prior to the date of this Agreement, other than information which (i) was or becomes generally available to the public other than as a result of disclosure by Buyer or any Buyer Representative, (ii) was or becomes available to Buyer on a nonconfidential basis prior to disclosure to Buyer by the Shareholders or the Company or their respective representatives, or (iii) was or becomes available to Buyer from a source other than the Shareholders or the Company and their respective representatives, provided that such source is not known by Buyer to be bound by a confidentiality agreement with the Shareholders or the Company. The agreement contained in this Section 5.1(c) shall terminate upon the Closing. (d) RETURN OF INFORMATION. If this Agreement is terminated, Buyer shall promptly return or destroy, and shall use its reasonable best efforts to cause all Buyer Representatives to promptly return or destroy, all Confidential Information relating to the Company without retaining any copies thereof, provided that such portion of the Confidential Information as consists of notes, compilations, analyses, reports, or other documents prepared by Buyer or Buyer Representatives shall be destroyed. 5.2 GOVERNMENTAL FILINGS. Each of Buyer, the Company and the Shareholders agrees to make as promptly as practicable all filings necessary under any applicable 19 federal, state, local and foreign laws and to obtain any required regulatory approvals, clearances or expirations of waiting periods in connection with the transactions contemplated by this Agreement (all such filings required to be made as provided herein are referred to herein collectively as the "Governmental Filings"). Each party shall use its good faith best efforts, and cause its counsel to use their good faith best efforts, to cooperate with the other parties in preparing their respective Governmental Filings and in obtaining all required regulatory approvals, clearances and expirations of waiting periods. 5.3 LEGAL CONDITIONS. Each of Buyer, the Company and the Shareholders will take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on such party with respect to the consummation of the transactions contemplated by this Agreement and will promptly cooperate with and furnish information to such other party or parties in connection with any such requirements as may be imposed upon such other party or parties in connection with the consummation of the transactions contemplated by this Agreement. 5.4 CERTAIN DEFAULTS. The Company will give prompt notice to Buyer of (a) any notice of default received by it subsequent to the date of this Agreement and prior to the Closing Date under any material instrument or material agreement to which it is a party or by which it is bound, which default would, if not remedied, result in a Material Adverse Change or which would render materially incomplete or untrue any representation made herein, and (b) any suit, action or proceeding instituted or, to the knowledge of it, threatened against or affecting it subsequent to the date of this Agreement and prior to the Closing Date which, if adversely determined, would result in a Material Adverse Change or which would render materially incorrect any representation made herein. 5.5 EXPENSES. Except as provided in Section 10.10 hereof or as otherwise contemplated herein, whether or not the transactions contemplated by this Agreement are consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense. 5.6 ACCESS TO INFORMATION AND DILIGENCE REVIEW. Between the date of this Agreement and the Closing Date at Buyer's expense the Company shall (i) give Buyer and its authorized representatives reasonable access during normal business hours to all plants, offices, warehouses and other facilities and to all contracts, internal reports, data processing files and records, federal, state, local and foreign tax returns and records, commitments, books, records and affairs of the Company, whether located on the premises of the office facilities for the Company or at another location, including, without limitation, the relationship of the Company to its related employee leasing company; (ii) permit Buyer to make such inspections as it may require, (iii) cause its officers to furnish to Buyer such financial, operating, technical and product data and other information with respect to the business and properties of the Company as Buyer from time to time may request, including without limitation financial statements and schedules, and (iv) assist and cooperate with Buyer in the development of integration plans for implementation by Buyer following the Closing Date; provided, however, that no investigation pursuant to this Section shall affect or be deemed to modify any representation or warranty made by the Company or the Shareholders herein and provided further that the Company shall have the right to have a representative present at all times. 20 5.7 ADDITIONAL ACTIONS. Subject to the terms and conditions of this Agreement, each of the parties hereto agrees to use all reasonable good faith efforts to take, or cause to be taken, all reasonable action and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement as promptly as reasonably practicable. The Company and the Shareholders shall give prompt notice to Buyer of any material breach of any of their respective covenants hereunder or the occurrence of any event that is reasonably likely to cause any of their respective representations and warranties hereunder to become incomplete or untrue in any material respect. 5.8 TAX MATTERS. (a) PREPARATION OF TAX RETURNS DUE PRIOR TO CLOSING AND PAYMENT OF TAXES. The Shareholders and the Company shall take all actions required to maintain, and shall refrain from taking any actions that would terminate, the Company's qualification as an S corporation for federal tax purposes for the period through and including the day immediately preceding the Closing Date. The Shareholders shall cause the Company to, and the Company shall, prepare (on a Consistent Basis as that term is defined in Section 5.8(b)(ii) hereof) and timely file all Tax Returns and amendments thereto having a due date (not including extensions) on or before the Closing Date, and all such Tax Returns shall be true, complete and accurate. Any Tax Return having a due date which has been extended to a date following the Closing Date, including but not limited to federal and state income and franchise tax returns for the 1995 calendar year if the due date therefor has been so extended, shall be subject to the foregoing covenant. All Taxes shown to be payable by the Company on such Tax Returns shall be paid in full by the Shareholders prior to the Closing Date and no Taxes shall be payable by the Company with respect to items or periods covered by such Tax Returns (whether or not shown on or reportable on such Tax Returns). (b) PREPARATION OF 1996 FEDERAL INCOME AND TEXAS FRANCHISE TAX RETURNS DUE FOLLOWING CLOSING AND PAYMENT OF TAXES. (i) SHORT PERIOD S CORPORATION RETURN. The parties acknowledge and agree that Code Section 1362(e)(6)(D) shall be effective as of the Closing Date and that the Company shall be required to file a short period return as an S corporation for the period commencing January 1, 1996, and ending on the day immediately preceding the Closing Date (herein the "Short Period S Return"). Prior to the due date (including extensions) for such Short Period S Return, Shareholders shall cause to be prepared and shall submit to Buyer such Short Period S Return. Such Short Period S Return (A) shall be true, accurate and complete and shall be prepared so as to report the Company's income, losses, gains, profits, deductions, credits and other tax items (collectively "Tax Items") consistently with the manner in which equivalent or comparable Tax Items have been reported by the Company in Tax Returns filed with respect to prior years but taking into account any changes to such items heretofore given effect pursuant to amendments to such prior year Tax Returns or pursuant to adjustments related to such prior year Tax Returns resulting from tax audits, tax examinations or other administrative 21 or judicial tax proceedings (collectively "Tax Proceedings") which are final and complete prior to the preparation of such Short Period S Return (herein such prior year consistency requirement shall be referred to as preparing and filing 1996 Tax Returns on a "Consistent Basis"), and (B) shall be prepared based on a closing of the Company's books as of the Closing Date based on the Company's normal tax accounting methods and in accordance with the requirements of Code Section 1362(e)(6)(D). Such Short Period S Return shall be submitted by Shareholders to Buyer on or before the date that is 60 days prior to the due date (including extensions) for the filing of such Short Period S Return. On or before the date that is 30 days prior to such due date (including extensions), Buyer shall notify Shareholders as to whether Buyer agrees that such Short Period S Return has been properly prepared on a Consistent Basis in accordance with this Section 5.8(b)(i). If Buyer approves such Short Period S Return, or fails to provide any notice of objections prior to the expiration of such review period, the Short Period S Return shall be filed as furnished to Buyer. If during such review period Buyer shall notify Shareholders that Buyer does not agree that such Short Period S Return has been properly prepared in accordance with this Section 5.8(b)(i), the parties shall attempt in good faith to resolve the Buyer's objections, and if they are unable to resolve such objections the matter shall be resolved pursuant to the dispute resolution provisions of Article IX hereof. Upon resolution of such dispute, and in all events prior to the due date thereof (including extensions), Buyer shall cause such Short Period S Return to be filed. If Shareholders shall fail to timely submit to Buyer any such Short Period S Return prepared in accordance with this Section 5.8(b)(i), Buyer shall cause such Short Period S Return to be prepared in accordance with this Section 5.8(b)(i) and timely filed, and any expense incurred by Buyer in preparing and filing such Short Period S Return shall be paid by Shareholders. The Shareholders shall pay and discharge on a timely basis all Taxes shown to be payable by the Company as reflected on such Short Period S Return and no Taxes shall be payable by the Company with respect to items or periods covered by such Short Period S Return. Any refunds of such Taxes, whether pursuant to amended returns or any Tax Proceeding, shall be paid to and for the benefit of Shareholders. Any additional Taxes (including interest, penalties and other additions to tax) in excess of the Taxes reflected on the Short Period S Return which at any time are imposed upon or against or otherwise become payable by the Company with respect to the short period, whether as a result of a Tax Proceeding or otherwise, shall be paid by Shareholders promptly upon demand therefor by Buyer. (ii) TEXAS FRANCHISE TAX RETURN. For purposes of the Texas corporate franchise tax, the parties acknowledge and agree that the Company will be required, with respect to the 1996 year, to file a full year return (herein the "Full Year Return") reporting and accounting for such Texas franchise tax on an aggregate basis covering both the 1996 period ending on the Closing Date (the "Pre-Closing Period") and the 1996 period following the Closing Date (the "Post-Closing Period"). Prior to the due date (including extensions) for such Full Year Return, Buyer shall cause the Company to prepare and timely file such Full Year Return on which all Tax Items attributable to the Pre-Closing Period shall be reported and accounted for on a Consistent Basis. Prior to the due date for the payment of the Taxes shown to be payable by the Company on such Full 22 Year Return, the Shareholders shall pay to Buyer the portion of such Taxes attributable to the Pre-Closing Period. Such portion shall be the amount of such Taxes as calculated and determined as if the Pre-Closing Period constituted a short period as to which a short period return were prepared and filed in accordance with the provisions of Section 5.8(b)(i). Any refunds of such Taxes, whether pursuant to amended returns or any Tax Proceeding, shall be paid to and for the benefit of Shareholders. Any additional Taxes (including interest, penalties and other additions to tax) attributable to the Pre-Closing Period (as determined in the same manner) which as a result of any Tax Proceeding or otherwise are imposed upon or against or otherwise become payable by the Company with respect to the Pre- Closing Period shall be paid by the Shareholders promptly upon demand therefor by Buyer. (iii) On or before the date which is 90 days following the Closing Date, Buyer shall cause the Company to make available to Shareholders and their representatives such information pertaining to the Company as is reasonably required to prepare the Short Period S Return in accordance with the provisions of Section 5.8(b)(i). (c) OTHER TAX RETURNS AND TAXES. Prior to the due date (including extensions) for any other Tax Returns which the Company is required to file with respect to the 1996 year, Buyer shall cause such Tax Returns to be prepared and filed. Prior to the due date for the payment of any Taxes shown to be payable by the Company on any such Tax Returns, Shareholders shall pay to Buyer the portion of such Taxes attributable to the Pre-Closing Period. Such portion shall be the amount of such Taxes as calculated and determined as if the Pre-Closing Period constituted a short period as to which a short period return were prepared and filed in accordance with the provisions of Section 5.8(b)(i). Any additional Taxes (including interest, penalties and other additions to tax) attributable to the Pre-Closing Period (as determined in the same manner) which as a result of any Tax Proceeding or otherwise are imposed upon or against or otherwise become payable by the Company shall be paid by the Shareholders promptly upon demand therefor by Buyer. The foregoing is intended to implement the parties' agreement that the Shareholders shall be responsible for the payment of any Taxes attributable to the Company's activities and operations during the Pre-Closing Period. The parties further agree that the Shareholders shall have no liability hereunder with respect to Taxes attributable to the Company's activities and operations in any Post-Closing Period. For such purposes, if the Company is a partner in a partnership as of the Closing Date which has a tax year that does not end as of the Closing Date, any Tax liability attributable to such partnership's activities shall be allocated among the Pre-Closing Period and the Post- Closing Period on a fair and reasonable basis consistent with the allocation principles underlying this Section 5.8. Notwithstanding the foregoing, the Shareholders shall not be liable for any Pre-Closing Period Taxes that are imposed upon the Company with respect to the Pre-Closing Period solely and directly as a result of changes in the Company's business and operations following the Closing Date. (d) TRANSFER TAXES. As used herein the term "Transfer Taxes" shall mean any Taxes imposed on or with respect to the sale of stock as contemplated by this Agreement. The Shareholders shall pay all such Transfer Taxes. 23 (e) ACCESS TO RECORDS FOLLOWING CLOSING. Shareholders agree that so long as any books, records and files retained by Shareholders relating to the business of Company, to the extent they relate to the operations of Company prior to the Closing Date, remain in existence and available, Buyer (at its expense) shall have the right upon prior notice to inspect and to make copies of the same at any time during business hours for any proper purpose. Shareholders shall use reasonable efforts not to destroy or allow the destruction of any such books, records and files without first offering in writing to deliver them to Buyer. (f) REFUNDS. Buyer agrees to pay to the Shareholders, in proportion to their respective ownership interests in the Company, any refund received after the Closing Date by Buyer or the Company, in respect of any Taxes for which the Shareholders are liable under SECTION 8.1(a)(II) hereof, but only to the extent such has not been reflected as a receivable on the Financial Statements. The Company shall be entitled to any refund in respect of any Taxes for which the Shareholders are not liable under SECTION 8.1(a)(II) hereof, and if the Shareholders shall receive any such refund they shall pay the same to the Company or to Buyer on behalf of the Company. The parties shall cooperate in order to take all necessary steps to claim any such refund. Any such refund received by a party or its affiliate for the account of the other party shall be turned over to such other party within 10 days after such refund is received. (g) COOPERATION. Within 10 days of receipt, each party will provide, or cause to be provided, to the other party copies of all correspondence received from any taxing authority by such party or any of its affiliates in connection with the liability of the Company for Taxes for any period for which such other party is or may be liable under SECTIONS 8.1(a)(II) or 8.1(b)(II) or otherwise. The parties will, at their own expense, provide each other with such cooperation and information as they may reasonably request of each other in preparing or filing any return, amended return or claim for refund, in determining a liability or a right of refund or in conducting any audit or other Tax Proceeding, including cooperating with respect to reasonable requests from the other party for extending statutes of limitation applicable to any Tax Proceeding, in respect of Taxes for any period for which such other party is or may be liable under SECTIONS 8.1(a)(II) or 8.1(b)(II) or otherwise. (h) SURVIVAL. Notwithstanding any other provision of this Agreement, the covenants set forth in this Section shall survive until the expiration of the respective statute of limitations applicable to the period to which the Taxes relate. 5.9 FURTHER CONVEYANCES, ASSURANCES AND COOPERATION. After the Closing, the Shareholders will, without further consideration of any nature from Buyer, other than reimbursement of expenses reasonably incurred at the request of Buyer, execute and deliver, or cause to be executed and delivered, to Buyer, such additional documentation and instruments as Buyer may reasonably request, to (i) sell, transfer and assign to and fully vest in Buyer ownership of the Shares (ii) allow Buyer to operate the business of the Company, (iii) obtain any consent or approval which was not obtained on or prior to the Closing, (iv) comply with any Tax investigation, audit or inquiry, (v) allow Buyer to use the name of the Company and the name 24 "American Dental Group Agency, Inc." for business in all states of the United States, whether through a consent to use of name or otherwise, or (vi) otherwise provide information, books, records, evidence, testimony and other reasonable assistance to Buyer in connection with its ownership of the business of the Company. ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PARTIES 6.1 CONDITIONS TO THE OBLIGATIONS OF BUYER, THE COMPANY AND THE SHAREHOLDERS. The respective obligations of Buyer, the Company and the Shareholders set forth in this Agreement shall be subject to the satisfaction on or prior to the Closing Date of the following conditions, unless waived by each such party: (a) GOVERNMENTAL APPROVALS. All material authorizations, consents, orders or approvals of, or declarations or filings with, or expiration of waiting periods imposed by, any federal, state, local or foreign governmental or regulatory authority (including, without limitation, the Texas Department of Insurance) necessary for the consummation of the transactions contemplated by this Agreement shall have been filed, occurred or been obtained, including any and all necessary permits, licenses and certificates. (b) LEGAL ACTION. No temporary restraining order, preliminary injunction or permanent injunction or other order preventing the consummation of the transactions contemplated by this Agreement shall have been issued by any federal, state or foreign court or other governmental or regulatory authority and remain in effect, and no litigation seeking the issuance of such an order or injunction, or seeking substantial damages against Buyer or the Company if the transactions contemplated by this Agreement are consummated, shall be pending which, in the good faith judgment of the Boards of Directors of Buyer or the Company (acting upon advice of their respective counsel) has a reasonable probability of resulting in such order, injunction or substantial damages. In the event any such order or injunction shall have been issued, each party agrees to use its reasonable efforts to have any such injunction lifted. (c) STATUTES. No federal, state, local or foreign statute, rule or regulation shall have been enacted which would make the consummation of the transactions contemplated by this Agreement illegal. (d) FINANCING. Buyer shall have obtained financing in a form and amount reasonably satisfactory to enable Buyer to fulfill its obligations under this Agreement. (e) SATISFACTION OF AMERICAN DENTAL CONDITIONS. All conditions precedent to the Closing set forth in the American Stock Purchase Agreement shall have been satisfied in full or waived. 25 6.2 FURTHER CONDITIONS TO THE OBLIGATIONS OF BUYER. The obligations of Buyer set forth in this Agreement are subject to the satisfaction on or prior to the Closing Date of the following conditions, unless waived by Buyer: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company and the Shareholders set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made at and as of the Closing Date (except to the extent such representations or warranties speak to a particular date), and Buyer shall have received a certificate signed by the Shareholders and authorized officers of the Company to such effect. (b) PERFORMANCE OF OBLIGATIONS OF OTHER PARTIES. The Company and the Shareholders shall have performed in all material respects all obligations required to be performed by them under this Agreement prior to the Closing Date and Buyer shall have received a certificate signed by the Shareholders and authorized officers of the Company to such effect. (c) NO LITIGATION. Since the date hereof, there shall not have been instituted and be continuing or threatened against the Company any claim, action or proceeding the result of which could reasonably be expected to result in a Material Adverse Change. (d) NO ADVERSE CHANGE. No Material Adverse Change shall have occurred in the business, operations or prospects of the Company. (e) SPOUSAL CONSENT. A spousal consent to the transactions contemplated by this Agreement, substantially in the form of EXHIBIT A hereto, shall have been executed and delivered by the spouse of each Shareholder, if applicable. (f) THIRD-PARTY APPROVALS. Any and all consents required from third parties relating to contracts, licenses, leases and other agreements and instruments material to the financial condition or results of operations of the Company shall have been obtained. (g) RESIGNATIONS. The Company shall have delivered to Buyer all resignations of the officers and directors of the Company requested by Buyer, effective as of the Closing Date. (h) BOARD AND SHAREHOLDER APPROVAL. The Board of Directors and the Shareholders of the Company shall have approved the form of the definitive purchase agreement and all related agreements and documents and the Shareholders shall provide Buyer with a copy of such resolutions at the Closing. (i) FINANCIAL STATEMENTS AUDIT. At the Company's expense, the Company shall cause its certified independent accountants (the "Company's Accountant") 26 to conduct and complete an independent audit of the Interim Financial Statements (the "Audit") pursuant to generally accepted accounting principles. The Company shall have delivered to Buyer an unqualified opinion of the Company's Accountant, in a form and substance reasonably satisfactory to Buyer, certifying the Audit. (j) FINANCIAL RESULTS. The results of operations (net income) less commissions or distributions of the Company determined in accordance with generally accepted accounting principles for the period January 1, 1996 through the Closing shall be greater than or equal to zero. (k) OPINION OF COUNSEL. Buyer shall have received an opinion dated the Closing Date of Stieber Campbell PC, counsel to the Company, in form and substance acceptable to Buyer. (l) AGREEMENT TERMINATION. The Shareholders shall cause any commission agreements by and among the Company and Dr. Davenport and Dr. Rinker to be terminated and to be of no further force and effect on or prior to the Closing Date with no further obligation of the Company to make payments thereunder. To the extent that the Company has any contracts or agreements with affiliates of American Dental or the Company or family members of the Shareholders, such arrangements shall be terminated as of or prior to the Closing Date. (m) EMPLOYMENT ARRANGEMENTS. Other than payment to employees in the ordinary course of business, there will be no obligation on the part of the Company for any amounts due for salary or accrued vacation to any terminating employees of the Company or for salary or accrued vacation to Dr. Davenport and Dr. Rinker after the Closing Date. (n) PAYMENT AND RELEASE OF LIENS. All amounts owing under any bank loans, lines of credit or other indebtedness shall be paid off in full as of the Closing Date and the Shareholders shall provide Buyer either evidence that such lien has been terminated or shall deliver to Buyer a termination statement signed by the lien holder on the Closing Date terminating the lien on the property of the Company. 6.3 FURTHER CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND THE SHAREHOLDERS. The obligations of the Company and the Shareholders set forth in this Agreement are subject to the satisfaction on or prior to the Closing Date of the following conditions, unless waived by the Company and the Shareholders: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Buyer set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made at and as of the Closing Date (except to the extent such representations or warranties speak to a particular date), and the Company and the Shareholders shall have received a certificate signed by authorized officers of Buyer to such effect. 27 (b) PERFORMANCE OF OBLIGATIONS OF OTHER PARTIES. Buyer shall have performed in all material respects all obligations required to be performed by it under this Agreement prior to the Closing Date, and the Company and the Shareholders shall have received a certificate signed by authorized officers of Buyer to such effect. (c) THIRD-PARTY APPROVALS. Any and all consents required by Buyer from third parties in order to consummate the transactions contemplated hereby shall have been obtained. ARTICLE VII TERMINATION, EXTENSION AND WAIVER 7.1 TERMINATION This Agreement may be terminated at any time prior to the Closing Date as follows: (a) BY MUTUAL CONSENT By mutual consent of the Company and Buyer. (b) BY ANY PARTY By any party to this Agreement if: (i) the transactions contemplated by this Agreement shall not have been consummated on or before September 30, 1996; provided that the failure of the transactions to be consummated by such date is not caused by any breach of this Agreement by the party seeking such termination; (ii) a court of competent jurisdiction or other governmental or regulatory authority shall have issued an order, decree or ruling or taken any other action, in each case permanently restraining, enjoining or otherwise prohibiting the consummation of the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and not appealable; (iii) any statute, rule or regulation is enacted, promulgated or deemed applicable to the transactions contemplated by this Agreement by any competent governmental or regulatory authority which makes the consummation of the transactions illegal; or (iv) the American Stock Purchase Agreement terminates in accordance with its terms, including due to the failure of the Department of Insurance of the State of Texas to approve in writing the application for transfer of control of American Dental without withdrawing such disapproval within 20 days after the date on which the Company and/or Buyer receive notice of such written disapproval. (c) BY BUYER. By Buyer if a material default under or a material breach of this Agreement by the Company or the Shareholders, as the case may be, shall have occurred and be continuing ten (10) business days after receipt of notice thereof from Buyer. 28 (d) BY THE COMPANY. By the Company if a material default under or a material breach of this Agreement by Buyer shall have occurred and be continuing ten (10) business days after receipt of notice thereof from the Company. Any action taken to terminate this Agreement pursuant to this Section shall become effective when notice of such termination is delivered by the terminating party to the other party in accordance with the provisions of SECTION 10.2 below. 7.2 EFFECT OF TERMINATION. In the event of the termination of this Agreement pursuant to Section 7.1 by the Shareholders of the Company, on the one hand, or Buyer, on the other, written notice thereof shall be given promptly to the other party specifying the provision hereof pursuant to which such termination is made, and this Agreement shall become void and have no effect, except that the agreements contained in this Section and in Sections 2.10 (Broker's Commissions or Finder's Fees), 4.5 (No Solicitation), 5.1 (Confidentiality), 5.5 (Expenses), Article IX (Arbitration), or 10.10 (Attorney's Fees), shall survive the termination hereof for a period of one year, unless a specific claim in writing with respect to these matters shall have been made before such date. Nothing contained in this Section shall relieve any party from liability for damages actually incurred as a result of any breach of this Agreement. 7.3 EXTENSION; WAIVER. At any time prior to the Closing Date, to the extent legally allowed, any party hereto (a) may extend the time for the performance of any of the obligations owed to such party by the other parties hereto, (b) may waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto, and/or (c) may waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid if set forth in an instrument in writing signed on behalf of such party and shall be effective only to the extent set forth in such instrument. No extension or waiver of any single condition, covenant, agreement, representation, warranty, breach, default or other matter hereunder shall be deemed an extension or waiver of such or any other condition, covenant, agreement, representation, warranty, breach, default or other matter theretofore or thereafter occurring. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. The failure of any party to insist upon a strict performance of any of the terms or provisions of this Agreement, or to exercise any option, right or remedy herein contained, shall not be construed as a waiver or as a relinquishment for the future of such term, provision, option, right or remedy, but the same shall continue and remain in full force and effect. ARTICLE VIII INDEMNIFICATION 8.1 INDEMNIFICATION. (a) INDEMNIFICATION BY THE SHAREHOLDERS. Dr. Davenport and Dr. Rinker shall jointly and severally (except with respect to any representations or warranties made by such Shareholders severally (and not jointly) in which case the indemnity provided herein shall be several and not joint) indemnify and hold harmless Buyer and its 29 affiliates from and against any and all Losses (as defined in SECTION 8.1(C)) incurred by any of such indemnified parties in any way relating to, arising out of or resulting from: (i) The breach of any of the representations or warranties made by the Company or the Shareholders in this Agreement; (ii) The breach or the failure of performance by the Company or the Shareholders of any of the covenants, promises or agreements that any of them is to perform under this Agreement; (iii) Taxes (including interest, penalties and other additions to tax that may become payable in respect thereof) which are (i) Transfer Taxes (as defined in Section 5.8(c)) imposed on Shareholders that Buyer or the Company pays (in whole or in part) or result in liens or encumbrances on any assets of Buyer or the Company, and/or (ii) imposed on the Company in respect of its income, business, property or operations or for which the Company may otherwise be liable for or with respect to any period ending prior to or on the Closing Date, including but not limited to any Taxes for which the Shareholders are liable in accordance with the provisions of Section 5.8; (iv) The death of or injury to any person or damage to property that occurred prior to the Closing and arose out of or in connection with the business or operations of the Company prior to the Closing; (v) All employment-related claims and causes of action, and all other claims and causes of action, that have arisen or arise out of or in connection with the business or operations of the Company conducted prior to the Closing; and (vi) The existence prior to the Closing Date of any hazardous or toxic substances, wastes or materials, defined as such or governed by any applicable Environmental Law ("Hazardous Materials") upon, about or beneath any property of the Company or migrating or threatening to migrate from any of such properties, or the existence of a violation of any Environmental Law pertaining to such properties or the operations of the Company (including, but not limited to, violations of laws dealing with the generation, transport, treatment, storage or disposal of hazardous or other regulated material), regardless of whether the existence of such Hazardous Materials or the violation of Environmental Law arose prior to the present ownership or operation of such properties by the Company or was disclosed to Buyer by the Company, the Shareholders or otherwise. (b) INDEMNIFICATION BY BUYER. Buyer shall indemnify and hold harmless the Shareholders and their affiliates from and against any and all Losses incurred by such indemnified parties in any way relating to, arising out of or resulting from: (i) The breach of any of the representations or warranties made by Buyer in this Agreement; 30 (ii) The breach or the failure of performance by Buyer of any of the covenants, promises or agreements that it is to perform under this Agreement; (iii) Taxes (including interest, penalties and other additions to tax that may become payable in respect thereof) which are imposed on the Shareholders in respect of the Company's income, business, property or operations or for which the Company may otherwise be liable for or with respect to any period following the Closing Date; (iv) The death of or injury to any person or damage to property that occurred after the Closing and arose out of or in connection with the business or operations of the Company after the Closing; (v) All employment-related claims and causes of action, and all other claims and causes of action, that have arisen or arise out of or in connection with the business or operations of the Company conducted after the Closing; and (vi) The existence after the Closing Date of any Hazardous Materials upon, about or beneath any property of the Company or migrating or threatening to migrate from any of such properties, or the existence of a violation of any Environmental Law pertaining to such properties or the operations of the Company (including, but not limited to, violations of laws dealing with the generation, transport, treatment, storage or disposal of hazardous or other regulated material), unless the existence of such Hazardous Materials or the violation of Environmental Law arose prior to the ownership or operation of the Company by the Buyer. (c) DEFINITION OF LOSSES. For purposes of this Article, "Losses" shall mean any and all liabilities, obligations, losses, damages, claims, deficiencies, penalties, taxes, levies, actions, judgments, settlements, suits, costs, legal fees, accountants' fees, disbursements or expenses. Losses shall exclude any amount which any party actually receives under any insurance policy which provides coverage for the liability in question. 8.2 THIRD PARTY CLAIMS, NOTICE AND OPPORTUNITY TO SETTLE. (a) Within 30 days after the receipt by the party entitled to indemnity hereunder (the "Indemnified Party") of any claim or demand (including but not limited to, notice of any action, suit or proceeding) by any third party (a "Third Party Claim") against an Indemnified Party which gives rise to a right to indemnification for a Loss hereunder (or, in the case of the receipt of any notice of any examination, claim, adjustment or other proceeding with respect to Taxes for any period for which the Shareholders are liable under SECTION 8.1(a)(iii) or for which Buyer is liable under SECTION 8.1(b)(iii) ("Tax Proceeding"), promptly after the receipt of such notice), the Indemnified Party shall give each party who may be obligated to provide indemnity hereunder (the "Indemnifying Party") written notice of such claim or demand; provided, however, that the failure to give such notice shall not relieve the Indemnifying Party of its obligations hereunder except to the extent that such failure is materially prejudicial to the Indemnifying Party. 31 (b) The Indemnifying Party shall have the right (without prejudice to the right of any Indemnified Party to participate at its own expense through counsel of its own choosing), to defend against such claim or demand (for purposes of this Section, any Tax proceeding shall be considered a "claim or demand") at its expense and through counsel of its own choosing (the choice of such counsel to be subject to the reasonable consent of the affected Indemnified Parties) and to control such defense if it gives written notice of its intention to do so within 15 days of the receipt of the notice referred to in SECTION 8.2(a). If the Indemnifying Party shall decline to assume the defense of such claim or demand, the affected Indemnified Parties shall have the right to assume control of such defense at the expense of the Indemnifying Party. The Indemnified Parties shall cooperate fully in the defense of such claim or demand and shall make available to the Indemnifying Party or its counsel all pertinent information under their control relating thereto. The Indemnifying Party agrees to cooperate with the Indemnified Parties in order to enable their counsel to participate in the defense and to deliver to the Indemnified Parties copies of all pleadings and other information within the Indemnifying Party's knowledge or possession reasonably requested by the Indemnified Parties that is relevant to the defense of any such claim or demand. The Indemnified Parties and their counsel shall maintain confidentiality with respect to all such information consistent with the conduct of a defense hereunder. (c) The Indemnifying Party shall have the right to elect to settle (i) any such claim or demand other than a Tax Proceeding, for monetary damages only and including an unconditional release, or (ii) any Tax Proceeding, subject to the consent of the affected Indemnified Party, provided, however, with respect to any Permissible Settlement (as defined herein), if the affected Indemnified Parties fail to give such consent within 20 days of being requested to do so, the affected Indemnified Parties shall, at their expense, assume the defense of such claim or demand and regardless of the outcome of such matter, the Indemnifying Party's liability hereunder shall be limited to the amount of any such proposed settlement. As used herein the term "Permissible Settlement" shall mean a settlement as to which there is no reasonable likelihood that it will result in the imposition on such affected Indemnified Parties of Taxes for a taxable period for which the Indemnifying Party is not obligated hereunder to indemnify such affected Indemnified Parties. (d) In the event the Indemnifying Party assumes the defense of a claim or demand, the Indemnified Parties shall have the right to assume control of the defense of any claim or demand from the Indemnifying Party at any time and to elect to settle such claim or demand; provided, however, the Indemnifying Party shall have no indemnification obligations with respect to such claim, demand or settlement except for the costs and expenses of such Indemnifying Party incurred prior to the assumption of the defense of the claim or demand by the Indemnified Parties. 8.3 RIGHT TO OFFSET. Buyer shall have the right to offset all or any part of its Losses under this Agreement against that portion of the Holdback under the American Stock Purchase Agreement allocable to the Shareholders ($900,000) by notifying the Shareholders in writing that Buyer is reducing the amount owed to the Shareholders; provided, however, that the 32 Shareholders shall have thirty (30) days following receipt of such notification to rectify the cause of any such loss to Buyer before Buyer shall be entitled to exercise its right of offset or recoupment hereunder. Buyer shall offset its Losses against the Holdback until the Shareholders' allocable portion of the Holdback is exhausted, at which time the Shareholders shall be personally liable as provided in this Agreement for any remaining and future Losses, whether undisputed or established in accordance with Article IX hereof. Notwithstanding the foregoing, the existence of the Holdback and any offsets thereunder shall not relieve the Shareholders from liability or limit their liability to Buyer for any breaches hereunder. 8.4 NON-THIRD PARTY CLAIMS. In the event any Indemnified Party should have a claim against any Indemnifying Party hereunder which does not involve a Third Party Claim, the Indemnified Party shall transmit to the Indemnifying Party a written notice (the "Indemnity Notice") describing in reasonable detail the nature of the claim, an estimate of the amount of damages attributable to such claim and the basis of the Indemnified Party's request for indemnification under this Agreement. If the Indemnifying Party does not notify the Indemnified Party within 30 days from the Indemnifying Party's receipt of the Indemnity Notice that the Indemnifying Party disputes such claim, the claim specified by the Indemnified Party in the Indemnity Notice shall be deemed a liability of the Indemnifying Party hereunder; provided, however, that, if Buyer asserts a claim that is not a Third Party Claim and the Indemnifying Party does not dispute such claim in a timely manner in accordance with this Section 8.4, Buyer shall have offset and recoup its Losses as provided in SECTION 8.3. 8.5 PAYMENTS. Any timely, disputed non-Third Party Claim shall be submitted to arbitration in accordance with the provisions of Article IX hereof. Payments of all amounts owing by an Indemnifying Party pursuant to this Article relating to a Third Party Claim shall be made within 30 days after the latest of (a) the settlement of such Third Party Claim, (b) the expiration of the period for appeal of a final adjudication of such Third Party Claim or (c) the expiration of the period for appeal of a final adjudication of the Indemnifying Party's liability to the Indemnified Party under this Agreement. Subject to SECTION 8.3, payments of all amounts owing by an Indemnifying Party pursuant to SECTION 8.4 shall be made within 30 days after the later of (i) the expiration of the 30-day Indemnity Notice period or (ii) the expiration of the period for appeal of a final adjudication of the Indemnifying Party's liability to the Indemnified Party under this Agreement. ARTICLE IX DISPUTE RESOLUTION All disputes arising under this Agreement shall be resolved by submission to binding arbitration at the Dallas office of JAMS/Endispute ("JAMS") in accordance with its rules and procedures regarding commercial disputes, except to the extent such rules or procedures vary from the following provisions: 9.1 NOTICE. The party desiring to initiate arbitration can do so by sending written notice of an intention to arbitrate by registered or certified mail to the other parties and to JAMS. The notice must contain a description of the dispute, the amount of money involved, and the remedies sought. 33 9.2 ARBITRATOR. The parties shall attempt to agree on a retired judge from the JAMS panel to act as the arbitrator hereunder. If the parties are unable to agree, JAMS shall provide a list of three available judges to each party and each party may strike one. The remaining judge shall serve as the arbitrator. The parties agree the arbitration must be initiated within one year after the claimed breach occurred and that the failure to initiate arbitration within the one year period constitutes an absolute bar to the institution of any arbitration or any judicial proceeding on any dispute set forth in the notice of intent to arbitrate. 9.3 PRE-HEARING CONFERENCE. Once an arbitrator is assigned to hear the matter, the arbitrator shall schedule a pre-hearing conference to reach agreement on procedural matters, arrange for the exchange of information, obtain stipulations, and attempt to narrow the issues. 9.4 DISCOVERY. It is the parties' objective to expedite the arbitration proceedings by placing the following limitations on discovery: (a) on a date to be determined at the pre-hearing conference, each party may serve one demand for production of documents and one set of twenty interrogatories (without subparts) upon the other parties (the response to the document demand, the documents to be produced, and the responses to the interrogatories shall be exchanged thirty days later); (b) each party may depose two witnesses. Each deposition must be concluded within eight hours and all depositions must be taken within sixty days of the pre-hearing conference. Any party deposing an opponent's expert must pay the expert's fee for attending the deposition. All discovery disputes shall be decided in the sole discretion of the arbitrator. 9.5 BRIEFS AND HEARING. The parties must file briefs with the arbitrator at least three days before the arbitration hearing, specifying the facts each intends to prove and analyzing the applicable law. The parties have the right to representation by legal counsel throughout the arbitration proceedings. The presentation of evidence at the arbitration hearing shall be governed by the Texas Evidence Code. Within reasonable limitations, both sides at the hearing may call and examine witnesses for relevant testimony, introduce relevant exhibits or other documents, cross-examine or impeach witnesses who shall have testified orally on any matter relevant to the issues, and otherwise rebut evidence, as long as these rights are exercised in an efficient and expeditious manner in the sole discretion of the arbitrator. Oral evidence given at the arbitration hearing shall be given under oath. Any party desiring a stenographic record may secure a court reporter to attend the arbitration proceedings. The party requesting the court reporter must notify the other parties and the arbitrator of the arrangement in advance of the hearing, and must pay for the cost incurred. 9.6 DECISION. The arbitrator's decision shall be based on the evidence introduced at the hearing, including all logical and reasonable inferences therefrom. The arbitrator may grant any remedy or relief which is just and equitable. The award must be made in writing and signed by the arbitrator. It shall contain a concise statement of the reasons in support of the decision. The award must be mailed promptly to the parties, but no later than thirty days from the closing of the hearing. The award can be judicially enforced (confirmed, corrected or vacated) pursuant to Tex. Civ. Prac. & Rem. Code Ann. Section 171 ET SEQ. The award is final and 34 binding and there is no direct appeal from the award on the grounds of error in the application of the law. 9.7 COSTS. Each party to the arbitration must pay its own witness fees. Each party must pay its pro-rata share of the arbitrator's fees. The arbitrator must award to the prevailing party attorneys' fees and costs actually and reasonably incurred. ARTICLE X GENERAL PROVISIONS 10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties contained herein shall survive the Closing and will expire on the fifth anniversary of the Closing Date (the "Survival Date"); unless prior to the Survival Date, a claim specifying a breach of any of the representations or warranties described above is submitted in writing to the indemnifying party and identified as a claim for indemnification pursuant to this Agreement. From and after the Survival Date, no party hereto nor any shareholder, director, officer, employee, or affiliate of such party shall have any indemnity obligation pursuant to Article VIII, except with respect to matters as to which notice has been received in accordance with this Section 10.1. Notwithstanding the foregoing, any representations and warranties made relating to antitrust matters shall not terminate. 10.2 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given upon facsimile transmission (with written or facsimile confirmation of receipt), or delivery by a reputable overnight commercial delivery service (delivery, postage or freight charges prepaid), or on the fourth day following deposit in the United States mail (if sent by registered or certified mail, return receipt requested, delivery, postage or freight charges prepaid), addressed to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): If to Buyer: Safeguard Health Enterprises, Inc. 505 N. Euclid Street Anaheim, California 92801 Attn: Ronald I. Brendzel, Esq. Phone: (714) 758-4329 Fax: (714) 758-4383 With a copy to: Gibson, Dunn & Crutcher LLP 4 Park Plaza, Suite 1800 Irvine, CA 92614 Attn: Walter L. Schindler, Esq. Phone: (714) 451-3800 Fax: (714) 451-4220 If to the Company: T.R.C. Agency, Inc. 14800 Landmark Boulevard, 7th Floor Dallas, Texas 75240 35 Attn: James L. Davenport, D.D.S. Phone: (214) 661-5848 Fax: (214) 392-0237 With a copy to: Stieber Campbell PC 2828 Routh Street, Suite 760 Dallas, TX 75201 Attn: Drew A. Campbell, Esq. Phone: (214) 979-0902 Fax: (214) 979-0907 If to the Shareholders: James L. Davenport, D.D.S. Martin J. Rinker, D.D.S. c/o First American Dental Benefits, Inc. Phone: (214) 661-5848 Fax: (214) 392-0237 10.3 INTERPRETATION. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 10.4 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be an original and all of which together shall be one and the same instrument. 10.5 INTEGRATION. This Agreement and the Exhibits, Schedules, documents, instruments and other agreements among the parties hereto that are referred to herein or any other agreements dated of even date herewith to which Buyer, Dr. Davenport and Dr. Rinker, among others, are parties, constitute the entire agreement of the parties with respect to the subject matter set forth herein or therein and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof or thereof. 10.6 GOVERNING LAW. This Agreement and the rights of the parties hereunder will be interpreted in accordance with the laws of the State of Texas, and all rights and remedies will be governed by such laws without regard to principles of conflict of laws. 10.7 AMENDMENT. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 10.8 ASSIGNMENT. No party hereto shall assign or transfer or permit the assignment or transfer of this Agreement without the prior written consent of the other parties, except that the Buyer may assign its rights and obligations hereunder to any wholly-owned subsidiary and its rights hereunder to any employee of Buyer. 10.9 SEVERABILITY. If any paragraph, section, sentence, clause or phrase contained in this Agreement will become illegal, null or void or against public policy, for any reason, or will be held by any court of competent jurisdiction to be incapable of being construed 36 or limited in a manner to make it enforceable, or is otherwise held by such court to be illegal, null or void or against public policy, the remaining paragraphs, sections, sentences, clauses or phrases contained in this Agreement will not be affected thereby. 10.10 FEES. If any party to this Agreement shall bring any arbitration or any other action, suit, counterclaim or appeal for any relief against any other party, declaratory or otherwise, to enforce the terms hereof or to declare rights hereunder (collectively, an "Action"), the prevailing party shall be entitled to recover as part of any such Action its reasonable attorneys' fees and costs, including any fees and costs incurred in bringing and prosecuting such Action and/or enforcing any order, judgment, ruling or award granted as part of such Action. "Prevailing party" within the meaning of this section includes, without limitation, a party who agrees to dismiss an Action upon the other party's payment of all or a portion of the sums allegedly due or performance of the covenants allegedly breached, or who obtains substantially the relief sought. 10.11 TRANSFER TAXES. The Shareholders shall bear all transfer, sales, use, income or other taxes, if any, payable in connection with the transfer of Stock contemplated by this Agreement or as a result of the transactions contemplated hereby, and shall be responsible for the payment of any individual taxes levied against them personally as a result of selling their Shares to Buyer. 37 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above.
Company: Buyer: T.R.C. AGENCY, INC., a Texas SAFEGUARD HEALTH ENTERPRISES, corporation INC., a Delaware corporation By: /s/ James L. Davenport By: --------------------------------- ------------------------------- James L. Davenport, D.D.S. John E. Cox Chairman of the Board and Executive Vice President and Chief Executive Officer Chief Operating Officer By: /s/ Martin J. Rinker By: --------------------------------- -------------------------------- Martin J. Rinker, D.D.S. Steven J. Baileys, D.D.S. Vice President Chairman of the Board, President and Chief Executive Officer
Shareholders: /s/ James L. Davenport - ------------------------------------- JAMES L. DAVENPORT, D.D.S. /s/ Martin J. Rinker - ------------------------------------- MARTIN J. RINKER, D.D.S. 38 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above.
Company: Buyer: T.R.C. AGENCY, INC., a Texas SAFEGUARD HEALTH ENTERPRISES, corporation INC., a Delaware corporation By: By: /s/ John E. Cox --------------------------------- ------------------------------- James L. Davenport, D.D.S. John E. Cox Chairman of the Board and Executive Vice President and Chief Executive Officer Chief Operating Officer By: By: /s/ Steven J. Baileys --------------------------------- -------------------------------- Martin J. Rinker, D.D.S. Steven J. Baileys, D.D.S. Vice President Chairman of the Board, President and Chief Executive Officer
Shareholders: - ------------------------------------- JAMES L. DAVENPORT, D.D.S. - ------------------------------------- MARTIN J. RINKER, D.D.S. INDEX TO SCHEDULES AND EXHIBITS Exhibit A Spousal Consent Schedule 2.2 Shareholder Interests in the Company Schedule 2.7 Financial Statements Schedule 2.12 Litigation Schedule 2.13 Taxes Schedule 2.15 Contracts Schedule 2.16 Commission Arrangements and Sales Schedule 2.18 Interests in Competitors Schedule 2.22 Insurance Policies Schedule 2.24 Banking Facilities Schedule 2.30 Transactions with Related Parties Schedule 2.31 Compliance with Insurance Laws Stock Purchase Agreement TRC Agency EX-99.E 6 EXHIBIT 99.E CREDIT AGREEMENT CREDIT AGREEMENT DATED AS OF SEPTEMBER 25, 1996 SAFEGUARD HEALTH ENTERPRISES, INC., A DELAWARE CORPORATION AND BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION TABLE OF CONTENTS Page ---- 1. DEFINITIONS AND FINANCIAL REQUIREMENTS . . . . . . . . . . . . . . . . 1 1.1 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 FINANCIAL REQUIREMENTS . . . . . . . . . . . . . . . . . . . . 6 1.3 OTHER INTERPRETIVE PROVISIONS. . . . . . . . . . . . . . . . . 6 2. CREDIT FACILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.1 REVOLVING ACQUISITION FACILITY . . . . . . . . . . . . . . . . 7 2.2 REVOLVING WORKING CAPITAL FACILITY . . . . . . . . . . . . . . 9 2.3 RATES OF INTEREST. . . . . . . . . . . . . . . . . . . . . . . 9 2.4 INTEREST RATE PROTECTION . . . . . . . . . . . . . . . . . . . 11 2.5 MANDATORY PAYMENT. . . . . . . . . . . . . . . . . . . . . . . 11 3. TAXES, YIELD PROTECTION AND ILLEGALITY . . . . . . . . . . . . . . . . 11 3.1 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.2 ILLEGALITY . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.3 INCREASED COSTS AND REDUCTION OF RETURN. . . . . . . . . . . . 12 3.4 FUNDING LOSSES . . . . . . . . . . . . . . . . . . . . . . . . 12 3.5 INABILITY TO DETERMINE RATES . . . . . . . . . . . . . . . . . 13 3.6 SURVIVAL . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4. FEES AND EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.1 FACILITY FEE . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.2 COMMITMENT FEE . . . . . . . . . . . . . . . . . . . . . . . . 13 4.3 EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5. COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.1 PROPERTY PLEDGED . . . . . . . . . . . . . . . . . . . . . . . 13 5.2 STOCK PLEDGE . . . . . . . . . . . . . . . . . . . . . . . . . 14 6. EXTENSIONS OF CREDIT, PAYMENTS AND INTEREST CALCULATIONS . . . . . . . 14 6.1 PROCEDURE FOR BORROWING. . . . . . . . . . . . . . . . . . . . 14 6.2 REQUEST FOR BORROWING. . . . . . . . . . . . . . . . . . . . . 14 6.3 CONVERSION AND CONTINUATION ELECTIONS. . . . . . . . . . . . . 15 6.4 DISBURSEMENTS AND PAYMENTS . . . . . . . . . . . . . . . . . . 15 6.5 BRANCH ACCOUNTS. . . . . . . . . . . . . . . . . . . . . . . . 15 6.6 EVIDENCE OF INDEBTEDNESS . . . . . . . . . . . . . . . . . . . 15 6.7 DIRECT DEBIT (PRE-BILLING) . . . . . . . . . . . . . . . . . . 16 6.8 DIRECT DEBIT (REVOLVING WORKING CAPITAL FACILITY). . . . . . . 16 6.9 INTEREST CALCULATION . . . . . . . . . . . . . . . . . . . . . 16 6.10 LATE PAYMENTS; COMPOUNDING . . . . . . . . . . . . . . . . . . 17 6.11 DEFAULT RATE . . . . . . . . . . . . . . . . . . . . . . . . . 17 7. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF BANK. . . . . . . . . . 17 7.2 ADDITIONAL CONDITIONS TO EXTENSION OF CREDIT FOR THE AMERICAN ACQUISITION i AND THE TRC ACQUISITION. . . . . . . . . . . . . . . . . . . . 20 7.3 CONDITIONS TO EACH EXTENSION OF CREDIT FOR THE PERMITTED ACQUISITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.4 CONDITION TO EACH EXTENSION OF CREDIT UNDER REVOLVING WORKING CAPITAL FACILITY . . . . . . . . . . . . . . . . . . . . . . . 20 8. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . 20 8.1 ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . 21 8.2 NO CONFLICTS . . . . . . . . . . . . . . . . . . . . . . . . . 21 8.3 ENFORCEABILITY . . . . . . . . . . . . . . . . . . . . . . . . 21 8.4 GOOD STANDING. . . . . . . . . . . . . . . . . . . . . . . . . 21 8.5 COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . . . . 21 8.6 TITLE TO PROPERTIES. . . . . . . . . . . . . . . . . . . . . . 21 8.7 PERMITS, FRANCHISES. . . . . . . . . . . . . . . . . . . . . . 21 8.8 PERFECTED SECURITY INTEREST IN COLLATERAL. . . . . . . . . . . 21 8.9 LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . 21 8.10 NO EVENT OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . 22 8.11 OTHER OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . . 22 8.12 INFORMATION SUBMITTED. . . . . . . . . . . . . . . . . . . . . 22 8.13 NO MATERIAL ADVERSE CHANGE . . . . . . . . . . . . . . . . . . 22 8.14 ERISA PLAN COMPLIANCE. . . . . . . . . . . . . . . . . . . . . 22 8.15 LOCATION OF BORROWER . . . . . . . . . . . . . . . . . . . . . 23 9. AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . 23 9.1 NOTICE OF CERTAIN EVENTS . . . . . . . . . . . . . . . . . . . 23 9.2 FINANCIAL AND OTHER INFORMATION. . . . . . . . . . . . . . . . 23 9.3 BOOKS, RECORDS, AUDITS AND INSPECTIONS . . . . . . . . . . . . 25 9.4 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . 25 9.5 COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . . . . 25 9.6 ADDITIONAL ACTS. . . . . . . . . . . . . . . . . . . . . . . . 25 9.7 MINIMUM LIQUIDITY. . . . . . . . . . . . . . . . . . . . . . . 25 9.8 MAXIMUM TOTAL LIABILITIES TO TANGIBLE NET WORTH. . . . . . . . 26 9.9 MINIMUM FIXED CHARGE COVERAGE RATIO. . . . . . . . . . . . . . 26 9.10 OUT-OF-DEBT REQUIREMENT. . . . . . . . . . . . . . . . . . . . 27 9.11 USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . 27 9.12 EXISTENCE AND PROPERTIES . . . . . . . . . . . . . . . . . . . 27 9.13 CHANGE IN NAME, STRUCTURE OR LOCATION. . . . . . . . . . . . . 27 10. NEGATIVE COVENANTS.. . . . . . . . . . . . . . . . . . . . . . . . . . 27 10.1 OTHER INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . 28 10.2 LIENS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 10.3 CAPITAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 29 10.4 ACQUISITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 29 10.5 DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . 29 10.6 LOANS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 10.7 LOSSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 10.8 CHANGE OF CONTROL. . . . . . . . . . . . . . . . . . . . . . . 29 10.9 SALES AND LEASEBACKS . . . . . . . . . . . . . . . . . . . . . 29 10.10 LIQUIDATIONS AND MERGERS . . . . . . . . . . . . . . . . . . . 29 10.11 SALE OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 29 10.12 BUSINESS ACTIVITIES. . . . . . . . . . . . . . . . . . . . . . 29 ii 11. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . 30 12. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 12.1 SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . . . . . 32 12.2 CONSENTS AND WAIVERS . . . . . . . . . . . . . . . . . . . . . 32 12.3 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . 32 12.4 ADMINISTRATION COSTS . . . . . . . . . . . . . . . . . . . . . 32 12.5 ATTORNEYS' FEES. . . . . . . . . . . . . . . . . . . . . . . . 32 12.6 INTEGRATION. . . . . . . . . . . . . . . . . . . . . . . . . . 32 12.7 PARTICIPATION. . . . . . . . . . . . . . . . . . . . . . . . . 32 12.8 INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . 33 12.9 HAZARDOUS WASTE INDEMNIFICATION. . . . . . . . . . . . . . . . 33 12.10 ARBITRATION; REFERENCE PROCEEDING. . . . . . . . . . . . . . . 33 12.11 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 12.12 SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . 34 12.13 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . 34 EXHIBITS EXHIBIT A - COMPLIANCE CERTIFICATE iii CREDIT AGREEMENT This Credit Agreement ("Agreement") is entered into as of September 25, 1996, between Bank of America National Trust and Savings Association ("Bank") and Safeguard Health Enterprises, Inc., a Delaware corporation ("Borrower"). 1. DEFINITIONS AND FINANCIAL REQUIREMENTS. 1.1 DEFINITIONS. In addition to the terms defined elsewhere in this Agreement, the following terms have the meanings indicated for the purposes hereof: "Acquisitions" means the American Acquisition, the Permitted Acquisitions and the TRC Acquisition. "Agreement" means this Credit Agreement. "American" means First American Dental Benefits, Inc., a Texas corporation, dba American Dental Corporation. "American Acquisition" means the acquisition by Borrower of all of the issued and outstanding capital stock of American. "Availability Period" means the period commencing on the date of this Agreement and ending on the Maturity Date. "Banking Day" means with respect to advances bearing interest rates at the LIBOR Rate, a day, excluding Saturdays and Sundays, on which Bank is open for business in California and is dealing in offshore dollars in the London inter-bank market. With respect to all other amounts payable under this Agreement, a "Banking Day" means a day other than a Saturday or a Sunday on which Bank is open for business in California. "Borrowing Date" means any date on which an advance is made under Sections 2.1 and 2.2 of this Agreement. "Capital Adequacy Regulation" means any guideline, request or directive of any central bank or other governmental authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of a bank or of any organization controlling a bank. "Cash Flow" means, for any fiscal period, net income, plus tax expense, plus depreciation, plus non-cash amortization, plus amortization expense arising from any covenants not to compete, plus interest expense, less extraordinary income/gains, minus gains (or plus losses) on fixed asset sales, minus cash taxes payable, minus cash paid for stock repurchases, and minus non-financed and non-acquisition capital expenditures. "Closing Date" means the date on which all of the conditions precedent set forth in Sections 7.1 and 7.2 are satisfied or waived by Bank. "Collateral" means the personal property described in the Collateral Agreements. "Collateral Agreements" means the security agreement(s) and/or pledge agreement(s) 1 required under Section 5 of this Agreement. "Compliance Certificate" means a certificate substantially in the form of Exhibit A. "Consideration" means cash paid, funded debt incurred, the market value of any shares of the capital stock of Borrower issued to a seller, assumed liabilities, excluding normal payables and accruals, and the present value of amounts paid by Borrower in connection with any covenants not to compete, if any, discounted at Reference Rate, in connection with a Permitted Acquisition. "Credit Limit" means the amount of Thirty Million Dollars ($30,000,000), which represents the total of the Revolving Acquisition Credit Limit and the Revolving Working Capital Credit Limit. "Default" means any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. "EBITA" means net income plus interest expense, plus taxes, plus amortization, plus losses and minus gains on the sale of fixed assets and minus extraordinary income and gains computed for Borrower on a consolidated basis. "EBITDA" means net income plus interest expense, plus taxes, plus depreciation plus amortization, plus losses and minus gains on the sale of fixed assets and minus extraordinary income and gains computed for Borrower on a consolidated basis. "Equity Prepayment" means the reduction in the commitment of the Bank under the Revolving Acquisition Facility described in Section 2.1(b)(ii)(2) of this Agreement. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Plan" means any employee pension benefit plan maintained or contributed to by Borrower and insured by the Pension Benefit Guaranty Corporation under Title IV of ERISA. "Event of Default" means any of the events or circumstances specified in Section 11 of this Agreement. "Fixed Charges" means the sum of gross interest expense, plus payments in connection with any covenants not to compete obtained in connection with a Permitted Acquisition, plus scheduled principal payments on all indebtedness including, but not limited to, payments under capital leases and the amounts as stated under Sections 2.1(b)(ii)(1) and 9.9(a) of this Agreement. "GAAP" means generally accepted accounting principals set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination. "Governmental Authority" means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any 2 entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "LIBOR Rate" means, for LIBOR Rate Interest Periods, the interest rate determined by the following formula, rounded upward to the nearest 1/100 of one percent. (All amounts in the calculation will be determined by Bank as of the first day of the LIBOR Rate Interest Period.) LIBOR Rate = London Rate --------------------------- (1.00 - Reserve Percentage) (a) "London Rate" means the interest rate at which Bank's London Branch, London, Great Britain, would offer U.S. Dollar deposits for the applicable interest period to other major banks in the London inter-bank market at approximately 11:00 a.m. London time two (2) Banking Days before the commencement of the interest period. (b) "Reserve Percentage" means the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities, as defined in Federal Reserve Board Regulation D, rounded upward to the nearest 1/100 of one percent. The percentage will be expressed as a decimal, and will include, but not be limited to, marginal, emergency, supplemental, special, and other reserve percentages. "LIBOR Rate Interest Period" means, for any extension of credit bearing interest at the LIBOR Rate, the period commencing on the date of the interest rate designation and ending from two (2) weeks to six (6) months thereafter, as requested by Borrower. "LIBOR Rate Portion" means all or such part of the principal balance of credit provided under this Agreement for which interest is payable at the rate related to the LIBOR Rate. "Loan Documents" means this Agreement and all other documents required to be executed and delivered to Bank in connection with this Agreement. "Material Adverse Change" means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, condition (financial or otherwise) or prospects of Borrower or Borrower and its Material Subsidiaries, taken as a whole, or as to any Material Subsidiary, (b) a material impairment of the ability of Borrower to perform under any Loan Document and to avoid any Event of Default, or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against Borrower of any Loan Document. "Material Subsidiary" means Safeguard Health Plans, Inc., a California corporation, SafeHealth Life Insurance Company, a California corporation, Safeguard Health Plans, Inc., a Texas corporation, American Dental and TRC, and includes, without limitation, any Subsidiary whose net revenues, at any time, represent ten percent (10%) or more of the consolidated revenues of Borrower. "Maturity Date" means March 31, 2002. "Metroplex Dental" means contracts assigned to American pursuant to the Assignment and Assumption Agreement dated September 26, 1996. "Minimum Fixed Charge Coverage Ratio" means the ratio of Cash Flow to Fixed 3 Charges. "Permitted Acquisition" means a transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in the acquisition or purchase of the assets, business or securities of a Person ("Target"), provided: (a) Such acquisition or purchase has been approved by the board of directors or similar governing body of the Target; (b) The Consideration paid through the Maturity Date for any such acquisition or purchase does not, when added to the total Consideration paid in connection with earlier Permitted Acquisitions, exceed Five Million Dollars ($5,000,000), plus the net proceeds received by Borrower in respect of the issuance and sale of shares of its capital stock, less the amount of any Equity Prepayment, up to a maximum of Ten Million Dollars ($10,000,000); (c) The indebtedness of the Target will not, when assumed by Borrower and added to the outstanding indebtedness of Borrower, violate any of the financial covenants contained in Section 9 below; (d) The Target is engaged in the same or a similar line of business as Borrower or any Subsidiary; (e) No contingent liability is assumed by Borrower or any Subsidiary; (f) The Target has a positive trailing four quarter EBITA, computed in accordance with GAAP consistently applied; (g) The acquisition complies in all material respects with all applicable requirements of law of Governmental Authorities having jurisdiction over the transaction and Borrower; (h) Financial statements of the Target, as of the most recently ended fiscal year have been audited by a "Big Six" CPA firm, or another nationally recognized CPA firm which is acceptable to Bank; (i) The transaction does not involve the incurrence of debt by a Subsidiary; (j) Seller financing incurred by Borrower plus the assumption of funded debt by Borrower or Target does not exceed One Million Dollars ($1,000,000); provided that any debt incurred by Borrower must be unsecured, or in the case of assumed debt, secured solely by the specific fixed assets financed, as evidenced by copies of lien searches and filings submitted to Bank; (k) Bank receives a Compliance Certificate executed by a Responsible Officer certifying that after taking into consideration the Permitted Acquisition, Borrower is in compliance with all financial covenants listed on Section 9 of this Agreement, and Borrower and Target are in compliance with all financial responsibility and other material requirements of Governmental Authorities having jurisdiction over Borrower and Target; and (l) Bank receives and finds acceptable a summary of sources and uses of funds for the acquisition. 4 "Person" means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, or joint venture. "Reference Rate" means the rate of interest publicly announced from time to time by Bank in San Francisco, California, as its reference rate. Any change in the Reference Rate shall take effect on the day specified in the public announcement of such change. The Reference Rate is set by Bank based on various factors, including Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans. Bank may price loans at, above or below the Reference Rate. "Reference Rate Portion" means all or such part of the principal balance of credit provided under this Agreement for which interest is payable at the Reference Rate. "Responsible Officer" means the chief executive officer or president of Borrower, or any other officer having substantially the same authority and responsibility; or, with respect to compliance with financial covenants, the chief financial officer or the treasurer of Borrower, or any other officer having substantially the same authority and responsibility. "Revolving Acquisition Credit Limit" means the amount of Twenty-Two Million Dollars ($22,000,000). "Revolving Acquisition Facility" means the line of credit described in Section 2.1 of this Agreement. "Revolving Credit Facilities" means the Revolving Acquisition Facility and the Revolving Working Capital Facility. "Revolving Working Capital Credit Limit" means the amount of Eight Million Dollars ($8,000,000). "Revolving Working Capital Facility" means the line of credit described in Section 2.2 of this Agreement. "Selling Shareholders" means James L. Davenport, D.D.S., Martin Rinker, D.D.S. and William N. Rees, Jr. "Subsidiary" or "Subsidiaries" means any corporation, association, partnership, limited liability company, joint venture or other business entity of which more than fifty percent (50%) of the voting stock, membership interests or other equity interests is owned or controlled, directly or indirectly, by Borrower. "Tangible Net Worth" means the gross book value of the assets of Borrower (exclusive of goodwill, patents, trademarks, trade names, organization expense, treasury stock, unamortized debt discount and expense, deferred charges and other like intangibles, and monies due from affiliates, officers, directors or shareholders of Borrower) less (a) reserves applicable thereto, and (b) all liabilities (including accrued and deferred income taxes). "Total Funded Debt" means all indebtedness for borrowed money, including, but not limited to, outstanding debt under the Bank credit facilities, seller notes, non-compete agreements, purchase money agreements, and lease agreements. "Total Liabilities" means all liabilities of Borrower defined in accordance with GAAP. 5 "TRC" means T.R.C. Agency, Inc., a Texas corporation. "TRC Acquisition" means the acquisition by Borrower of all of the issued and outstanding capital stock of TRC. 1.2 FINANCIAL REQUIREMENTS. Unless otherwise specified in this Agreement, all accounting terms used in this Agreement shall be interpreted, all financial computations required under this Agreement shall be made, and all financial information required under this Agreement shall be prepared in accordance with GAAP. 1.3 OTHER INTERPRETIVE PROVISIONS. (a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. (b) The words "hereof", "herein", "hereunder" and similar words refer to this Agreement as a whole and not to any particular provision of this Agreement; and subsection, Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. The term "including" is not limiting and means "including without limitation". In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding", and the word "through" means "to and including". (c) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. (d) The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. This Agreement and other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms. Unless otherwise expressly provided, any reference to any action of the Bank by way of consent, approval or waiver shall be deemed modified by the phrase "in its sole discretion." (e) The Loan Documents are the result of negotiations between, and have been reviewed by counsel to, Bank and Borrower, and are the products of both parties. Accordingly, they shall not be construed against Bank merely because of Bank's involvement in their preparation. 2. CREDIT FACILITIES. 2.1 REVOLVING ACQUISITION FACILITY. From time to time during the Availability Period, Bank, on a revolving basis, will make advances to Borrower as provided herein. The total of all advances, may not exceed at any one time the amount provided herein. 6 (a) ADVANCES UNDER REVOLVING ACQUISITION FACILITY. (i) TOTAL ADVANCES. The total of all advances outstanding at any one time under the Revolving Acquisition Facility may not exceed the Revolving Acquisition Credit Limit; (ii) INITIAL ADVANCE. The initial advance under the Revolving Acquisition Facility (the "Initial Advance") shall be for an amount not to exceed Nineteen Million Dollars ($19,000,000); (iii) USE OF PROCEEDS. Borrower shall use the proceeds of the Initial Advance to concurrently finance the American Acquisition and the TRC Acquisition; and (iv) PERMITTED ACQUISITIONS. The balance of the Revolving Acquisition Credit Limit, including amounts available under the Revolving Acquisition Credit Facility shall be used by Borrower solely to finance Permitted Acquisitions. (b) REPAYMENT. (i) INTEREST PAYMENTS. Except as provided in Section 2.3(b)(iii) below, interest on advances under the Revolving Acquisition Facility shall be due and payable on a monthly basis commencing on the last day of the month following the Closing Date and continuing through the Maturity Date; provided, that in the event the Closing Date falls on or after the twentieth (20th) day of a month, interest payments will commence on the last day of the next succeeding month; (ii) REVOLVING ACQUISITION CREDIT LIMIT REDUCTIONS. (1) QUARTERLY REDUCTIONS. On the last day of every calendar quarter, commencing June 30, 1997, the Revolving Acquisition Credit Limit shall be reduced by the amounts set forth below: Period Amount ------ ------ On June 30, 1997 $500,000 On September 30, 1997 and December 31, 1997 $750,000 per quarter From March 31, 1998 through December 31, 1998 $875,000 per quarter From March 31, 1999 through December 31, 2001 $1,000,000 per quarter On March 31, 2002 $1,500,000 (2) EQUITY PREPAYMENT. The Revolving Acquisition Credit Limit shall be automatically reduced by an amount equal to fifty percent (50%) of the net proceeds received by Borrower from any issuance and sale of shares of its capital stock ("Equity Prepayment") up to a maximum reduction in the Revolving Acquisition Credit Limit of Ten Million Dollars ($10,000,000); 7 (3) STEP DOWN. The Revolving Acquisition Credit Limit shall be automatically reduced by Three Million Dollars ($3,000,000) on September 30, 1998 ("Principal Reduction"); provided, however, that the reduction required under this subsection (3) shall not be required if on or before September 30, 1998, the Revolving Acquisition Credit Limit has been reduced by at least Three Million Dollars ($3,000,000) as a result of Equity Prepayment(s); (4) VOLUNTARY PREPAYMENTS. The Revolving Acquisition Credit Limit shall not be reduced by voluntary prepayments made by Borrower; and (5) FINAL PAYMENT. Borrower shall repay the entire unpaid balance of advances under the Revolving Acquisition Facility, including accrued but unpaid interest, on the Maturity Date. 2.2 REVOLVING WORKING CAPITAL FACILITY. From time to time during the Availability Period, Bank, on a revolving basis, will make advances to Borrower as provided herein. The total of all advances may not exceed at any one time the amount provided herein. (a) ADVANCES UNDER THE REVOLVING WORKING CAPITAL FACILITY. (i) TOTAL ADVANCES. The total of all advances outstanding at any one time under the Revolving Working Capital Facility may not exceed the Revolving Working Capital Credit Limit. (ii) USE OF PROCEEDS. Borrower shall use the proceeds of advances under the Revolving Working Capital Facility for working capital and other general corporate purposes of Borrower and its Subsidiaries, excluding Acquisitions and investments other than investments in marketable securities. (b) REPAYMENT. (i) INTEREST PAYMENTS. Except as provided in Section 2.3(b)(iii) below, interest on advances under the Revolving Working Capital Facility shall be due and payable on a monthly basis commencing on the last day of the month following the initial advance under the Revolving Working Capital Facility and continuing through the Maturity Date. (ii) FINAL PAYMENT. Borrower shall repay the entire principal balance of outstanding advances under the Revolving Working Capital Facility, as well as accrued but unpaid interest, on the Maturity Date. 2.3 RATES OF INTEREST. (a) REFERENCE RATE. Advances under the Revolving Credit Facilities shall bear interest during each quarter at a rate per annum equal to the Reference Rate plus the percentage points set forth below corresponding to the ratio set forth below as of the end of the immediately preceding quarterly accounting period. 8 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total Funded Debt/Trailing Reference Rate Spread LIBOR Rate Spread Four Quarter EBITDA - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- >1.75:1 0.25% 2.00% - -------------------------------------------------------------------------------- > or equal to 1.75:1>1.00 0.125% 1.875% - -------------------------------------------------------------------------------- < or equal to 1.00 0.00% 1.75% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (b) LIBOR RATE. In lieu of the interest rate related to the Reference Rate, Borrower may elect to have all or portions of advances under the Revolving Credit Facilities bear interest during each calendar quarter at the LIBOR Rate plus the percentage points set forth above corresponding to the ratio set forth above as of the end of the immediately preceding quarterly accounting period; and further subject to the following requirements: (i) Each LIBOR Rate Portion shall be for an amount not less than Five Hundred Thousand Dollars ($500,000). (ii) A LIBOR Rate Interest Period shall not end later than the last day of the Availability Period. (iii) Borrower shall pay interest on each LIBOR Rate Portion on the earlier of the last day of each LIBOR Rate Interest Period for such portion, or ninety (90) days from the date of the advance of such portion. (iv) A LIBOR Rate Portion shall not be converted to a different interest rate during its LIBOR Rate Interest Period. Upon the expiration of a LIBOR Rate Interest Period, the LIBOR Rate Portion shall thereafter bear interest at the rate related to the Reference Rate unless Borrower elects a new interest rate as provided hereunder. (v) Any payment of a LIBOR Rate Portion prior to the last day of the LIBOR Rate Interest Period for such portion, whether voluntary, by reason of acceleration or otherwise, including any mandatory payments required under this Agreement and applied by Bank to an LIBOR Rate Portion, shall be accompanied by the amount of accrued interest on the amount repaid and by the amount (if any) by which (1) the additional interest which would have been payable on the amount repaid had it not been paid until the last day of its LIBOR Rate Interest Period exceeds, and (2) the interest which would have been recoverable by Bank by placing the amount repaid on deposit in the London inter-bank market for a period starting on the date it was repaid and ending on the last day of the LIBOR Rate Interest Period for such portion. (vi) Bank shall have no obligation to accept an election for a LIBOR Rate Portion if any of the following described events has occurred and is continuing: (1) Dollar deposits in the principal amount, and for periods equal to the interest period, of a LIBOR Rate Portion are not available in the London inter-bank market; or (2) The LIBOR Rate does not accurately reflect the cost of a LIBOR Rate Portion. 9 (vii) Upon the occurrence of an Event of Default, Bank may terminate the availability of the rate related to the LIBOR Rate for LIBOR Rate Interest Periods commencing after the occurrence of the Event of Default. 2.4 INTEREST RATE PROTECTION. Concurrently with the execution of this Agreement, and on terms acceptable to Bank, Borrower shall enter into an interest rate swap for a fixed rate covering (a) at least seventy-five percent (75%) of the projected annual outstanding principal balance of the Revolving Acquisition Facility for a term of two (2) years, (b) at least fifty percent (50%) of the projected annual outstanding principal balance of the Revolving Acquisition Facility for a term of one (1) year thereafter, and (c) protecting the LIBOR Rate index from exceeding seven and one-half percent (7.5%). 2.5 MANDATORY PAYMENT. If at any time and for any reason the total amount of credit outstanding under the Revolving Credit Facilities exceeds the limitations set forth herein, Borrower shall pay Bank, upon Bank's election and demand, the amount of the excess. Payments under this Section 2.5 may be applied to the obligations of Borrower to Bank in the order and manner as Bank in its discretion may determine. 3. TAXES, YIELD PROTECTION AND ILLEGALITY. 3.1 TAXES. If any payments to Bank under this Agreement are made from outside the United States, Borrower will not deduct any foreign taxes from any payments it makes to Bank. If any such taxes are imposed on any payments made by Borrower (including payments under this Section), Borrower will pay the taxes and will also pay to Bank, at the time interest is paid, any additional amount which Bank specifies as necessary to preserve the after-tax yield Bank would have received if such taxes had not been imposed. Borrower will confirm that it has paid the taxes by giving Bank official tax receipts (or notarized copies) within thirty (30) days after the due date. 3.2 ILLEGALITY. (a) If Bank determines that the introduction of any requirement of law, or any change in any requirement of law, or in the interpretation or administration of any requirement of law, has made it unlawful, or that any central bank or other governmental authority has asserted that it is unlawful, for Bank or any applicable lending office of Bank to make LIBOR Rate Portions, then, on notice thereof by Bank to Borrower, any obligation of Bank to make advances for which interest is payable at the LIBOR Rate shall be suspended until Bank notifies Borrower that the circumstances giving rise to such determination no longer exists. (b) If Bank determines that it is unlawful to maintain LIBOR Rate Portions, Borrower upon its receipt of notice of such fact and demand from Bank, prepay in full all LIBOR Rate Portions then outstanding, together with interest accrued thereon and amounts required under Section 3.3, either on the last day of the LIBOR Rate Interest Period thereof, if Bank may lawfully continue to maintain LIBOR Rate Portions to such day, or immediately, if Bank may not lawfully continue to maintain LIBOR Rate Portions. If Borrower is required to so prepay any LIBOR Rate Portion, then concurrently with such prepayment, Borrower shall borrow from Bank, in the amount of such repayment, a Reference Rate Portion. 3.3 INCREASED COSTS AND REDUCTION OF RETURN. (a) If Bank determines that, due to either (i) the introduction of or any change 10 in or in the interpretation of any law or regulation, or (ii) the compliance by Bank with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to Bank of agreeing to make or making, funding or maintaining any LIBOR Rate Portion, then Borrower shall be liable for, and shall from time to time, upon demand, pay to Bank, additional amounts as are sufficient to compensate Bank for such increased costs. (b) If Bank shall have determined that (i) the introduction of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (iv) compliance by Bank (or any applicable lending office of Bank) or any corporation controlling Bank with any Capital Adequacy Regulation, affects or would affect the amount of capital required or expected to be maintained by Bank or any corporation controlling Bank and (taking into consideration Bank's or such corporation's policies with respect to capital adequacy and Bank's desired return on capital) determines that the amount of such capital is increased as a consequence of its commitment under this Agreement, then, upon demand of Bank to Borrower, Borrower shall pay to Bank, from time to time as specified by Bank, additional amounts sufficient to compensate Bank for such increase. 3.4 FUNDING LOSSES. Borrower shall reimburse Bank and hold Bank harmless from any loss or expense which Bank may sustain or incur as a consequence of: (a) the failure of Borrower to make on a timely basis any payment of principal of any LIBOR Rate Portion; (b) the failure of Borrower to borrow, continue or convert an advance after Borrower has requested an advance or has given (or is deemed to have given) a Notice of Conversion/Continuation; (c) the failure of Borrower to make any prepayment in accordance with any notice delivered under Section 6.3; (d) the prepayment or other payment (including after acceleration thereof) of a LIBOR Rate Portion on a day that is not the last day of the relevant LIBOR Rate Interest Period; or (e) the automatic conversion under Section 6.3 below of any LIBOR Rate Portion to a Reference Rate Portion on a day that is not the last day of the relevant LIBOR Rate Interest Period; including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain any LIBOR Portions or from fees payable to terminate the deposits from which such funds were obtained. 3.5 INABILITY TO DETERMINE RATES. If Bank determines that for any reason adequate and reasonable means do not exist for determining the LIBOR Rate for any requested Interest LIBOR Rate Period with respect to a proposed LIBOR Rate Portion, for any requested Interest Period, does not adequately and fairly reflect the cost to Bank of funding such advance, Bank will promptly so notify Borrower. Thereafter, the obligation of Bank to make or maintain LIBOR Rate Portions hereunder shall be suspended until Bank revokes such notice in writing. Upon receipt of such notice, Borrower may revoke any notice of borrowing then submitted by it. If Borrower does not revoke such notice, Bank shall make, convert or continue the advance, as proposed by Borrower, in the amount specified in the applicable notice submitted by Borrower, but such advances shall be made, converted or continued as a Reference Rate Portion instead of a LIBOR Rate Portion. 3.6 SURVIVAL. The agreements and obligations of Borrower in this Section 3 shall survive the payment of all other obligations. 4. FEES AND EXPENSES. 4.1 FACILITY FEE. Borrower shall pay Bank a fee ("Facility Fee") of Seventy-Five 11 Thousand Dollars ($75,000) on or before the date of last execution of this Agreement. 4.2 COMMITMENT FEE. Borrower shall pay Bank a fee ("Commitment Fee") on the average daily unused portion of the Credit Limit computed on a quarterly basis in arrears on the last business day of each calendar quarter based upon the daily utilization for that quarter as calculated by Bank, equal to one-quarter of one percent (0.25%) per annum. This fee is due quarterly in arrears on the last day of each accounting quarter commencing on the Closing Date, and on the last day of each accounting quarter thereafter until the expiration of the Availability Period. 4.3 EXPENSES. (a) Borrower agrees to pay to Bank, on demand, all out-of-pocket costs and expenses reasonably incurred by Bank in connection with the preparation of the Loan Documents in excess of those fees and costs listed above. Expenses include, but are not limited to, reasonable attorneys' fees, including any reasonably allocated costs of Bank's in-house counsel, auditors, filing, recording and search fees and documentation fees. (b) Borrower agrees to reimburse Bank for the cost of periodic audits of the books and records of Borrower and the Material Subsidiaries and periodic audits and appraisals of the Collateral. Such audits and appraisals shall not be conducted more than once a year, provided Borrower is not in default hereunder. The audits and appraisals may be performed by employees of Bank or by independent auditors or appraisers. 5. COLLATERAL. 5.1 PROPERTY PLEDGED. All obligations of Borrower under this Agreement shall be secured by one or more security agreements approved by Bank and executed by Borrower as debtor in favor of Bank as secured party, granting Bank a first priority security interest in all personal property ("Personal Property") of Borrower including, but not limited to: (a) Receivables. (b) Fixed assets, excluding leasehold improvements. (c) Patents, trademarks and other general intangibles. The Personal Property shall be more particularly described in the security agreement(s) approved by Bank and executed by Borrower. The Personal Property securing the obligations of Borrower under this Agreement shall also secure all other present and future obligations of Borrower to Bank and all personal property securing any other present or future obligations of Borrower to Bank shall also secure Borrower's obligations under this Agreement. 5.2 STOCK PLEDGE. All obligations of Borrower under this Agreement shall also be secured by all of the issued and outstanding shares of the capital stock of all Subsidiaries now or hereinafter formed or acquired (the "Shares" and, together with the Personal Property, the "Collateral"), all as more particularly described in the pledge agreement(s) approved by Bank and executed by Borrower. 6. EXTENSIONS OF CREDIT, PAYMENTS AND INTEREST CALCULATIONS. 6.1 PROCEDURE FOR BORROWING. Bank may honor any instructions for advances or 12 repayments or for the designation of optional interest rates which are in writing and signed by two (2) authorized employees of Borrower. Advances will be deposited into and repayments will be withdrawn from Borrower's commercial account number 14559-00150 at the North Orange County Regional Commercial Banking Office of Bank, or such other account(s) as may be specified in writing by Borrower. Bank shall honor any instructions made by any two (2) individuals authorized to sign loan agreements on behalf of Borrower, or any other individual designated by any such authorized signers. Bank shall be entitled to rely upon written instructions from persons it reasonably believes to be authorized by Borrower to make such requests without making independent inquiry. Borrower hereby indemnifies Bank for, and holds Bank harmless from, any and all losses, damages, claims and expenses (including reasonable attorneys' fees and allocated costs of Bank's in-house counsel), however arising, which Bank suffers or incurs based on or arising out of extensions of credit or payments made on any written request except that Bank shall not be indemnified against its own gross negligence or willful misconduct. The provisions of this Section 6.1 shall survive termination of this Agreement. 6.2 REQUEST FOR BORROWING. Each request for an extension of credit must be received by Bank prior to 9:00 a.m. Los Angeles time (a) two (2) Banking Days prior to the requested Borrowing Date, in the case of a LIBOR Rate Portion; and (b) on the requested Borrowing Date, in the case of a Reference Rate Portion, specifying: (i) the amount of the advance, which shall be in a minimum amount of Five Hundred Thousand Dollars ($500,000) or any multiple of Two Hundred Fifty Thousand Dollars ($250,000) in excess thereof; (ii) the requested Borrowing Date, which shall be a Business Day; (iii) the type of advance requested; and (iv) the duration of the Interest Period applicable to such extension of credit. If Borrower fails to specify the duration of the interest period for a LIBOR Rate Portion, such interest period shall be thirty (30) days. 6.3 CONVERSION AND CONTINUATION ELECTIONS. (a) Borrower may (i) elect, as of any Banking Day, in the case of a Reference Rate Portion, or as of the last day of the applicable Interest Period, in the case of a LIBOR Rate Portion to convert any such advance (or any part thereof in an amount not less than Five Hundred Thousand Dollars ($500,000), or that is in an integral multiple of One Million Dollars ($1,000,000) in excess thereof) into an advance of any other type; or (ii) elect, as of the last day of the applicable Interest Period, to continue an advance having an Interest Period expiring on such day (or any part thereof in an amount not less than Five Hundred Thousand Dollars ($500,000), or that is in an integral multiple of Two Hundred Fifty Thousand Dollars ($250,000) in excess thereof) ("Conversion/Continuation Date"); PROVIDED, that if at any time the amount of any LIBOR Rate Portion is reduced, by payment, prepayment, or conversion of part thereof to be less than Five Hundred Thousand Dollars ($500,000), such LIBOR Rate Portion shall automatically convert into a Reference Rate Portion, and on and after such date the right of Borrower to continue such advance, and convert such advance into a Reference Rate Portion or LIBOR Rate Portion, as the case may be, shall terminate. (b) Borrower shall make the election provided for in subsection (a) above not later than 9:00 a.m. (Los Angeles time) at least (i) three (3) Banking Days in advance of the Conversion/Continuation Date, if any loan is to be converted into or continued as a LIBOR Rate Portion; (ii) on the Conversion/Continuation Date, if any loan is to be converted into a Reference Rate Portion, specifying: (1) the proposed Conversion/Continuation Date; (2) the amount of the loan to be converted or continued; (3) the type of loan resulting from the proposed conversion or continuation; and (4) other than in the case of conversions into Reference Rate Portions, the duration of the requested interest period. 6.4 DISBURSEMENTS AND PAYMENTS. Each disbursement by Bank and each payment by 13 Borrower under this Agreement shall be made in immediately available funds, or such other type of funds selected by Bank, and at such branch of Bank as Bank may from time to time select. 6.5 BRANCH ACCOUNTS. Each extension of credit under this Agreement shall be made for the account of such branch of Bank as Bank may from time to time select. 6.6 EVIDENCE OF INDEBTEDNESS. Principal, interest and all other sums due Bank under this Agreement shall be evidenced by entries in records maintained by Bank, and, if required by Bank, by a promissory note or notes. Each payment on and any other credits with respect to principal, interest and all other sums due under this Agreement shall be evidenced by entries to records maintained by Bank. 6.7 DIRECT DEBIT (PRE-BILLING). (a) Borrower hereby authorizes Bank to debit Borrower's account number 14559-00150 at the North Orange County Regional Commercial Banking Office of Bank (the "Designated Account") in the amount of principal, interest, fees or any other amount due under this Agreement or under any instrument or agreement required under this Agreement. Bank shall debit the account on the date such amounts become due, or, if such due date is not a Banking Day, on the next Banking Day after such due date. If there are insufficient funds in the account to cover the amount debited to the account in accordance with this Section 6.7, such debit will be reversed and such amount will remain unpaid. (b) Approximately ten (10) days prior to each due date, Bank will mail to Borrower a statement of the amounts that will be due on that due date (the "Billed Amount"). The calculation will be made on the assumption that no new extensions of credit or payments will be made between the date of the billing statement and the due date, and that there will be no changes in the applicable interest rate. (c) Bank will debit the Designated Account for the Billed Amount, regardless of the actual amount due on that date (the "Accrued Amount"). If the Billed Amount debited to the Designated Account differs from the Accrued Amount, the discrepancy will be treated as follows: (i) If the Billed Amount is less than the Accrued Amount, the Billed Amount for the following due date will be increased by the amount of the discrepancy. Borrower will not be in default by reason of any such discrepancy. (ii) If the Billed Amount is more than the Accrued Amount, the Billed Amount for the following due date will be decreased by the amount of the discrepancy. Regardless of any such discrepancy, interest will continue to accrue based on the actual amount of principal outstanding without compounding. Bank will not pay Borrower interest on any overpayment. 6.8 DIRECT DEBIT (REVOLVING WORKING CAPITAL FACILITY). Borrower agrees that Bank may create advances under the Revolving Working Capital Facility to pay interest and any fees that are due under this Agreement. Bank shall create such advances on the dates the payments become due. If a due date does not fall on a Banking Day, Bank shall create the advance on the first Banking Day following the due date. If the creation of an advance under the Revolving Working Capital Facility causes the total amount of credit outstanding thereunder to exceed the limitations set forth in this Agreement, Borrower shall immediately pay the excess to Bank upon 14 Bank's demand. 6.9 INTEREST CALCULATION. Except as otherwise stated in this Agreement, all interest and fees, if any, payable under this Agreement shall be computed on the basis of a three hundred sixty (360) day year and actual days elapsed, which results in more interest or a larger fee than if a three hundred sixty-five (365) day year were used. 6.10 LATE PAYMENTS; COMPOUNDING. Any sum payable by Borrower hereunder (including unpaid interest) if not paid when due shall bear interest (payable on demand) from its due date until payment in full at a rate per annum equal to the Reference Rate plus two (2) percentage point(s). At the option of Bank, in each instance, any sum payable hereunder which is not paid when due (including unpaid interest) may be added to principal of the applicable Revolving Facility and shall thereafter bear interest at the rate applicable to principal. 6.11 DEFAULT RATE. Upon the occurrence and during the continuation of any Event of Default, and without constituting a waiver of any such Event of Default, advances under the applicable Revolving Facility shall at the option of Bank bear interest at a rate per annum which is two (2) percentage point(s) higher than the rate of interest otherwise provided under this Agreement. 7. CONDITIONS PRECEDENT. 7.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF BANK. Bank's obligation to extend credit under this Agreement is subject to Bank's receipt of the following, each of which must be in form and substance satisfactory to Bank. (a) PURCHASE AGREEMENTS. The Purchase Agreement for the American Acquisition and the TRC Acquisition and all documents to be delivered in connection therewith (the "Purchase Documents"), including, but not limited to, the non-competition agreements with William N. Rees, Jr., James L. Davenport, D.D.S., and Martin J. Rinker, D.D.S., the Assignment and Assumption Agreement, dated September 26, 1996, executed by American, D&R Dental Services Group (Metroplex Dental Group/Irving L.L.P) ("D & R") and the Selling Shareholders, the Cross Marketing Agreement, dated as of September 26, 1996, and the NorWest Bank Texas Escrow Agreement Holdback, dated as of September 26, 1996 are in form and substance substantially the same as the Purchase Documents reviewed and found acceptable by Bank, and have been executed by the parties thereto; (b) LOAN DOCUMENTS. The Loan Documents executed by Borrower; (c) RESOLUTIONS; INCUMBENCY. (i) Copies of the resolutions of the board of directors of Borrower and D & R authorizing the transactions contemplated hereby, certified as of the Closing Date by the Secretary of Borrower and D & R; and (ii) a certificate of the Secretary of Borrower and D & R certifying the names and true signatures of the officers of Borrower and D & R who are authorized to execute, deliver and perform, as applicable, this Agreement, and all other Loan Documents to be delivered by it hereunder; (d) ORGANIZATION DOCUMENTS; GOOD STANDING. Each of the following documents: (i) the articles or certificate of incorporation and the bylaws of Borrower and each Subsidiary as in effect on the Closing Date, certified by the Secretary of Borrower and each Subsidiary as of the Closing Date; and (ii) a good standing and tax clearance certificate for Borrower and each Material Subsidiary from the Secretary of State (or similar, applicable Governmental Authority) of its state of incorporation and each state where Borrower and each 15 Material Subsidiary is qualified to do business as a foreign corporation as of a recent date, together with a bring-down certificate by facsimile, dated the Closing Date for those Subsidiaries located in California and Texas and as soon as possible after the Closing Date for all other Material Subsidiaries; (e) LEGAL OPINION. A favorable opinion of counsel to Borrower, addressed to Bank, with respect to such legal matters relating hereto as Bank may request; (f) PAYMENT OF FEES. Evidence of payment by Borrower of all accrued and unpaid fees, costs and expenses to the extent then due and payable on the Closing Date, together with attorney fees and expenses of Bank to the extent invoiced prior to or on the Closing Date, plus such additional amounts of attorney fees and expenses as shall constitute Bank's reasonable estimate of costs and expenses incurred or to be incurred by it through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between Borrower and Bank); including any such costs, fees and expenses arising under or referenced in Sections 12.4 and 12.5 below; (g) CERTIFICATE. A certificate executed by a Responsible Officer dated as of the Closing Date, stating that: (i) the representations and warranties contained in Section 8 are true and correct on and as of such date, as though made on and as of such date; (ii) no Default or Event of Default exists or would result from the execution and delivery of this Agreement; (iii) there has occurred since June 30, 1996, no event or circumstance that has resulted or could reasonably be expected to result in a Material Adverse Change; (iv) Borrower and its Material Subsidiaries are in compliance with all material regulations of Governmental Authorities having jurisdiction over Borrower and each such Material Subsidiary; (v) after taking into consideration the transactions contemplated by this Agreement, Borrower is in compliance with the financial covenants described in Section 9 below and Borrower and its Material Subsidiaries are in compliance with all financial responsibility and other material requirements of all Governmental Authorities having jurisdiction over Borrower and its Material Subsidiaries, including the California Department of Corporations and the Texas Department of Insurance; and (vi) stating the sources and uses of funds for the American Acquisition and the TRC Acquisition; (h) TERMINATION STATEMENTS. Evidence of the satisfaction and termination of all liens affecting the Collateral; (i) PERMITS. Evidence that Borrower and each Material Subsidiary possess the necessary licenses and permits to conduct its business as presently conducted; (j) REGULATORY APPROVAL. Evidence that Borrower has received all approvals, clearances or expirations of waiting periods for the Acquisitions required by all federal, state and local Governmental Authorities having jurisdiction over Borrower, its Material Subsidiaries and the transactions contemplated by this Agreement; (k) FINANCIAL STATEMENTS. Bank shall have received and found acceptable the following financial statements: (i) The combined and combining income statements of American, TRC and Metroplex Dental for the fiscal year ended December 31, 1995, with proforma adjustments made to the historical financial statements to take into consideration the effect of the termination of Borrower's contract with the Employees Retirement System of Texas and compensation formerly paid to the Selling Shareholders, and interim combined and combining financial statements of Borrower, American, TRC and Metroplex Dental 16 for the six (6) month period ending June 30, 1996. The financial statements shall be accompanied by the opinion of Deloitte and Touche ("Deloitte") which report shall state that they have examined the proforma adjustments in accordance with the standards established by the American Institute of Certified Public Accountants; (ii) The audited financial statements of TRC for fiscal years ended December 31, 1993, December 31, 1994 and December 31, 1995, and interim audited financial statement of TRC for the six (6) month period ended June 30, 1996; (iii) The interim financial statement of American for the six (6) month period ended June 30, 1996, audited by Robert Allen, CPA; (iv) The audited financial statement of Safeguard Health Plans, Inc., a California corporation, Safeguard Health Plans, Inc., a Texas corporation, and SafeHealth Life Insurance Company, a California corporation for the fiscal year ended December 31, 1995, and unaudited year-to-date results for each corporation; (v) The financial statement of Metroplex Dental for the most recent fiscal year and the interim financial statement for the quarter ended June 30, 1996, prepared by Borrower; (vi) CPA management letters for fiscal years ended December 31, 1994 and 1995 for Borrower and American; (vii) Consolidated and consolidating projections for Borrower, American and TRC for fiscal years 1996 through and including 2000, and a certificate executed by a Responsible Officer, certifying to Bank that the financial projections are: (1) either based on (A) facts which are true, correct and complete in all material respects, or (B) consistent with such facts; and (2) reasonably consistent with such facts and assumptions. (viii) Pre-closing and post-closing pro forma Borrower prepared consolidated and consolidating balance sheets of Borrower, American, TRC and Metroplex Dental, to include accompanying explanatory notes. (l) MATERIAL CONTRACTS. A listing and summary of all material contracts of Borrower, its Material Subsidiaries and Target, the terms of which shall be acceptable to Bank. Borrower shall provide Bank with copies of any material contracts requested by Bank; (m) UCC-1 FINANCING STATEMENTS. Borrower shall deliver to Bank two (2) UCC-1 Financing Statements in paper form for filing with the California and Delaware Secretaries of State and Bank shall have received a certificate of the Secretary of State of California and Delaware showing said financing statements to be subject to no prior filings; (n) INSURANCE. Borrower shall deliver to Bank, within thirty (30) days, a copy of the Property insurance policy for Borrower listing Bank as loss payee or; and (p) OTHER DOCUMENTS. Such other approvals, opinions, documents or materials as Bank may request. 17 7.2 ADDITIONAL CONDITIONS TO EXTENSION OF CREDIT FOR THE AMERICAN ACQUISITION AND THE TRC ACQUISITION. Bank's obligation to extend credit for the American Acquisition and the TRC Acquisition is subject to Bank's receipt of the following, each of which must be in form and substance satisfactory to Bank: (a) PURCHASE DOCUMENTS. Evidence that all conditions to the effectiveness of the Purchase Documents have been satisfied or waived. (b) CONDITIONS PRECEDENT. Satisfaction of all of the conditions of Section 7.1 above. (c) COMPLIANCE CERTIFICATE. Bank shall have received a Compliance Certificate executed by a Responsible Officer in form and substance reasonably satisfactory to Bank. 7.3 CONDITIONS TO EACH EXTENSION OF CREDIT FOR THE PERMITTED ACQUISITIONS. Bank's obligation to extend credit for a Permitted Acquisition is subject to Bank's receipt of the following, each of which must be in form and substance satisfactory to Bank. (a) COMPLIANCE CERTIFICATE. Bank shall have received a Compliance Certificate executed by a Responsible Officer in form and substance reasonably acceptable to Bank. (b) PURPOSE STATEMENT. A certificate executed by a Responsible Officer stating the specific purpose of the requested advance. (c) CONTINUATION OF REPRESENTATIONS AND WARRANTIES. Bank shall have received a certificate executed by a Responsible Officer that the representations and warranties of Borrower set forth in this Agreement are true and correct as though made at and as of the date of the certificate. 7.4 CONDITION TO EACH EXTENSION OF CREDIT UNDER REVOLVING WORKING CAPITAL FACILITY. Before each extension of credit, including the first, Bank shall have received a certificate executed by a Responsible Officer setting forth the specific corporate or working capital needs that will be met with the proceeds of an extension of credit including, to the extent applicable, the Subsidiary on whose behalf the advance will be utilized. 8. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants (and each request for an extension of credit under this Agreement shall be deemed a representation and warranty made on the date of such request) that: 8.1 ORGANIZATION. Borrower and each of its Subsidiary is a corporation duly organized and existing under the laws of the state of its organization and the execution, delivery, and performance of this Agreement and of any instrument or agreement required by this Agreement are within Borrower's powers, have been duly authorized, and are not in conflict with the terms of any charter, bylaw, or other organization papers of Borrower. 8.2 NO CONFLICTS. The execution, delivery, and performance of this Agreement and of any instrument or agreement required by this Agreement are not in conflict with any law or any indenture, agreement, or undertaking to which Borrower or any Material Subsidiary is a party or by which Borrower is bound or affected. 18 8.3 ENFORCEABILITY. This Agreement is a legal, valid and binding agreement of Borrower, enforceable against Borrower in accordance with its terms, and any instrument or agreement required under this Agreement, when executed and delivered, will be similarly legal, valid, binding and enforceable. 8.4 GOOD STANDING. Borrower and each Material Subsidiary is properly licensed and in good standing in each state in which Borrower is doing business and Borrower has qualified under, and complied with, where required, the fictitious name statute of each state in which Borrower is doing business. 8.5 COMPLIANCE WITH LAWS. Borrower and each Material Subsidiary has complied with all federal, state, and local laws, rules, and regulations affecting the business of Borrower including, but not limited to, laws establishing capital, equity, liquidity and surplus requirements for Borrower and its Material Subsidiaries. 8.6 TITLE TO PROPERTIES. All property of Borrower and each Subsidiary shall be owned or leased free and clear of all security interests, liens, encumbrances and rights of others except the rights of any lessor under any lease or security interest, the rights of Bank under any security agreements or deeds of trust required under this Agreement and those consented to in writing by Bank. 8.7 PERMITS, FRANCHISES. Borrower and each Material Subsidiary possess all permits, memberships, franchises, contracts and licenses required and all trademark rights, trade name rights, patent rights and fictitious name rights necessary to enable it to conduct the business in which it is now engaged. 8.8 PERFECTED SECURITY INTEREST IN COLLATERAL. Except for the filing of a financing statement with respect to the Collateral and the delivery to Bank of any Collateral as to which possession is the only method of perfecting a security interest therein, no further action is necessary in order to establish and perfect Bank's lien on or security interest in the Collateral. 8.9 LITIGATION. There is no litigation, tax claim, proceeding or dispute pending, or, to the knowledge of Borrower, threatened, against or affecting the property of Borrower or any Material Subsidiary, the adverse determination of which might affect the financial condition or operations of Borrower or any Material Subsidiary, or impair Borrower's ability to perform its obligations hereunder or under any instrument or agreement required hereunder. 8.10 NO EVENT OF DEFAULT. No event has occurred and is continuing or would result from the extension of credit under this Agreement which constitutes or would constitute an Event of Default or which, upon a lapse of time or notice or both, would become an Event of Default. 8.11 OTHER OBLIGATIONS. Except as disclosed in writing to Bank, neither Borrower nor any Material Subsidiary is in default under any other agreement involving the borrowing of money, the extension of credit, or the lease of real or personal property to which Borrower is a party as borrower, guarantor, installment purchaser or lessee. 8.12 INFORMATION SUBMITTED. All financial and other information that has been or will be submitted by Borrower to Bank, including Borrower's financial statements dated as of June 30, 1996, is and will be: (a) Prepared in accordance with GAAP consistently applied; 19 (b) True and correct in all material respects and is complete insofar as may be necessary to give Bank a true and accurate knowledge of the subject matter thereof; (c) In form and content required by Bank; and (d) In compliance with all government regulations applicable thereto. 8.13 NO MATERIAL ADVERSE CHANGE. There has been no Material Adverse Change in the financial condition or operation of Borrower and its Material Subsidiaries since the date of the most recent financial statements submitted to Bank. 8.14 ERISA PLAN COMPLIANCE. (a) Borrower has fulfilled its obligations, if any, under the minimum funding standards of ERISA and the Internal Revenue Code of 1986, as amended from time to time, (the "Code") with respect to each ERISA Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and has not incurred any liability with respect to any ERISA Plan under Title IV of ERISA; (b) No reportable event has occurred under Section 4043(b) of ERISA for which the Pension Benefit Guaranty Corporation requires 30 day notice; (c) No action by Borrower to terminate or withdraw from any ERISA Plan has been taken and no notice of intent to terminate an ERISA Plan has been filed under Section 4041 of ERISA; and (d) No proceeding has been commenced with respect to an ERISA Plan under Section 4042 of ERISA, and no event has occurred or condition exists which might constitute grounds for the commencement of such a proceeding. 8.15 LOCATION OF BORROWER. Borrower's place of business (or, if Borrower has more than one place of business, its chief executive office) is located at the address listed under Borrower's signature on this Agreement. 9. AFFIRMATIVE COVENANTS. So long as credit is available under this Agreement and until full and final payment of all of Borrower's obligations under this Agreement and any instrument or agreement required under this Agreement, unless Bank waives compliance in writing, Borrower shall, and shall cause its Subsidiaries to: 9.1 NOTICE OF CERTAIN EVENTS. Immediately give written notice to Bank of: (a) All litigation where the amount claimed is One Million Dollars ($1,000,000) or more; (b) Any material dispute which may exist with any governmental regulatory body or law enforcement authority; (c) Any Event of Default or any event which, upon a lapse of time or notice or both, would become an Event of Default; 20 (d) The occurrence of any reportable event under Section 4043(b) of ERISA for which the Pension Benefit Guaranty Corporation requires thirty (30) day notice; any action by Borrower to terminate or withdraw from an ERISA Plan or the filing of any notice of intent to terminate under Section 4041 of ERISA; any notice of noncompliance made with respect to an ERISA Plan under Section 4041(b) of ERISA; or the commencement of any proceeding with respect to an ERISA Plan under Section 4042 of ERISA; (e) Any material notice received from a governmental authority; or (f) Any other matter which has resulted or might result in a Material Adverse Change in the financial condition or operations of Borrower and its Material Subsidiaries. 9.2 FINANCIAL AND OTHER INFORMATION. Deliver to Bank in form and detail satisfactory to Bank, and in such number of copies as Bank may request: (a) Within one hundred twenty (120) days after the end of each fiscal year, the audited consolidated financial statements of Borrower and its Subsidiaries for such year together with (i) an unqualified opinion of a "Big Six" CPA firm, or another nationally recognized CPA firm, which is acceptable to Bank, that the financial statements present fairly the financial position of Borrower and its Subsidiaries for the period indicated in conformity with GAAP applied on a basis consistent with prior years, (ii) a copy of the CPA management letter, and (iii) a Compliance Certificate which includes all computations made by the accounting firm to determine the compliance by Borrower and each Material Subsidiary with all financial responsibility requirements imposed by any Governmental Authority having jurisdiction over Borrower and each Material Subsidiary; (b) Within forty-five (45) days after the end of each quarterly accounting period, the consolidated financial statements of Borrower and its Subsidiaries for such period prepared by Borrower together with a Compliance Certificate executed by a Responsible Officer certifying the compliance by Borrower and the Subsidiaries with all financial responsibility requirements of Governmental Authorities having jurisdiction over Borrower and each Material Subsidiary; (c) Within forty-five (45) days after the end of each quarterly accounting period, a Compliance Certificate in the form of Exhibit A; (d) Within forty-five (45) days after the end of each quarterly accounting period, financial statements of each Material Subsidiary, including a Compliance Certificate executed by a Responsible Officer certifying that each such Material Subsidiary is in compliance with all financial responsibility requirements of Governmental Authorities having jurisdiction over Borrower and each Material Subsidiary; (e) Within ten (10) days after the date of filing with the Securities and Exchange Commission, copies of Borrower's Form 10-K Annual Report, Form 10-Q Quarterly Report and Form 8-K Current Report; (f) Within ten (10) days after the date of filing with the California Department of Corporations, the Texas Department of Insurance, and any other Governmental Authority having jurisdiction over the business and affairs of Borrower and any Material Subsidiary, a copy of each filing required as a result of, or which indicates that, Borrower or any Material Subsidiary is not in compliance with all financial responsibility requirements of the applicable 21 Governmental Authority; (g) Within thirty (30) days prior to the end of a fiscal year, consolidated financial projections for Borrower and its Subsidiaries for the remaining fiscal years through the Maturity Date based upon (i) Borrower's knowledge and belief that the facts are materially true, correct, and complete in all respects, and (ii) assumptions which are reasonable, complete, and consistent with such facts. (h) Within sixty (60) days of closing of a Permitted Acquisition, consolidated and consolidating balance sheet of Borrower and the Target audited by an independent accountant acceptable to Bank, which balance sheet shall not contain any materially adverse information from that provided to the Bank pursuant to Section 7.1(k)(viii); (i) Within one hundred twenty (120) days after the end of each fiscal year, the financial statements of each Material Subsidiary for such period, prepared by Borrower; and (j) Promptly upon request of Bank, such other statements, lists of property and accounts, budgets, forecasts or reports as to Borrower and each Subsidiary as Bank may reasonably request. 9.3 BOOKS, RECORDS, AUDITS AND INSPECTIONS. Maintain for Borrower and each Subsidiary adequate books, accounts and records and prepare all financial statements required hereunder in accordance with GAAP, and in compliance with the regulations of any Governmental Authority having jurisdiction over Borrower or a Subsidiary or Borrower's or a Subsidiary's business and permit employees or agents of Bank at any reasonable time to inspect the Collateral and Borrower's or a Subsidiary's properties, to conduct appraisals of the Collateral, and to examine or audit Borrower's or a Subsidiary's books, accounts, and records and make copies and memoranda thereof. In the event any Collateral, properties, books, accounts or records are in the possession of or under the control of a third party, Borrower or its Subsidiary shall direct and hereby authorizes such third party to permit access to Bank's employees or agents for the purpose of performing the inspections, appraisals, examinations or audits permitted under this Section, and to respond to any requests from Bank for information concerning the amount, status or condition of any Collateral in such third party's possession or control. 9.4 INSURANCE. Maintain and keep in force fire and hazard insurance policies covering the tangible property comprising the Collateral. Each such insurance policy shall be in an amount equal to the full replacement value of such Collateral, shall include a replacement cost endorsement, shall be issued by an insurance company with at least a B+, V rating, as set forth in the most current issue, at any point in time, of "Best's Insurance Guide", and shall include a loss payable endorsement in favor of Bank in a form acceptable to Bank. Borrower shall also maintain and keep in force insurance satisfactory to Bank as to amount, nature and carrier covering property damage (including use and occupancy) to any of Borrower's other properties, public liability insurance including coverage for contractual liability, product liability, property damage and workers' compensation, and any other insurance which is usual for Borrower's business. Borrower shall require all its Subsidiaries to maintain the same or better insurance coverage that Bank is requiring of Borrower, including, if appropriate, professional liability insurance. Borrower shall deliver to Bank upon Bank's request a copy of each personal property insurance policy listing Bank as loss payee and a certificate of insurance listing all insurance in force for Borrower and its Subsidiaries. 9.5 COMPLIANCE WITH LAWS. At all times comply with, or cause to be complied with, 22 all laws, statutes (including but not limited to any fictitious name statute), rules, regulations, orders and directions of any Governmental Authority having jurisdiction over the business and operations of Borrower and its Subsidiaries. 9.6 ADDITIONAL ACTS. Perform, on request of Bank, such acts as may be necessary or advisable to perfect any lien or security interest provided for herein or otherwise to carry out the intent of this Agreement. 9.7 MINIMUM LIQUIDITY. Maintain on a consolidated basis, a total of unencumbered and unrestricted cash and market value of cash equivalents and marketable securities plus the unused amount of advances under the Revolving Working Capital Facility ("Liquidity") of at least Seven Million Dollars ($7,000,000). 9.8 MAXIMUM TOTAL LIABILITIES TO TANGIBLE NET WORTH. Maintain on a consolidated basis a ratio of Total Liabilities to Tangible Net Worth of not more than the ratio indicated for each period set forth below: Period Ratio ------ ----- From the Closing Date through December 30, 1996 3.60 to 1 From December 31, 1996 through December 30, 1997 2.80 to 1 From December 31, 1997 through December 30, 1998 1.80 to 1 From December 31, 1998 and thereafter 1.10 to 1 9.9 MINIMUM FIXED CHARGE COVERAGE RATIO. As of the end of each quarterly accounting period maintain on a consolidated basis a ratio of Cash Flow to Fixed Charges at least equal to the ratio indicated: Period Ratio ------ ----- For the one quarter period ending December 31, 1996 1.10 to 1 For the two quarter period ending March 31, 1997 1.10 to 1 For the three quarter period ending June 30, 1997 1.10 to 1 For the four quarter period ending September 30, 1997 1.15 to 1 For the four quarter periods ending December 31, 1997 through September 30, 1998 1.20 to 1 23 For the four quarter periods ending December 31, 1998 and thereafter 1.25 to 1 This ratio shall be calculated quarterly using the income statement results for the periods stated above. For purposes of computing the Minimum Fixed Charge Coverage Ratio, the following shall apply: (a) The amount of Five Hundred Thousand Dollars ($500,000) per quarter shall be deemed payable for the quarters ending December 31, 1996, and March 31, 1997; and (b) The amount of Three Million Dollars ($3,000,000) representing the principal reduction in the Revolving Acquisition Facility Credit Limit required under Section 2.1(b) above, shall not be included in calculating the ratio. 9.10 OUT-OF-DEBT REQUIREMENT. Repay all advances outstanding under the Revolving Working Capital Facility and not draw any new advances for a period of at least thirty (30) consecutive calendar days during each rolling twelve (12) month period during the Availability Period and, in the event the Availability Period is extended, during each subsequent twelve (12) month period. 9.11 USE OF PROCEEDS. Use the proceeds of the Revolving Acquisition Facility to finance the Acquisitions; and use the proceeds of the Revolving Working Capital Facility for working capital and other general corporate purposes (excluding Acquisition financing). 9.12 EXISTENCE AND PROPERTIES. Maintain and preserve Borrower's existence and all rights, privileges and franchises now enjoyed, conduct the business of Borrower and its Subsidiaries in an orderly, efficient and customary manner, keep all properties of Borrower and its Subsidiaries in good working order and condition, and from time to time make all needed repairs, renewals or replacements thereto and thereof so that the efficiency of such property shall be fully maintained and preserved. 9.13 CHANGE IN NAME, STRUCTURE OR LOCATION. Notify Bank in writing prior to any change in (a) Borrower's name, (b) Borrower's business or legal structure, or (c) Borrower's place of business or chief executive office if Borrower has more than one place of business. 10. NEGATIVE COVENANTS. So long as credit is available under this Agreement and until full and final payment of all of Borrower's obligations under this Agreement and any instrument or agreement required under this Agreement, and unless Bank waives compliance in writing, Borrower shall not, and shall not permit any Subsidiary to: 10.1 OTHER INDEBTEDNESS. Create or incur any indebtedness for borrowed money or for the deferred purchase price of property under capital leases, or become liable as a surety, guarantor, accommodation endorser, or otherwise for or upon the obligation of any other person, firm or corporation; provided, however, that this Section shall not be deemed to prohibit: (a) Direct or contingent obligations owed to Bank; (b) The acquisition of goods, supplies or merchandise on normal trade credit; 24 (c) The execution of bonds or undertakings in the ordinary course of its business as presently conducted; (d) The endorsement of negotiable instruments received in the ordinary course of its business as presently conducted; (e) Indebtedness and lease obligations existing as of the date of this Agreement and which have been disclosed to Bank in writing; and (f) Additional indebtedness, including lease obligations, for the acquisition of fixed or capital assets to the extent permitted under this Agreement. 10.2 LIENS. Create, assume or suffer to exist any security interest, lien (including the lien of an attachment, judgment or execution) or encumbrance, securing a charge or obligation, on or of any of its property, real or personal, whether now owned or hereafter acquired, except: (a) Security interest(s) and deed(s) of trust in favor of Bank; (b) Liens, security interests and encumbrances in existence as of the date of this Agreement which have been disclosed to Bank in writing; (c) Liens for current taxes, assessments or other governmental charges which are not delinquent or remain payable without any penalty; (d) Purchase money security interests in personal or real property hereafter acquired when the security interest does not extend beyond the property purchased and the aggregate amount of liabilities secured thereby do not exceed, at any one time, One Million Dollars ($1,000,000) and on terms otherwise acceptable to Bank; provided, however, that this exception shall not apply to any Subsidiary; and (e) Any mechanic's, materialmen's or other lien on account of labor or material furnished or used in connection with any construction or improvements on any of their real or personal property, provided that the aggregate of all such liens shall not at any point in time exceed One Hundred Thousand Dollars ($100,000). 10.3 CAPITAL ASSETS. Expend or incur in any fiscal year, obligations (including obligations incurred under any capital leases) of more than Three Million One Hundred Thousand Dollars ($3,100,000) for the acquisition of fixed or capital assets in aggregate. 10.4 ACQUISITIONS. Acquire or purchase the assets or business of any Person other than the Acquisitions. 10.5 DIVIDENDS. Declare or pay any dividends on any of its shares except dividends paid to Borrower from its Subsidiaries and dividends payable in capital stock of Borrower, and not purchase, redeem or otherwise acquire for value any of its shares, or create any sinking fund in relation thereto in excess of Two Hundred Fifty Thousand Dollars ($250,000) during each fiscal year during the Availability Period. 10.6 LOANS. Make any loans, advances or other extensions of credit to any of Borrower's or its Subsidiary's executives, officers, or directors or shareholders (or any relatives of any of the foregoing) in excess of Two Hundred Fifty Thousand Dollars ($250,000) in the 25 aggregate outstanding at any one time. 10.7 LOSSES. Suffer a loss on a quarterly basis. For purposes of this Section 10.7, the term "loss" means the absence of a net profit after taxes computed in accordance with GAAP. 10.8 CHANGE OF CONTROL. Cause, permit, or suffer a Change of Control. For purposes of this Agreement, the term "Change of Control" means (a) the sale, lease or transfer of all or substantially all of the assets of Borrower or a Material Subsidiary, (b) except for the transfer by sale or otherwise to Steven J. Baileys, D.D.S. and his affiliates, the transfer by sale or otherwise of more than thirty percent (30%) of the outstanding voting shares of Borrower, (c) the change in the composition of the board of directors of Borrower such that the members of the board of director of Borrower does not consist of at least a majority of the current members of the board of directors of Borrower, or (d) the shareholders of Borrower approve and adopt a plan of liquidation or dissolution of Borrower. 10.9 SALES AND LEASEBACKS. Dispose of any of its assets except for full, fair and reasonable consideration, or enter into any sale and leaseback agreement covering any of its fixed or capital assets. 10.10 LIQUIDATIONS AND MERGERS. Liquidate or dissolve or enter into any consolidation, merger, partnership, joint venture or other combination. 10.11 SALE OF ASSETS. Sell, lease, or otherwise dispose of its business or assets, except in the ordinary course of its business theretofore conducted, without the prior written consent of Bank; and not to sell, lease or otherwise dispose of any assets in the ordinary course of business for less than fair market value. 10.12 BUSINESS ACTIVITIES. Engage in any business activities or operations substantially different from or unrelated to present business activities and operations. 11. EVENTS OF DEFAULT. The occurrence of any of the following Events of Default shall terminate any obligation on the part of Bank to extend credit under this Agreement and, at the option of Bank under all Sections (except automatically in the case of Sections 11.5 and 11.6), shall make all obligations of Borrower to Bank under or in respect of this Agreement and any instrument or agreement required under this Agreement immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor, or other notices or demands of any kind or character. 11.1 FAILURE TO PAY. Borrower fails to pay, within three (3) days after the date when due, any installment of interest or principal or any other sum due under the Loan Documents in accordance with the terms thereof. 11.2 BREACH OF REPRESENTATION OR WARRANTY. Any representation or warranty herein or in any agreement, instrument or certificate executed pursuant hereto or in connection with any transaction contemplated hereby proves to have been false or misleading in any material respect when made. 11.3 FALSITY OF INFORMATION. Any financial or other information delivered by Borrower to Bank proves to be false or misleading in any material respect. 11.4 SECURITY INTEREST. Bank fails to have a valid and enforceable perfected security 26 interest in or lien on the Collateral or such security interest or lien fails to be prior to the rights and interest of others except those consented to in writing by Bank. 11.5 FAILURE TO PAY DEBTS; VOLUNTARY BANKRUPTCY. Borrower or any Material Subsidiary fails to pay Borrower's or such Material Subsidiary's debts generally as they come due, or files any petition, proceeding, case, or action for relief under any bankruptcy, reorganization, insolvency, or moratorium law, or any other law or laws for the relief of, or relating to, debtors. 11.6 INVOLUNTARY BANKRUPTCY. An involuntary petition is filed under any bankruptcy or similar statute against Borrower or any Material Subsidiary, or a receiver, trustee, liquidator, assignee, custodian, sequestrator, or other similar official is appointed to take possession of the properties of Borrower or any Material Subsidiary. Such Event of Default shall be deemed cured if such petition or appointment is set aside or withdrawn or ceases to be in effect within thirty (30) days from the date of said filing or appointment; provided, however, that Bank shall not be obligated to extend any additional credit to Borrower during such period. 11.7 SUITS. One or more suits are filed against Borrower or any Material Subsidiary by a trade creditor or trade creditors of Borrower or any Material Subsidiary in the aggregate amount of One Million Dollars ($1,000,000) or more. 11.8 JUDGMENTS. One or more judgments or arbitration awards are entered against Borrower or any Material Subsidiary, or Borrower or any Material Subsidiary enters into any settlement agreements with respect to any litigation or arbitration, in the aggregate amount of One Million Dollars ($1,000,000) or more on a claim or claims not covered by insurance. 11.9 SUSPENSION OF BUSINESS. Borrower or any Material Subsidiary voluntarily suspends its business for more than five (5) days in any thirty (30) day period. 11.10 GOVERNMENTAL ACTION. Any Governmental Authority takes or institutes action which, in the opinion of Bank, will have a material adverse affect on the financial condition, operations or ability of Borrower to pay its obligations under this Agreement or any instrument or agreement required under this Agreement. 11.11 DEFAULT OF OTHER FINANCIAL OBLIGATIONS. Any default occurs under any other agreement involving the borrowing of money or the extension of credit to which Borrower or any Material Subsidiary may be a party as borrower, guarantor or installment purchaser if such default consists of the failure to pay any obligation when due or if such default gives to the holder of the obligation concerned the right to accelerate the obligation. 11.12 MISUSE OF COLLATERAL. Bank, in good faith, considers any Collateral to be unsafe or in danger of misuse to the extent that Bank's prospect of or right to payment or performance under this Agreement or any instrument or agreement required hereunder is materially impaired. 11.13 DEFAULT OF OTHER BANK OBLIGATIONS. Any default occurs under any other obligation of Borrower or any Material Subsidiary to Bank or to any subsidiary or affiliate of Bank. 11.14 MATERIAL ADVERSE CHANGE. A Material Adverse Change occurs in the financial condition or results of operations of Borrower or any Subsidiary, or a material change occurs in the ability of Borrower to perform its obligations under this Agreement or under any instrument or agreement required by this Agreement. 27 11.15 ERISA PLAN TERMINATION. Any ERISA Plan termination or any full or partial withdrawal from an ERISA Plan occurs which could result in liability of Borrower to the Pension Benefit Guaranty Corporation or to the ERISA Plan in an aggregate amount which, in the reasonable opinion of Bank, will have a material adverse effect on the financial condition of Borrower. 11.16 CHANGE IN CONTROL. A Change in Control occurs regarding Borrower or any Material Subsidiary. 11.17 OTHER BREACH UNDER AGREEMENT. Borrower breaches, or defaults under, any term, condition, covenant, provision, representation or warranty contained in this Agreement not specifically referred to in this Section; provided, however, that if in Bank's opinion such default is capable of being remedied, such default shall not be considered an Event of Default hereunder for a period of thirty (30) days after the date on which Bank gives written notice of such default to Borrower; it is further provided that, notwithstanding any other provision of this Agreement, Bank shall be under no obligation to extend additional credit under this Agreement following the occurrence of any default hereunder unless and until such default has been cured. 12. MISCELLANEOUS. 12.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that Borrower shall not assign this Agreement or any of the rights, duties or obligations of Borrower hereunder without the prior written consent of Bank. 12.2 CONSENTS AND WAIVERS. No consent or waiver under this Agreement shall be effective unless in writing. No waiver of any breach or default shall be deemed a waiver of any breach or default thereafter occurring. 12.3 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California. 12.4 ADMINISTRATION COSTS. Borrower agrees to pay to Bank, on demand, all reasonable costs and expenses incurred by Bank in connection with the administration of this Agreement and any instrument or agreement required under this Agreement including, but not limited to, documentation, audit and filing costs. 12.5 ATTORNEYS' FEES. Borrower agrees to pay to Bank, on demand, all reasonable costs, expenses and attorneys' fees (including allocated costs for in-house legal services) incurred by Bank in connection with the enforcement and preservation of any rights or remedies under this Agreement and any instrument or agreement required under this Agreement, and including any amendment, waiver, "workout" or restructuring under this Agreement. In the event a legal action or arbitration proceeding is commenced in connection with the enforcement of this Agreement or any instrument or agreement required under this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees (including allocated costs for in-house legal services), costs and necessary disbursements incurred in connection with such action or proceeding, as determined by the court or arbitrator. 12.6 INTEGRATION. This Agreement and any instrument, agreement or document attached hereto or referred to herein (a) integrate all the terms and conditions mentioned herein or incidental hereto, (b) supersede all oral negotiations and prior writings in respect to the subject matter hereof, and (c) are intended by the parties as the final expression of the agreement with 28 respect to the terms and conditions set forth in this Agreement and any such instrument, agreement or document and as the complete and exclusive statement of the terms agreed to by the parties. In the event of any conflict between the terms, conditions and provisions of this Agreement and any such instrument, agreement, or document, the terms, conditions and provisions of this Agreement shall prevail. 12.7 PARTICIPATION. Bank may at any time sell, assign, grant participation in, or otherwise transfer to any other person, firm, or corporation (a "Participant") all or part of the obligations of Borrower under this Agreement. Borrower agrees that each such disposition will give rise to a direct obligation of Borrower to the Participant. Borrower authorizes Bank and each Participant, upon the occurrence of an Event of Default, to proceed directly by right of setoff, banker's lien, or otherwise, against any assets of Borrower which may be in the hands of Bank or such Participant, respectively. Borrower authorizes Bank to disclose to any prospective Participant and any Participant any and all information in Bank's possession concerning Borrower, this Agreement and the Collateral. Borrower will not be required to pay any additional loan fee, placement fee or agency fee in connection with the syndication of this credit. 12.8 INDEMNIFICATION. Borrower agrees to indemnify Bank against, and hold Bank harmless from, all claims, actions, losses, costs and expenses (including attorneys' fees and allocated costs for in-house legal services) incurred by Bank and arising from any contention, whether well-founded or otherwise, that there has been a failure to comply with any law regulating Borrower's sales to or performance of services for receivable debtors and disclosures in connection therewith. The provisions of this Section shall survive termination of this Agreement. 12.9 HAZARDOUS WASTE INDEMNIFICATION. Borrower shall indemnify and hold harmless Bank, its parent company, subsidiaries and all of their directors, officers, employees agents, successors, attorneys and assigns from and against any loss, damage, cost, expense or liability directly or indirectly arising out of or attributable to the use, generation, manufacture, production, storage, release, threatened release, discharge, disposal or presence of a Hazardous Substance on, under or about Borrower's or any Subsidiary's property or operations or property leased to Borrower or any Subsidiary, including, but not limited to, attorneys' fees (including the reasonable estimate of the allocated cost of in-house counsel and staff). For purposes of this Agreement, "Hazardous Substance" means any substance which is or becomes designated as "hazardous" or "toxic" under any federal, state or local law. This indemnity shall survive termination of this Agreement. 12.10 ARBITRATION; REFERENCE PROCEEDING. (a) Any controversy or claim between or among the parties, including but not limited to those arising out of or relating to this Agreement or any agreements or instruments relating hereto or delivered in connection herewith and any claim based on or arising from an alleged tort, shall at the request of any party be determined by arbitration. The arbitration shall be conducted in accordance with the United States Arbitration Act (Title 9, U.S. Code), notwithstanding any choice of law provision in this Agreement, and under the Commercial Rules of the American Arbitration Association ("AAA"). The arbitrator(s) shall give effect to statutes of limitation in determining any claim. Any controversy concerning whether an issue is arbitrable shall be determined by the arbitrator(s). Judgment upon the arbitration award may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. 29 (b) Notwithstanding the provisions of subparagraph (a), no controversy or claim shall be submitted to arbitration without the consent of all parties if, at the time of the proposed submission, such controversy or claim arises from or relates to an obligation to Bank which is secured by real property collateral located in California. If all parties do not consent to submission of such a controversy or claim to arbitration, the controversy or claim shall be determined as provided in subparagraph (c). (c) A controversy or claim which is not submitted to arbitration as provided and limited in subparagraphs (a) and (b) shall, at the request of any party, be determined by a reference in accordance with California Code of Civil Procedure Sections 638 ET SEQ. If such an election is made, the parties shall designate to the court a referee or referees selected under the auspices of the AAA in the same manner as arbitrators are selected in AAA-sponsored proceedings. The presiding referee of the panel, or the referee if there is a single referee, shall be an active attorney or retired judge. Judgment upon the award rendered by such referee or referees shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (d) No provision of this paragraph shall limit the right of any party to this Agreement to exercise self-help remedies such as setoff, to foreclose against or sell any real or personal property collateral or security, or to obtain provisional or ancillary remedies from a court of competent jurisdiction before, after, or during the pendency of any arbitration or other proceeding. The exercise of a remedy does not waive the right of either party to resort to arbitration or reference. At Bank's option, foreclosure under a deed of trust or mortgage may be accomplished either by exercise of power of sale under the deed of trust or mortgage or by judicial foreclosure. 12.11 NOTICES. All notices required hereunder shall be delivered by certified mail return receipt requested, postage prepaid, to the addresses set forth on the signature page of this Agreement, or to such other addresses as the parties hereto may specify from time to time in writing. 12.12 SEVERABILITY. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 12.13 COUNTERPARTS. This Agreement may be executed in as many counterparts as may be deemed necessary or convenient, and by the different parties hereto on separate counterparts each of which, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same agreement. [SIGNATURE PAGE CONTINUES ON FOLLOWING PAGE] 30 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. Bank of America National Trust and Safeguard Health Enterprises, Inc., a Savings Association Delaware corporation By: KEN JAMESON By: STEVEN J. BAILEYS, D.D.S. ------------------------------- --------------------------------------- Typed Name: Ken Jameson Typed Name: Steven J. Baileys, D.D.S. ----------------------- ------------------------------- Title: Vice President Title: President and Chief Operating Ofcr. -------------------------- ----------------------------------- By: N/A By: RONALD I. BRENDZEL, J.D. ------------------------------- --------------------------------------- Typed Name: Typed Name: Ronald I. Brendzel, J.D. ----------------------- ------------------------------- Title: Title: Sr. Vice President and Secretary ---------------------------- ------------------------------------ Address where notices to Bank are Address where notices to Borrower are to be sent: to be sent: Bank of America National Trust and Safeguard Health Enterprises, Inc. Savings Association 505 North Euclid c/o North Orange County Commercial Anaheim, CA 92801 Banking Office #1456 Attention: Ronald I. Brendzel, Esq. 300 South Harbor Blvd. Anaheim, CA 92805 Attention: Martin Roblee, Vice President With a copy to: Gibson, Dunn & Crutcher 4 Park Plaza, Suite 1700 With a copy to: Irvine, CA 92714 Bank of America National Trust and Attention: Walter L. Schindler, Esq. Savings Association Legal Department #4017 555 South Flower St., Suite 800 Los Angeles, CA 90071 Attention: John S. Barry, Esq. 31 EX-99.F 7 EXHIBIT 99.F - OFFICIAL ORDER NO. 96-1120 --------- OFFICIAL ORDER OF THE COMMISSIONER OF INSURANCE OF THE STATE OF TEXAS AUSTIN, TEXAS DATE SEPTEMBER 25, 1996 SUBJECT CONSIDERED: ACQUISITION OF FIRST AMERICAN DENTAL BENEFITS, INC. dba AMERICAN DENTAL CORPORATION Dallas, Texas by SAFEGUARD HEALTH ENTERPRISES, INC A Delaware Corporation Consent Docket No. C-96-0832 GENERAL REMARKS AND OFFICIAL ACTION TAKEN: On this day came for consideration by the Commissioner of Insurance, the application of SAFEGUARD HEALTH ENTERPRISES, INC., a Delaware corporation hereinafter referred to as APPLICANT, for approval of its acquisition of control of FIRST AMERICAN DENTAL BENEFITS, INC. dba AMERICAN DENTAL CORPORATION, Dallas, Texas, hereinafter referred to as FIRST AMERICAN DENTAL. The APPLICANT and the duly authorized representative of FIRST AMERICAN DENTAL have consented to the entry of this order and request the Commissioner of Insurance to informally dispose of this matter pursuant to the provisions of TEX. GOV'T CODE ANN. SECTION 2001.056 and 28 TEX. ADMIN. CODE SECTION 1.47. WAIVER APPLICANT and FIRST AMERICAN DENTAL acknowledge the existence of their rights, including but not limited to, the issuance and service of notice of hearing, a public hearing, a proposal for decision, rehearing by the Commissioner of Insurance, and judicial review of this administrative action, as provided in TEX. INS. CODE ANN. art. 1.04, and TEX. GOV'T CODE ANN. SECTIONS 2001.051-2001.902, and have expressly waived each and every such right. 96-1120 COMMISSIONER'S ORDER, INC. FIRST AMERICAN DENTAL BENEFITS dba AMERICAN DENTAL CORPORATION PAGE 2 OF 5 FINDINGS OF FACT Based upon the information submitted to and reviewed by the Texas Department of Insurance, the Commissioner of Insurance makes the following findings of fact: 1. FIRST AMERICAN DENTAL is a domestic health maintenance organization duly licensed in the State of Texas pursuant to the provisions of Chapter 20A of the Texas Insurance Code. 2. APPLICANT is a corporation duly organized under the laws of the state of Delaware and has its principal executive offices in Anaheim, California. 3. The proposed acquisition plan of APPLICANT provides for the acquisition of all the issued and outstanding stock of FIRST AMERICAN DENTAL for approximately $11,950,000. 4. The acquisition will be funded by a Reducing Revolver loan agreement entered into between APPLICANT and Bank of America in the amount of $30,000,000. The loan has a maturity date of March 31, 2002, and includes as security, a first priority interest in all personal property, including accounts receivables, fixed assets, and intangibles of APPLICANT, except for newly acquired fixed assets financed by purchase money and liens on personal property assets existing as of June 30, 1996. Additionally, the loan will be secured by a pledge of subsidiary stock and a negative pledge on real property of APPLICANT. APPLICANT currently has no long-term or short-term debt. 5. After the change of control, the present officers and directors of FIRST AMERICAN DENTAL will be replaced with the officers and directors of APPLICANT as follows: Steven J. Baileys, D.D.S., Chairman, President and Chief Executive Officer, Director John E. Cox, Executive Vice President and Chief Operating Officer, Director Ronald I. Brendzel, J.D., Senior Vice President, Secretary and General Counsel, Director Ronald B. Bolden, Vice President and Executive Director Thomas C. Tekulve, C.P.A., Vice President Accounting and Finance, and Treasurer Jan Ragland, Vice President of Operations James M. Dills, Chief Financial Officer George H. Stevens, Director 6. After the change in control, the home office and administrative office of FIRST AMERICAN DENTAL will remain in Dallas, Texas. 96-1120 COMMISSIONER'S ORDER, INC. FIRST AMERICAN DENTAL BENEFITS dba AMERICAN DENTAL CORPORATION PAGE 3 OF 5 7. APPLICANT intends for FIRST AMERICAN DENTAL to continue its dental plan operations in Texas. Following APPLICANT's acquisition of FIRST AMERICAN DENTAL, APPLICANT anticipates no changes in the operations, products, forms, contracts, or premium rates of FIRST AMERICAN DENTAL will occur. In addition, APPLICANT'S wholly-owned subsidiary, Safeguard Health Plans, Inc., a Texas corporation, will also continue its dental plan operations in the state of Texas and no changes in the operations, products, forms, contracts, or premium rates will occur as a result of the acquisition of FIRST AMERICAN DENTAL. 8. The acquisition involves the execution of non-competition agreements between APPLICANT and Mr. William N. Rees and between APPLICANT and Dr. James L. Davenport and Dr. Martin Rinker, owners of all issued and outstanding shares of FIRST AMERICAN DENTAL. The payment for the non- competition agreement with Mr. Rees is $50,000, which will be made at closing. The payment for the non-competition agreement with Dr. Davenport and Dr. Rinker will be in the aggregate sum of $3,576,000, payable over the three years ($1,192,000 per year) as consideration for the five-year non- competition agreement. These payments will be allocated in equal amounts to Dr. Davenport and Dr. Rinker. 9. No evidence was presented that immediately upon the change of control FIRST AMERICAN DENTAL would not be able to satisfy the requirements for the issuance of a new certificate of authority to operate a health maintenance organization as it is presently licensed to do. 10. No evidence was presented that the effect of such acquisition of control would be to substantially lessen competition among health maintenance organizations in this state or tend to create a monopoly therein. 11. No evidence was presented that the financial condition of APPLICANT is such as might jeopardize the financial stability of FIRST AMERICAN DENTAL or prejudice the interest of its enrollees or the interests of any remaining shareholders who are unaffiliated with such acquiring party. 12. No evidence was presented that the terms of the acquisition of control are unfair and unreasonable to the shareholders of FIRST AMERICAN DENTAL. 96-1120 COMMISSIONER'S ORDER, INC. FIRST AMERICAN DENTAL BENEFITS dba AMERICAN DENTAL CORPORATION PAGE 4 OF 5 13. No evidence was presented that the APPLICANT has any plans or proposals to liquidate FIRST AMERICAN DENTAL, sell its assets, or consolidate or merge it with any person, or to make any other material change in its business or corporate structure or management, or cause it to enter into material agreements, arrangements, or transactions of any kind with any party that are unfair, prejudicial, hazardous, or unreasonable to enrollees or shareholders FIRST AMERICAN DENTAL and not in the public interest. 14. No evidence was presented that the competence, trustworthiness, experience and integrity of those persons who would control the operations of FIRST AMERICAN DENTAL are such that it would not be in the interest of the enrollees of FIRST AMERICAN DENTAL and of the public to permit the acquisition of control. 15. No evidence was presented that the acquisition of control would violate any laws of this State, any other state, or the United States. 16. Representatives of the APPLICANT and FIRST AMERICAN DENTAL have waived the right to a hearing under TEX. INS. CODE ANN. art. 1.33(e) and all procedural requirements for the entry of this order. CONCLUSIONS OF LAW Based upon the foregoing findings of the fact, the Commissioner of Insurance makes the following conclusions of law: 1. The Commissioner of Insurance has authority and jurisdiction over this application for approval of acquisition of control pursuant to TEX. INS. CODE ANN. art. 20A.05, 5(d). 2. The Commissioner of Insurance has authority to dispose of this matter under TEX. INS. CODE ANN. art. 1.33 (e). 3. APPLICANT and FIRST AMERICAN DENTAL have knowingly and voluntarily waived all procedural requirements for the entry of this order, including but not limited to, notice of hearing, a public hearing, a proposal for decision, rehearing by the Commissioner, and judicial review of the order as provided for in TEX. GOV'T CODE ANN. SECTIONS 2001.051 and 2001.052. 4. As found in the foregoing findings of fact, the proposed acquisition of control by APPLICANT of 100 percent of the outstanding stock of FIRST AMERICAN DENTAL constitutes a change of control of FIRST AMERICAN DENTAL under the provisions of TEX. INS. CODE ANN. art. 20A.05, SECTION (d). 96-1120 COMMISSIONER'S ORDER, INC. FIRST AMERICAN DENTAL BENEFITS dba AMERICAN DENTAL CORPORATION PAGE 5 OF 5 5. As found in facts numbered 10 through 16, there is no evidence that any of the events or conditions listed in 28 TEX. ADMIN. CODE, SECTION 11.1205(a) would occur or exist after the acquisition of control. 6. As found in the foregoing findings of fact, there is no evidence upon which the Commissioner could predicate a denial of the acquisition of control, under TEX. INS. CODE ANN. art. 20A.05. SECTION (d). 7. The application of APPLICANT for acquisition of control of FIRST AMERICAN DENTAL should be approved. IT IS THEREFORE ORDERED that the acquisition of control of FIRST AMERICAN DENTAL BENEFITS, INC. dba AMERICAN DENTAL CORPORATION, Dallas, Texas by SAFEGUARD HEALTH ENTERPRISES, INC., a Delaware corporation, is hereby approved. ELTON BOMER COMMISSIONER OF INSURANCE By: /s/ Jose Montemayor --------------------------- JOSE MONTEMAYOR ASSOCIATE COMMISSIONER FINANCIAL COMMISSIONER'S ORDER 96-1064 RECOMMENDED BY: /s/ Marianne Galea - ------------------------------ MARIANNE GALEA, ANALYST FINANCIAL MONITORING EX-99.G 8 EXHIBIT 99.G FINANCIALS, FIRST AMERICAN DENTAL FIRST AMERICAN DENTAL BENEFITS, INC. DBA AMERICAN DENTAL CORP. FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1996, THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND INDEPENDENT AUDITORS' REPORT INDEPENDENT AUDITOR'S REPORT Board of Directors First American Dental Benefits, Inc. Dallas, Texas I have audited the accompanying balance sheets of First American Dental Benefits, Inc. as of June 30, 1996, December 31, 1995, December 31, 1994 and December 31, 1993, and the related statements of income, stockholder's equity and cash flows for the six months ended June 30, 1996 and for each of the three years ended December 31, 1995, December 31, 1994 and December 31, 1993. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audits. I conducted the audits in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluation of the overall financial statement presentation. I believe that my audits provide a reasonable basis for my opinion. In my opinion, the financial statements present fairly, in all material respects, the financial position of First American Dental Benefits, Inc. as of June 30, 1996, December 31, 1995, December 31, 1994 and December 31, 1993 and the results of its operations and its cash flows for the six months ended June 30, 1996 and the three years ended December 31, 1995, December 31, 1994, and December 31, 1993 in conformity with generally accepted accounting principles. /s/ Robert E. Allen August 6, 1996 FIRST AMERICAN DENTAL BENEFITS, INC. Balance Sheet as of June 30, 1996, December 31, 1995, 1994, and 1993 ASSETS
SIX MONTHS ENDED DECEMBER 31 ---------------- ----------------------------------------- 6/30/96 1995 1994 1993 ---------------- ----------------------------------------- CURRENT ASSETS: Cash and cash equivalents $ 90,757 $ 316,464 $ 289,846 $ 280,677 Accounts receivable 1,357,111 1,275,296 1,111,647 995,526 Prepaid expenses and other current assets 158,442 143,243 160,396 38,915 ---------- ---------- ---------- ---------- TOTAL CURRENT ASSETS $1,606,310 $1,735,003 $1,561,889 $1,315,118 ---------- ---------- ---------- ---------- OTHER ASSETS $ 57,580 $ 58,580 $ 58,223 $ 58,392 PROPERTY AND EQUIPMENT: Property and Equipment $1,092,447 $ 986,521 $ 734,426 $ 535,864 Accumulated depreciation (501,836) (427,076) (294,210) (190,290) ---------- ---------- ---------- ---------- PROPERTY AND EQUIPMENT, NET $ 590,611 $ 559,445 $ 440,216 $ 345,574 TOTAL ASSETS $2,254,501 $2,353,028 $2,060,328 $1,719,084 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
SEE NOTES TO FINANCIAL STATEMENTS FIRST AMERICAN DENTAL BENEFITS, INC. Balance Sheet as of June 30, 1996, December 31, 1995, 1994, and 1993 LIABILITIES AND STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31 ---------------- ----------------------------------------- 6/30/96 1995 1994 1993 ---------------- ----------------------------------------- CURRENT LIABILITIES: Accounts payable and accrued expenses $ 478,912 $ 457,767 $ 421,527 $ 408,094 Accrued provider fees 1,136,647 784,114 746,616 565,150 Deferred revenue 188,740 185,285 173,552 161,791 Notes payable - banks 36,837 155,539 67,404 12,901 ---------- ---------- ---------- ---------- TOTAL CURRENT LIABILITIES $1,841,136 $1,582,705 $1,409,099 $1,147,936 ---------- ---------- ---------- ---------- OTHER LIABILITIES: Deferred income taxes payable $ 30,743 $ 30,743 $ - $ - Notes payable - banks 5,538 12,943 ---------- ---------- ---------- ---------- TOTAL OTHER LIABILITIES $ 30,743 $ 30,743 $ 5,538 $ 12,943 ---------- ---------- ---------- ---------- TOTAL LIABILITIES $1,871,879 $1,613,448 $1,414,637 $1,160,879 ---------- ---------- ---------- ---------- STOCKHOLDERS' EQUITY: Preferred stock - par value $10.00 per share; 100,000 shares authorized; 17,850 shares issued and outstanding $ 178,500 $ 178,500 $ 178,500 $ 178,500 Common stock - par value $0.01 per share; 900,000 shares authorized; 21,000 shares issued and outstanding 210 210 210 210 Paid in Capital 20,790 20,790 20,790 20,790 Retained earnings 183,122 540,080 446,191 358,705 ---------- ---------- ---------- ---------- TOTAL STOCKHOLDERS' EQUITY $ 382,622 $ 739,580 $ 645,691 $ 558,205 ---------- ---------- ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,254,501 $2,353,028 $2,060,328 $1,719,084 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
SEE NOTES TO FINANCIAL STATEMENTS FIRST AMERICAN DENTAL BENEFITS, INC. Statement of Income for the Six Months Ended June 30, 1996, and For the Years Ended December 31, 1995, 1994, and 1993
SIX MONTHS ENDED DECEMBER 31 ---------------- ----------------------------------------- 6/30/96 1995 1994 1993 ---------------- ----------------------------------------- REVENUES: Premium income $12,298,175 $23,550,341 $21,887,194 $19,580,776 Interest income 5,211 17,170 12,361 11,980 ----------- ----------- ----------- ----------- TOTAL REVENUES $12,303,386 $23,567,511 $21,899,555 $19,592,756 ----------- ----------- ----------- ----------- EXPENSES: MEDICAL BENEFITS: Physician services $ 6,467,624 $10,920,913 $10,631,829 $ 9,334,076 Other professional services 55,675 231,460 141,354 120,159 ----------- ----------- ----------- ----------- TOTAL MEDICAL BENEFITS $ 6,523,299 $11,152,373 $10,773,183 $ 9,454,235 ----------- ----------- ----------- ----------- ADMINISTRATION: Compensation $ 1,213,583 $ 1,864,262 $ 1,607,644 $ 1,328,786 Occupancy, depreciation, and amortization 371,661 607,372 508,378 456,976 Selling and Marketing 3,904,369 8,761,393 7,898,815 7,199,472 Insurance, taxes and other expense 525,476 1,008,236 978,560 1,009,814 ----------- ----------- ----------- ----------- TOTAL ADMINISTRATION $ 6,015,089 $12,241,263 $10,993,397 $ 9,995,048 ----------- ----------- ----------- ----------- TOTAL EXPENSES $12,538,388 $23,393,636 $21,766,580 $19,449,283 ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES $ (235,002) $ 173,875 $ 132,975 $ 143,473 PROVISION FOR FEDERAL INCOME TAXES 0 $ 65,834 $ 45,489 $ 39,090 ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ (235,002) $ 108,041 $ 87,486 $ 104,383 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
SEE NOTES TO FINANCIAL STATEMENTS FIRST AMERICAN DENTAL BENEFITS, INC. Statement of Stockholders' Equity Period Ended June 30, 1996, and Years Ended December 31, 1995, 1994, and 1993
COMMON STOCK PREFERRED STOCK ADDITIONAL --------------------- --------------------- PAID-IN RETAINED SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ------ ------ ------ -------- ---------- -------- Balance, December 31, 1992 21,000 $210 17,850 $178,500 $20,790 $254,322 Net income 1993 0 0 0 0 0 $104,383 ------ ------ ------ -------- ------- -------- Balance, December 31, 1993 21,000 $210 17,850 $178,500 $20,790 $358,705 Net income 1994 0 0 0 0 0 $87,486 ------ ------ ------ -------- ------- -------- Balance, December 31, 1994 21,000 $210 17,850 $178,500 $20,790 $446,191 Establish deferred income taxes payable as of December 31, 1994 0 0 0 0 0 $(14,152) ------ ------ ------ -------- ------- -------- Balance, December 31, 1994 as restated 21,000 $210 17,850 $178,500 $20,790 $432,039 Net income 1995 0 0 0 0 0 $108,041 ------ ------ ------ -------- ------- -------- Balance, December 31, 1995 21,000 $210 17,850 $178,500 $20,790 $540,080 Prior Year Adjustments per Internal Revenue Exam $(121,956) Net Loss for Six months Ended June 30, 1996 0 0 0 0 0 $(235,002) ------ ------ ------ -------- ------- -------- Balance, June 30, 1996 21,000 $210 17,850 $178,500 $20,790 $183,122 ------ ------ ------ -------- ------- -------- ------ ------ ------ -------- ------- --------
SEE NOTES TO FINANCIAL STATEMENTS FIRST AMERICAN DENTAL BENEFITS, INC. Statement of Cash Flows Six Months Ended June 30, 1996, and Years Ended December 31, 1995, 1994, and 1993
SIX MONTHS ENDED DECEMBER 31 ---------------- ----------------------------------------- 6/30/96 1995 1994 1993 ---------------- ----------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (235,002) $ 108,041 $ 87,486 $104,383 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation & amortization $ 74,761 $ 132,866 $ 103,919 $ 84,319 Changes in assets and liabilities: Decrease (increase) in receivables/prepaid expenses (97,010) (146,495) (237,603) (92,362) Increase (decrease) in accounts payable (100,810) 52,831 (27,016) (51,934) Increase (decrease) in claims payable 352,531 37,498 181,467 114,967 Increase (decrease) in unearned premium 3,456 11,734 52,209 (81,780) ----------- --------- --------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ (2,074) $ 196,475 $ 160,462 $ 77,593 ----------- --------- --------- -------- CASH FLOW PROVIDED BY INVESTING ACTIVITIES: Receipts from security deposits $ 1,000 $ - $ 168 $ - Payments for security deposits (357) (1,300) Payments for property & equipment (105,927) (252,095) (198,561) (84,948) ----------- --------- --------- -------- NET CASH PROVIDED BY INVESTING ACTIVITIES $ (104,927) $(252,452) $(198,393) $(86,248) ----------- --------- --------- -------- CASH FLOW PROVIDED BY FINANCING ACTIVITIES: Loan proceeds from non-affiliates $ 1,575,000 $ 90,000 $ 435,477 $ - Principal payments on loans from non-affiliates (1,693,702) (7,404) (388,378) (13,509) ----------- --------- --------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES $ (118,702) $ 82,596 $ 47,099 $(13,509) ----------- --------- --------- -------- NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS $ (225,703) $ 26,619 $ 9,168 $(22,164) ----------- --------- --------- -------- CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ 316,464 $ 289,845 $ 280,677 $302,841 ----------- --------- --------- -------- CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 90,761 $ 316,464 $ 289,845 $280,677 ----------- --------- --------- -------- ----------- --------- --------- -------- SUPPLEMENTARY INFORMATION: Cash paid during the year for: Interest 8,487 2,240 2,172 3,081 Income taxes 6,370 15,000 42,000 91,787
SEE NOTES TO FINANCIAL STATEMENTS FIRST AMERICAN DENTAL BENEFITS, INC. NOTES TO FINANCIAL STATEMENTS FOR SIX MONTHS ENDED JUNE 30, 1996, AND YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES COMPANY DESCRIPTION - First American Dental Benefits, Inc. dba American Dental Corporation (ADC) (formerly Amerident Corporation) is a dental health maintenance organization providing dental services to its members through contractual arrangements with qualified practitioners making up a vast dental panel of providers within the State of Texas. ADC operates in all populated areas of the state. ADC was incorporated August 5, 1985 in the State of Texas and received its Certification as a single purpose health maintenance organization from the Texas Department of Insurance on January 21, 1988. REVENUE AND EXPENSE RECOGNITION - Premium revenue is recorded as revenue in the month for which members are entitled to service. ADC contracts with dentists for a set per-member, per-month capitation fee to provide dental care for its members. Expenses are recognized as incurred. PROPERTY AND EQUIPMENT - Furniture, equipment and leasehold improvements are stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the related assets or lease term for leasehold improvements. These assets include office furniture and equipment, computers and related peripheral equipment and capitalized software. Leasehold improvements are depreciated over four years, computer software over five years and all other assets over seven years. STATEMENT OF CASH FLOWS - The title of cash and cash equivalents as used on the statement of cash flows includes cash in all bank accounts, cash investment in Government Bond Fund Shares and postage meter deposits. These items are shown as cash on the balance sheet and the detail is as follows: 6-30-96 12-31-95 12-31-94 12-31-93 ------- -------- -------- -------- Cash in Banks $78,788 $258,353 $258,190 $ 20,779 Cash in Government Bond Fund 6,408 53,041 28,597 258,593 Cash in Postage Meter 5,561 5,070 3,059 1,305 ------- -------- -------- -------- $90,757 $316,464 $289,846 $280,677 EMPLOYEE LEASING - During 1995, ADC contracted with an Employee Leasing company to administer employee payroll, benefits and other related functions. To maintain comparability between years and to industry standards, the employee leasing expense has been allocated to Employee Expense classifications on the financial statements. -1- 2. RESTRICTED CASH In order to meet regulatory requirements for health maintenance organizations required by Article 20A.13 of the code, ADC has deposited a $50,000 U.S. Treasury Note with the Texas Department of Insurance. This note earned interest at 7 3/8% and matured May 15, 1996. ADC paid a $4,551 premium for the Note. These funds are restricted and are shown as other assets. ADC has not renewed or changed the form of the security at this time and it remains in the possession of the Texas Department of Insurance. 3. COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS ADC leases office space under real estate lease contracts and certain equipment under operating leases. Lease expense for six months ended June 30, 1996 and years ended 1995, 1994 and 1993 was $163,445, $232,928, $196,767 and $213,999 respectively. Future lease requirements are as follows: 1997 $243,956 1998 $51,947 1999 $40,824 2000 $29,583 2001 -0- The ADC home office lease, which expires August 1997, has a five year renewal option on terms to be negotiated at that time. Notes payable to banks are detailed as follows: 6-30-96 12-31-95 12-31-94 12-31-93 ------- -------- ------- -------- Fixed payment note $ 1,837 $ 5,539 $12,943 $25,844 Revolving line of credit 35,000 150,000 60,000 0 ------- -------- ------- ------- $36,837 $155,539 $72,943 $25,844 The fixed payment note is dated September 5, 1991 bearing interest of 10.25% for five years with monthly payments of $731 including principal and interest. This note was used to purchase business equipment. The revolving line of credit has an available credit line of $200,000 at an interest rate of prime plus one percent. The credit line is collateralized by accounts receivable and fixed assets. The expiration date is upon demand and the lending institution can withdraw the credit line at their option. There are no compensating balances required. -2- ADC will have cash on deposit at certain times during any month in excess of the federally insured limits. ADC believes the loss exposure is very limited since cash deposits can fluctuate above or below the federal insured limit on a daily basis. Cash invested in the Government Bond Cash Fund is not federally insured. Approximately 54% of ADC's revenues resulted from the sale to one customer. 4. RELATED PARTY TRANSACTIONS The majority shareholders of ADC have interest in three entities that provide service to ADC. The services performed are medical provider services through affiliated dental clinics, commission sales through an affiliated general insurance agency and leased employee service through an employee leasing company. Payments to these entities are scheduled as follows: 6-30-96 12-31-95 12-31-94 12-31-93 ------- -------- -------- -------- Medical Services $ 942,276 $1,640,473 $2,664,582 $2,817,779 Insurance Agency 2,390,490 5,397,135 4,396,720 4,097,932 Employee Leasing 24,758 -0- -0- -0- ADC owed the insurance agency unpaid commissions as of the above dates of $113,596, $238,053, $209,641, $119,675 respectively. 5. FEDERAL INCOME TAXES ADC follows the liability method for income taxes and has established a deferred tax liability resulting from the differences between tax accounting and book accounting depreciation. Since ADC projects that the six months loss will be absorbed before year-end, it has chosen not to recognize a deferred tax account. Any tax benefit would not be considered significant at this time. 6. SUBSEQUENT EVENTS ADC has entered into a deferred compensation agreement with an employee dated July 1, 1996. The present value of this liability is approximately $400,000. The contract for ADC's largest customer will be expiring on August 31, 1996. Accounts receivable includes a sixty day old balance of approximately $66,000 from one of their large customers. ADC believes this receivable is collectible. On July 10, 1996, ADC signed a Letter of Intent to sell all of the issued and outstanding capital stock of ADC. Negotiations continue as of the date of this report. -3- EX-99.H 9 EXHIBIT 99.H FINANCIALS, METROPLEX METROPLEX DENTAL PLAN FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND INDEPENDENT AUDITORS' REPORT INDEPENDENT AUDITORS' REPORT To Metroplex Dental Plan: We have audited the accompanying balance sheets of Metroplex Dental Plan (MDP or the Proprietorship) as of June 30, 1996 and December 31, 1995, 1994 and 1993, and the related statements of income, owners' equity (deficit) and cash flows for the six months ended June 30, 1996 and each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Proprietorship's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 issued 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 financial statements present fairly, in all material respects, the financial position of MDP as of June 30, 1996 and December 31, 1995, 1994 and 1993, and the results of its operations and its cash flows for the six months ended June 30, 1996 and each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As described in Note 1, MDP is affiliated through common ownership with First American Dental Benefits, Inc. (FADB). MDP has historically received substantially all of its administrative services from FADB at no cost to MDP. In addition, certain of the MDP's members have received services from the Metroplex Dental Clinics (which are operated by the owners of MDP) at no cost to MDP. Accordingly, the accompanying financial statements may not necessarily be indicative of the conditions that would exist or the results of operations if MDP had been operated as an unaffiliated entity. /s/Deloitte & Touche LLP August 20, 1996
METROPLEX DENTAL PLAN BALANCE SHEETS AS OF JUNE 30, 1996 AND DECEMBER 31, 1995, 1994 AND 1993 - ---------------------------------------------------------------------------------------------------- December 31, June 30, ------------------------------------- 1996 1995 1994 1993 ASSETS CURRENT ASSETS - Cash and cash equivalents (Note 1) $ 37,401 $ 130,318 $ 1,766 $ 23,438 --------- --------- --------- --------- --------- --------- --------- --------- LIABILITIES AND OWNERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accrued agents' commissions $ 8,959 $ 10,003 $ 11,683 $ 4,958 Accounts payable - Providers 20,906 15,200 15,375 13,445 --------- --------- --------- --------- Total current liabilities 29,865 25,203 27,058 18,403 OWNERS' EQUITY (DEFICIT) 7,536 105,115 (25,292) 5,035 --------- --------- --------- --------- $ 37,401 $ 130,318 $ 1,766 $ 23,438 --------- --------- --------- --------- --------- --------- --------- ---------
See independent auditors' report and notes to financial statements. 2
METROPLEX DENTAL PLAN STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 - ---------------------------------------------------------------------------------------------------- December 31, June 30, ------------------------------------- 1996 1995 1994 1993 REVENUES - Healthcare revenues (Note 1) $ 342,998 $ 733,990 $ 779,120 $ 948,462 EXPENSES: Healthcare expense 111,607 189,380 177,696 128,416 Other expenses, net (Note 1) 62,367 137,695 151,350 170,499 --------- --------- --------- --------- Total expenses 173,974 327,075 329,046 298,915 --------- --------- --------- --------- NET INCOME $ 169,024 $ 406,915 $ 450,074 $ 649,547 --------- --------- --------- --------- --------- --------- --------- ---------
See independent auditors' report and notes to financial statements. 3
METROPLEX DENTAL PLAN STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 - ---------------------------------------------------------------------------------------------------- December 31, June 30, --------------------------------------- 1996 1995 1994 1993 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 169,024 $ 406,915 $ 450,074 $ 649,547 Adjustments to reconcile net income to net cash provided by operating activities - Changes in assets and liabilities - Accounts payable and accrued agent's commissions 4,662 (1,855) 8,655 (8,373) --------- --------- --------- --------- Net cash provided by operating activities 173,686 405,060 458,729 641,174 CASH FLOWS FROM FINANCING ACTIVITIES - Distributions to owners (266,603) (276,508) (480,401) (625,505) --------- --------- --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (92,917) 128,552 (21,672) 15,669 CASH AND CASH EQUIVALENTS, beginning of period 130,318 1,766 23,438 7,769 --------- --------- --------- --------- CASH AND CASH EQUIVALENTS, end of period $ 37,401 $ 130,318 $ 1,766 $ 23,438 --------- --------- --------- --------- --------- --------- --------- ---------
See independent auditors' report and notes to financial statements. 4 METROPLEX DENTAL PLAN STATEMENTS OF OWNERS' EQUITY (DEFICIT) FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 - -------------------------------------------------------------------------------- OWNERS' EQUITY BALANCES, January 1, 1993 $ (19,007) Distributions to owners (625,505) Net income 649,547 ---------- BALANCES, December 31, 1993 5,035 Distributions to owners (480,401) Net income 450,074 ---------- BALANCES, December 31, 1994 (25,292) Distributions to owners (276,508) Net income 406,915 ---------- BALANCES, December 31, 1995 105,115 Distributions to owners (266,603) Net income 169,024 ---------- BALANCES, June 30, 1996 $ 7,536 ---------- ---------- See independent auditors' report and notes to financial statements. 5 METROPLEX DENTAL PLAN NOTES TO FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS - Metroplex Dental Plan (MDP) is a prepaid dental plan. MDP operates as a proprietorship owner by two doctors. SIGNIFICANT TRANSACTIONS WITH AFFILIATED COMPANIES - MDP is affiliated through common ownership with FADB and has historically received substantially all of its administrative functions from FADB, at no cost to MDP. In addition, certain of MDP's members have received services from the Metroplex Dental Clinics (which are operated by the owners of MDP) at no cost to MDP. Accordingly, the accompanying financial statements may not necessarily be indicative of the conditions that would have existed or the results of operations if MDP had been operated as an unaffiliated entity. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. HEALTHCARE REVENUE AND EXPENSES - Healthcare revenue is recorded as revenue in the month the income is earned. Healthcare expense is recognized as incurred. Operating expenses are recognized when incurred. CASH AND CASH EQUIVALENTS - MDP considers highly-liquid investments with original maturities of three months or less when purchased to be cash equivalents. INCOME TAXES - No provision for income taxes has been recorded in the accompanying financial statements as MDP operates as a proprietorship. 2. OWNERS' EQUITY During the six months ended June 30, 1996 and the years ended December 31, 1995, 1994 and 1993, MDP made combined aggregate distributions to owners totaling $266,603, $276,508, $480,401 and $625,505, respectively. 3. SUBSEQUENT EVENTS On July 10, 1996, MDP signed a letter of intent to sell MDP and FADB, and concurrent with the sale, the shareholders of FADB will enter into a noncompetition agreement with the buyer. 6 EX-99.I 10 EXHIBIT 99.I TRC AGENCY TRC AGENCY, INC. FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30 1996, THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND INDEPENDENT AUDITORS' REPORT INDEPENDENT AUDITORS' REPORT To TRC Agency, Inc.: We have audited the accompanying balance sheets of TRC Agency, Inc. (TRC or the Company) as of June 30, 1996 and December 31, 1995, 1994 and 1993 and the related statements of income, stockholders' equity and cash flows for the six months ended June 30, 1996 and the years ended December 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our 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 financial statements present fairly, in all material respects, the financial position of TRC Agency, Inc. as of June 30, 1996 and December 31, 1995, 1994 and 1993, and the results of its operations and its cash flows for the six months ended June 30, 1996 and the years ended December 31, 1995, 1994 and 1993 in conformity with generally accepted accounting principles. As described in Note 1, the Company has historically received all commission income from First American Dental Benefits, Inc. (FADB), and FADB performs certain administrative and operational functions on behalf of TRC at no cost to TRC. The Company has also entered into transactions with other entities affiliated through common control which are material in amount. Accordingly, the accompanying financial statements may not necessarily be indicative of the conditions that would exist or the results of operations if the Company had been operated as an unaffiliated entity. /s/Deloitte & Touche LLP August 1, 1996
TRC AGENCY, INC. BALANCE SHEETS AS OF JUNE 30, 1996 AND DECEMBER 31, 1995, 1994 AND 1993 - ------------------------------------------------------------------------------------------------------------------------------------ December 31, June 30, ------------------------------------------------- 1996 1995 1994 1993 ASSETS CURRENT ASSETS: Cash and cash equivalents (Note 1) $ 17,552 $ 6,849 $ 3,955 $ 26,823 Receivable from affiliate (Note 2) 113,596 115,541 110,970 88,974 Other receivables 3,500 6,753 --------- --------- --------- --------- $ 134,648 $ 129,143 $ 114,925 $ 115,797 --------- --------- --------- --------- --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accrued agents' commissions $ 113,607 $ 115,528 $ 103,728 $ 89,654 Accounts payable 13,240 Payable to affiliate (Note 2) 46,000 --------- --------- --------- --------- Total current liabilities 159,607 115,528 103,728 102,894 STOCKHOLDERS' EQUITY: Common stock, $1 par value; 100,000 shares authorized, 1,000 shares issued and outstanding 1,000 1,000 1,000 1,000 Retained earnings (accumulated deficit) (25,959) 12,615 10,197 11,903 --------- --------- --------- --------- Total stockholders' equity (deficit) (24,959) 13,615 11,197 12,903 --------- --------- --------- --------- $ 134,648 $ 129,143 $ 114,925 $ 115,797 --------- --------- --------- --------- --------- --------- --------- ---------
See notes to financial statements. 2
TRC AGENCY, INC. STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 - ------------------------------------------------------------------------------------------------------------------------------------ December 31, June 30, --------------------------------------------------- 1996 1995 1994 1993 REVENUES: Commission income (Note 1) $ 2,388,784 $ 5,374,893 $ 4,447,482 $ 4,043,847 Other income (expense) (240) 820 90 470 ----------- ----------- ----------- ----------- Total revenues 2,388,544 5,375,713 4,447,572 4,044,317 EXPENSES: Agents' commissions (Note 1) 882,273 1,604,917 1,304,706 1,086,948 Stockholder commissions (Note 2) 2,415,368 Amerident Group agency commissions (Note 2) 500,441 Other expenses, net (Note 2) 100,845 95,878 76,411 29,657 ----------- ----------- ----------- ----------- Total expenses 983,118 1,700,795 1,381,117 4,032,414 ----------- ----------- ----------- ----------- NET INCOME $ 1,405,426 $ 3,674,918 $ 3,066,455 $ 11,903 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See notes to financial statements. 3
TRC AGENCY, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Retained Common stock earnings ----------------------------- (accumulated Shares Amount deficit) Total BALANCES, January 1, 1993 - $ - $ - $ - Issuance of stock 1,000 1,000 1,000 Net income 11,903 11,903 ----- -------- ---------- ---------- BALANCES, December 31, 1993 1,000 1,000 11,903 12,903 Distributions to stockholders (3,068,161) (3,068,161) Net income 3,066,455 3,066,455 ----- -------- ---------- ---------- BALANCES, December 31, 1994 1,000 1,000 10,197 11,197 Distributions to stockholders (3,672,500) (3,672,500) Net income 3,674,918 3,674,918 ----- -------- ---------- ---------- BALANCES, December 31, 1995 1,000 1,000 12,615 13,615 Distributions to stockholders (1,444,000) (1,444,000) Net income 1,405,426 1,405,426 ----- -------- ---------- ---------- BALANCES, June 30, 1996 1,000 $ 1,000 $ (25,959) $ (24,959) ----- -------- ---------- ---------- ----- -------- ---------- ----------
See notes to financial statements. 4
TRC AGENCY INC. STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 - ----------------------------------------------------------------------------------------------------------------------------------- December 31, June 30, --------------------------------------------------- 1996 1995 1994 1993 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,405,426 $ 3,674,918 $ 3,066,455 $ 11,903 Adjustments to reconcile net income to net cash provided by operating activities: Changes in assets and liabilities: Receivable from affiliate 1,945 (4,571) (21,996) (88,974) Other receivables 3,253 (6,753) Accounts payable (13,240) 13,240 Accrued agents' commissions (1,921) 11,800 14,074 89,654 Payable to affiliate 46,000 ----------- ----------- ----------- ----------- Net cash provided by operating activities 1,454,703 3,675,394 3,045,293 25,823 CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of stock 1,000 Distributions to stockholders (Note 3) (1,444,000) (3,672,500) (3,068,161) ----------- ----------- ----------- ----------- Net cash (used in) provided by financing activities (1,444,000) (3,672,500) (3,068,161) 1,000 ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,703 2,894 (22,868) 26,823 CASH AND CASH EQUIVALENTS, beginning of year 6,849 3,955 26,823 ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of year $ 17,552 $ 6,849 $ 3,955 $ 26,823 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See notes to financial statements. 5 TRC AGENCY, INC. NOTES TO FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 - -------------------------------------------------------------------------------- 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS - TRC Agency, Inc. (TRC or the Company) is a managing agent which oversees and pays agent commissions to a large number of writing and general (sub) agents on behalf of First American Dental Benefits, Inc. (FADB) (an affiliated company). The Company was incorporated in the State of Texas on December 11, 1992 and issued founders stock and commenced operations in 1993. TRANSACTIONS WITH AFFILIATED COMPANIES - TRC is affiliated through common ownership with FADB (the two stockholders owning 100% of TRC also own 90% of FADB). The Company has historically received all commission income from FADB. FADB performs certain administrative and operational functions on behalf of TRC, at no cost to TRC. The Company has also entered into transactions with other entities affiliated through common control (including American Dental Benefits Group and Amerident Group), which are material in amount. Accordingly, the accompanying financial statements may not necessarily be indicative of the conditions that would have existed or the results of operations if the Company had been operated as an unaffiliated entity. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. COMMISSION INCOME AND EXPENSES - Commission income is recorded as revenue in the month the income is earned. Commission expense is recognized as incurred. Operating expenses are recognized when incurred. CASH AND CASH EQUIVALENTS - The Company considers highly-liquid investments with original maturities of three months or less when purchased to be cash equivalents. INCOME TAXES - During fiscal 1993, the Company was taxed as a C corporation, whereby the taxable income is subject to standard corporate tax rates. Due to the minimal taxable income during fiscal 1993, the tax benefit is included in other expenses. At the beginning of fiscal 1994, the Company converted to S corporation status, whereby the taxable income is included in the personal returns of the stockholders. 6 TRC AGENCY, INC. NOTES TO FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued) - -------------------------------------------------------------------------------- 2. RELATED PARTY TRANSACTIONS The Company receives all commission income from FADB (see Note 1). Receivable from affiliate represents commission income receivable from FADB. Payable to affiliate represents amounts due FADB for consulting services paid by FADB on behalf of TRC. The Company made payments for legal services to a minority stockholder of FADB. These payments totaled $57,006 for the six months ended June 30, 1996 and $89,238 and $19,752 for the years ended December 31, 1995 and 1994, respectively. Such amounts have been included in other expenses in the accompanying statements of income. The Company paid commissions to Amerident Group (an affiliated company, see Note 1) of approximately $500,000 during the year ended December 31, 1993. During fiscal 1993, the Company paid commissions totaling $2,415,368 to its two stockholders. 3. STOCKHOLDERS' EQUITY During the six months ended June 30, 1996 and the years ended December 31, 1995 and 1994, the Company made combined aggregate distributions to its stockholders, totaling $1,444,000, $3,672,500 and $3,068,161, respectively. 4. SUBSEQUENT EVENTS On July 10, 1996, the Company signed a letter of intent to sell all of the issued and outstanding capital stock of the Company and FADB, and concurrent with the sale, the stockholders will enter into noncompetition agreements with the buyer. The total consideration for both TRC and FADB and the noncompete agreements will be $23,576,000 in cash. $19,000,000 will be paid at the closing for the shares of the Company, FADB and the noncompetition of a minority stockholder of FADB. $3,576,000 will be paid over three years as consideration for the five-year noncompetition agreements entered into by the two stockholders of the Company. $1,000,000 will be held in an escrow account to be paid, subject to resolution of any contingencies or issues that may arise, to the stockholders on the second anniversary after the closing. 7 EX-99.J 11 EXHIBIT 99.J FINANCIALS, SAFEGUARD HEALTH EXHIBIT 99-J SAFEGUARD HEALTH ENTERPRISES, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEAR ENDED DECEMBER 31, 1995 AND INDEPENDENT ACCOUNTANTS' REPORT UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INTRODUCTION The accompanying unaudited pro forma condensed consolidated financial statements reflect the consolidated financial position of Safeguard Health Enterprises, Inc. (the "Company") for the six months ended June 30, 1996, and the results of its consolidated operations for the year ended December 31, 1995, and the six months ended June 30, 1996, after giving pro forma effect to (a) the purchase of First American Dental Benefits, Inc. ("First American"), (b) T.R.C. Agency, Inc. ("TRC"), which is affiliated through common ownership with First American, and of (c) Metroplex Dental Plan ("MDP"), which is also affiliated through common ownership with First American. This business combination is described in Note 1 of these financial statements. The pro forma adjustments are based upon management's assumptions described in Note 2. The objective of this pro forma financial information is to show what the significant effects on the historical financial information might have been, had the purchased business combination occurred at an earlier date. However, the pro forma consolidated financial statements are not necessarily indicative of the results of operations or of the related effects on the financial position of the Company that would have been attained had the above-referenced purchase of the businesses actually occurred earlier, or which may be achieved in the future. SAFEGUARD HEALTH ENTERPRISES, INC. PRO FORMA CONSOLIDATED UNAUDITED BALANCE SHEET AS OF JUNE 30, 1996
- ------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) FIRST AMERICAN SAFEGUARD DENTAL TRC METROPLEX HEALTH BENEFITS, AGENCY, DENTAL ENTERPRISES, INC. INC. PLAN SUBTOTAL INC. ADJUSTMENTS CONSOLIDATED ASSETS CURRENT ASSETS: Cash and cash equivalents $ 91 $ 18 $37 $ 146 $ 6 $ - $ 152 Investments available for sale, at estimated fair value 8,924 (1,000) 7,924 Investments held to maturity, at cost 3,583 3,583 Accounts and notes receivable, net 1,357 117 1,474 5,468 6,942 Prepaid expenses and other current assets 158 158 1,295 1,453 Deferred income taxes 262 262 ------ ---- --- ------ ------- -------- ------- Total current assets 1,606 135 37 1,778 19,538 (1,000) 20,316 PROPERTY AND EQUIPMENT, net 591 591 14,341 14,932 INVESTMENTS HELD TO MATURITY, at cost 4,327 4,327 OTHER ASSETS 57 57 231 288 INTANGIBLES, net 573 20,134(l) 24,207 3,500(n) ------ ---- --- ------ ------- -------- ------- $2,254 $135 $37 $2,426 $39,010 $22,634 $64,070 ------ ---- --- ------ ------- -------- ------- ------ ---- --- ------ ------- -------- -------
See notes to pro forma consolidated unaudited financial statements. 2 SAFEGUARD HEALTH ENTERPRISES, INC. PRO FORMA CONSOLIDATED UNAUDITED BALANCE SHEET AS OF JUNE 30, 1996 (Continued)
- ------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) FIRST AMERICAN SAFEGUARD DENTAL TRC METROPLEX HEALTH BENEFITS, AGENCY, DENTAL ENTERPRISES, INC. INC. PLAN SUBTOTAL INC. ADJUSTMENTS CONSOLIDATED LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $1,615 $160 $29 $1,804 $ 2,325 $ 500 (o) $ 4,629 Reserves for incurred but not reported claims 1,353 1,353 Income taxes payable 781 781 Deferred revenue 189 189 302 491 Other liabilities 1,200 (n) 1,200 Notes payable, banks 37 37 2,000 (j) 2,037 ------ ---- --- ------ ------- ------- ------- Total current liabilities 1,841 160 29 2,030 4,761 3,700 10,491 LONG-TERM LIABILITIES 17,000 (j) 19,300 2,300 (n) DEFERRED INCOME TAXES 30 30 519 549 STOCKHOLDERS' EQUITY: Preferred stock 179 179 (179)(m) Common stock and paid-in capital 21 1 22 21,134 (22)(m) 21,134 Retained earnings 183 (26) 8 165 30,800 (165)(m) 30,800 Treasury stock, at cost (18,123) (18,123) Net unrealized loss on investment securities (81) (81) ------ ---- --- ------ ------- ------- ------- Total stockholders' equity 383 (25) 8 366 33,730 (366) 33,730 ------ ---- --- ------ ------- ------- ------- $2,254 $135 $37 $2,426 $39,010 $22,634 $64,070 ------ ---- --- ------ ------- ------- ------- ------ ---- --- ------ ------- ------- -------
See notes to pro forma consolidated unaudited financial statements. 3 SAFEGUARD HEALTH ENTERPRISES, INC. PRO FORMA CONSOLIDATED UNAUDITED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996
- ----------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) FIRST AMERICAN SAFEGUARD DENTAL TRC METROPLEX HEALTH BENEFITS, AGENCY, DENTAL ENTERPRISES, INC. INC. PLAN ADJUSTMENTS SUBTOTAL INC. ADJUSTMENTS CONSOLIDATED HEALTH CARE REVENUES $12,298 $2,388 $343 $(2,388)(a) $6,088 $44,276 $ - $50,364 (6,553)(d) COSTS AND EXPENSES: Health care services 6,523 112 (3,481)(d) 2,480 35,011 37,491 (674)(b) Selling, general and administrative 6,015 983 62 (2,388)(a) 2,416 7,055 250 (e) 10,071 (229)(b) 350 (f) (235)(c) (1,792)(d) ------- ------ ---- ------- ------ ------- ------- ------- Total costs and expenses 12,538 983 174 (8,799) 4,896 42,066 600 47,562 ------- ------ ---- ------- ------ ------- ------- ------- OPERATING INCOME (LOSS) (240) 1,405 169 (142) 1,192 2,210 (600) 2,802 OTHER INCOME (EXPENSE), net 5 5 538 (683)(g) (168) (28)(h) ------- ------ ---- ------- ------ ------- ------- ------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (235) 1,405 169 (142) 1,197 2,748 (1,311) 2,634 PROVISION FOR INCOME TAXES 1,061 20 (i) 1,081 ------- ------ ---- ------- ------ ------- ------- ------- NET INCOME (LOSS) $ (235) $1,405 $169 $ (142) $ 1,197 $ 1,687 $(1,331) $ 1,553 ------- ------ ---- ------- ------ ------- ------- ------- ------- ------ ---- ------- ------ ------- ------- ------- NET INCOME PER COMMON SHARE AND COMMON SHARE EQUIVALENT $0.31 ------- ------- WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 4,936 ------- -------
See notes to pro forma consolidated unaudited financial statements. 4 SAFEGUARD HEALTH ENTERPRISES, INC. PRO FORMA CONSOLIDATED UNAUDITED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) FIRST AMERICAN SAFEGUARD DENTAL TRC METROPLEX HEALTH BENEFITS, AGENCY, DENTAL ENTERPRISES, INC. INC. PLAN ADJUSTMENTS SUBTOTAL INC. ADJUSTMENTS CONSOLIDATED HEALTH CARE REVENUES $23,550 $5,376 $734 $ (5,376)(a) $11,458 $81,577 -- $93,035 (12,826)(d) COSTS AND EXPENSES: Health care services 11,152 189 (6,104)(d) 4,101 65,578 69,679 (1,136)(b) Selling, general and administrative 12,241 1,701 138 (5,376)(a) 4,579 13,451 500 (e) 19,230 (455)(b) 700 (f) (272)(c) (3,398)(d) ------- ------ ---- ------- ------ ------- ------- ------- Total costs and expenses 23,393 1,701 327 (16,741) 8,680 79,029 1,200 88,909 ------- ------ ---- ------- ------ ------- ------- ------- OPERATING INCOME 157 3,675 407 (1,461) 2,778 2,548 (1,200) 4,126 OTHER INCOME (EXPENSE), net 17 17 1,286 (1,512)(g) (264) (55)(h) ------- ------ ---- ------- ------ ------- ------- ------- INCOME BEFORE PROVISION FOR INCOME TAXES 174 3,675 407 (1,461) 2,795 2,834 (2,767) 3,862 PROVISION FOR INCOME TAXES 66 66 1,446 102 (i) 1,614 ------- ------ ---- ------- ------ ------- ------- ------- NET INCOME (LOSS) $ 108 $3,675 $407 $(1,461) $2,729 $ 2,388 $(2,869) $ 2,248 ------- ------ ---- ------- ------ ------- ------- ------- ------- ------ ---- ------- ------ ------- ------- ------- NET INCOME PER COMMON SHARE AND COMMON SHARE EQUIVALENT $0.48 ------- ------- WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 4,725 ------- -------
See notes to pro forma consolidated unaudited financial statements. 5 SAFEGUARD HEALTH ENTERPRISES, INC. NOTES TO PRO FORMA CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (IN THOUSANDS) 1. BASIS OF PRESENTATION On August 9, 1996, Safeguard Health Enterprises, Inc. (Safeguard) entered into stock purchase agreements (the Acquisition) to acquire all of the outstanding shares of First American Dental Benefits, Inc. (First American), a Texas corporation, TRC Agency, Inc. (TRC), a Texas corporation, and the operations of Metroplex Dental Plan (MDP). First American is a licensed Dental Health Maintenance Organization (DHMO). TRC is a managing agent which oversees a large number of writing and general agents on behalf of First American. MDP operates a prepaid dental health plan. As indicated above, First American, TRC and MDP have entered into transactions with other entities affiliated through common control, which are material in amount. Accordingly, their individual financial statements may not necessarily be indicative of the conditions that would have existed or the results of operations if First American, TRC and MDP had been operated as unaffiliated entities. As part of the acquisition, the selling shareholders will receive an aggregate of $20,000,000 in cash ($19,000,000 payable at closing and $1,000,000 payable, subject to certain conditions, on the second anniversary after closing) and approximately $3,500,000 payable in monthly amounts over a three-year period under five-year noncompetition agreements. The Acquisition is to be accounted for as a purchase. The pro forma consolidated unaudited statements of operations give effect to the acquisition as if it had occurred on January 1, 1995. The pro forma consolidated unaudited balance sheet gives effect to the acquisition as if it had occurred on June 30, 1996. The pro forma consolidated unaudited financial statements do not purport to represent what the results of operations or financial position of Safeguard would actually have been if the Acquisition had occurred on January 1, 1995 or on June 30, 1996 or at any future date. Pro forma net income per share is computed based on the weighted average number of Safeguard's common shares and dilutive common equivalent shares outstanding during the periods presented. 2. PRO FORMA ADJUSTMENTS The pro forma adjustments (adjustments (a) through (i) pertain to the consolidated statements of operations, adjustments (j) through (o) pertain to the consolidated balance sheet) are as described below: Consolidated statements of operations adjustments: (a) Elimination of revenues and marketing expenditures between First American and TRC. 6 SAFEGUARD HEALTH ENTERPRISES, INC. NOTES TO PRO FORMA CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (IN THOUSANDS)(CONTINUED) (b) Elimination of expenses recorded in the historical financial statements which were paid to the selling shareholders, their relatives and their other business entities and recorded as health care services and selling, general and administrative expenses. Such expenses are not expected to be incurred following the acquisition. (c) Elimination of compensation expense recorded in the historical statements of operations of First American for certain employees who, during the periods presented worked for an affiliated company owned by the selling shareholders. Such employees will not continue working at First American and will not be replaced following the Acquisition. (d) Elimination of revenues and expenses related to one First American contract (the State of Texas Employee Retirement System, or ERS) which has been terminated effective September 1, 1996. (e) Reflects amortization expense of the estimated $20,000,000 of goodwill arising from the acquisition, amortized on a straight-line basis over 40 years. The final allocation of the purchase price (and the exact amount of goodwill) will be determined upon consummation of the acquisition or shortly thereafter. (f) Reflects amortization expense relating to the approximately $3,500,000 noncompete agreements arising from the Acquisition. The consideration for the noncompete agreements is payable monthly over three years. The costs are being amortized on a straight-line basis over the five-year term of the agreement. (g) Reflects additional interest expense (at 8.4% per annum) on initial bank borrowings of approximately $19,000,000 used to finance the Acquisition. Principal is payable at $500,000 per quarter for the first year, $750,000 per quarter in the first half of the following year, with quarterly payments increasing thereafter. (h) Reflects interest income (at 5.5% per annum) lost on the $1,000,000 portion of the purchase price paid by Safeguard, which will be taken from investments available for sale. (i) Reflects the income tax effect of the (i) pro forma adjustments; (ii) S corporation income (TRC); and (iii) division entity income (MDP), adjusted for the pro forma effect of nondeductible goodwill amortization. Consolidated balance sheet adjustments: (j) Reflects initial bank borrowings of approximately $19,000,000 used to finance the acquisition, approximately $2,000,000 of which is estimated as short-term. (k) Reflects the use of $1,000,000 of Safeguard's investments available for sale, applied towards the acquisition. 7 SAFEGUARD HEALTH ENTERPRISES, INC. NOTES TO PRO FORMA CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (IN THOUSANDS)(CONTINUED) (l) Reflects the estimated cost in excess of the identifiable net assets acquired of First American, TRC and MDP. The final allocation of purchase price (and the amount of goodwill) will be determined upon consummation of the acquisition or shortly thereafter. (m) Reflects the elimination of First American's and TRC's shareholders' equity. (n) Reflects the $3,500,000 noncompete agreement and related obligation. Such obligation is estimated at approximately $1,200,000 current and approximately $2,300,000 long-term. (o) Reflects estimated costs and obligations incurred in connection with the acquisition. 8 -----END PRIVACY-ENHANCED MESSAGE-----