-----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, JCZDFcQAjcbgGGLjkP5Omjyjsx9AeuKKx95Rr/0XdonSLKR4/Aw5REzGtw0iz06o LriMQIgRiXWcjAmIcHW5fQ== 0000912057-96-005744.txt : 19960402 0000912057-96-005744.hdr.sgml : 19960402 ACCESSION NUMBER: 0000912057-96-005744 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 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: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-12050 FILM NUMBER: 96542638 BUSINESS ADDRESS: STREET 1: 505 N EUCLID ST STREET 2: PO BOX 3210 CITY: ANAHEIM STATE: CA ZIP: 92803-3210 BUSINESS PHONE: 7147781005 10-K405 1 FORM 10K405 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------- FORM 10-K ANNUAL REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1995 Commission File Number 0-12050 -------- SAFEGUARD HEALTH ENTERPRISES, INC. (Exact name of registrant as specified in its charter) [LOGO] Delaware 52-1528581 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 505 North Euclid Street P.O. Box 3210 Anaheim, California 92803-3210 (Address of principal offices) (Zip Code) Registrant's telephone number, including area code: (714) 778-1005 Fax telephone number, including area code: (714) 758-4383 -------- Securities registered to Section 12(b) of the Act: None Securities registered to Section 12(g) of the Act: Common Stock, $0.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filer pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 26, 1996, was $59,685,703. The number of shares outstanding of the registrant's $0.01 par value common stock as of March 26, 1996, was 4,707,500 (not including 3,274,788 shares held in treasury). -------- DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates information by reference to the registrant's Proxy Statement for the next Annual Meeting of Stockholders, to be held on May 22, 1996. - -------------------------------------------------------------------------------- SAFEGUARD HEALTH ENTERPRISES, INC. 1995 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Page PART 1 Item 1. Business .................................................. 1 Item 2. Properties................................................. 17 Item 3. Legal Proceedings.......................................... 17 Item 4. Submission of Matters to a Vote of Security Holders........ 17 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters ....................................... 18 Item 6. Selected Financial Data.................................... 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 23 Item 8. Financial Statements and Supplementary Data................ 25 Item 9. Changes in and Disagreements with Independent Accountants on Accounting and Financial Disclosure..................... 25 PART III Item 10. Directors and Executive Officers of the Registrant......... 25* Item 11. Executive Compensation..................................... 25* Item 12. Security Ownership of Certain Beneficial Owners and Management................................................. 25* Item 13. Certain Relationships and Related Transactions............. 25* PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................... 26 * Incorporated by reference from the 1996 Proxy Statement for the Company's Annual Meeting of Stockholders, scheduled for May 22, 1996. (i) PART I ITEM 1. BUSINESS (a) General Development of Business. Safeguard Health Enterprises, Inc. operates one of the largest publicly traded managed dental care plans in the United States. The Company was founded in California in 1974 and since 1982 has expanded its operations into Arizona, Colorado, Illinois, Kansas, Missouri, Nevada, Ohio, Oklahoma, Oregon, Texas, Utah and Washington. The Company also has regulatory approval to operate similar managed dental care programs in Kentucky and is pursuing opportunities in other states. The Company also operates a California based life and health indemnity insurance company primarily writing dental indemnity insurance which is licensed to transact insurance business in Arizona, California, Colorado, Illinois, Kansas, Missouri, Nevada, Ohio, Oregon, Texas and Wisconsin and is pursuing opportunities in other states. The Company's predecessor, Safeguard Health Plans, Inc., a California corporation (the "California Plan"), commenced operations in 1974 as a nonprofit corporation. The California Plan converted from nonprofit status in December 1982 and is currently a wholly-owned subsidiary of the Company. The Company was incorporated in California in November 1982 and acquired the California Plan in December of that year. Wholly-owned subsidiaries conduct business in other states. On August 24, 1987, the Company reincorporated in Delaware. In September 1992, the Company acquired a California domiciled life insurance company and renamed it SafeHealth Life Insurance Company. Unless the context otherwise requires, all references to the "Company" or "Safeguard" mean Safeguard Health Enterprises, Inc., a Delaware corporation, its predecessor California corporation, and its subsidiaries. The Company also operates 33 Company-owned dental offices in California which operate under the name of Guards Dental, Inc. ("Guards"). Guard's dental offices are established primarily for the purpose of supplementing, in geographical areas where needed, plan coverage provided by independent dental offices. Guards dental offices have been in operation since 1983. The Company's executive offices are located at 505 North Euclid Street, P.O. Box 3210, Anaheim, California 92803-3210; its telephone number is (714) 778-1005 and FAX number is (714) 758-4383. DENTAL CARE MARKETPLACE According to the United States Office of National Health Statistics, the total expenditures for dental care in the United States grew from approximately $14 billion in 1980 to an estimated $43 billion in 1995. The United States Health Care Financing Administration reports that expenditures for dental services account for approximately 5% of total national health care expenditures. According to the United States Department of Labor ("DOL"), the cost of dental services has been rising at a rate higher than that for consumer goods. The DOL statistics reported that, from 1982 to 1995, the consumer price index for all urban consumers for dental services increased 115%, whereas this index for all items increased 54%. As a result, the Company believes that there has been an increased interest by employers in managing dental care costs. Employer-sponsored dental benefits are one of the most common employee welfare benefits. The National Association of Dental Plans ("NADP") estimates that approximately 119 million persons, representing approximately 47% of the total United States population, are covered by some form of dental benefit coverage at the end of 1994. The NADP estimates that managed care enrollment has grown from 7.8 million covered lives in 1992, to approximately 19 million covered lives by the end of 1994. This compares to over 50 million Americans who were enrolled in medical HMOs in 1994, accordingly to the Group Health Association of America. The Company believes that the relatively high growth rate for managed care dental care plans, is attributable to (i) the greater acceptance of managed care by employers and employees; (ii) the significant price advantage relative to traditional fully-insured open panel fee-for-service or reimbursement plans; (iii) the cost effectiveness to employers of managed dental care plans as an employee benefit; and (iv) the growing acceptance of managed care dental plans by dentists throughout the country, resulting in improved accessibility and convenience for members. Members of managed dental benefit plans represent approximately 16% of the population with dental care coverage, and approximately 7% of the total United States population. As a result of these factors, the Company believes that there will continue to be significant growth opportunity in the managed dental benefits industry. 1 It has been the Company's experience that larger employers have been more likely to offer dental benefit coverage to their employees. Additionally, according to the 1993 Foster Higgins Survey of Employee Sponsored Health Plans, nationally, approximately 87% of employers with more than 200 employees offer some type of dental benefits to some or all employees, and approximately 64% of these employers have a stand-alone dental plan, distinct and separate from other health and welfare benefits offered to employees. By comparison, this survey reported that only 37% of employers that had less than 200 employees, offer dental benefits. It has been the Company's experience that many employers in the small to mid-size range, that do not offer dental benefits, are willing to consider offering a plan, initially in which the employee pays the full cost or substantially the full cost of such benefits through payroll deductions collected by the employer. The managed dental care industry as a whole, is currently fragmented and characterized by participation of several large, national insurance companies and numerous independent organizations. As of December 31, 1994, the NADP estimated that there were over 150 managed dental care companies in the United States, with no dominant market leader. The increase in the number of dentists nationally during the last two decades, has exceeded the rate of population growth. According to the American Dental Association ("ADA"), the number of practicing dentists in the United States per 100,000 population, has increased from 53 in 1980 to 60 1991. In addition, the dental delivery marketplace is highly fragmented with approximately 88% of all practicing dentists, working in a one or two-dentist office, according to the ADA. Also, according to a survey of dental practices published by DENTAL ECONOMICS in 1994, the median of staff and other costs that are part of total overhead expenses for practicing dentists were approximately 60% of the gross revenue of solo and group dental practices. The significant increase in the number of dentists as a proportion of the population, the fragmented dental delivery marketplace, the high proportion of overhead costs for dentists and an improved level of overall dental health in the country, has created a highly competitive environment among dentists, particularly in major metropolitan areas. The Company believes that these factors have contributed to the increased willingness of qualified dentists to participate in managed care and preferred provider organization networks, such as those maintained by the Company, as dentists seek alternative methods to increase practice revenues. As in the case of medical coverage, the substantial majority of dental coverage is provided through traditional fee-for-service fully-insured open panel indemnity dental plans. Under a traditional fee-for-service indemnity plan, coverage is provided based on a reimbursement formula of the usual and customary charges submitted by the dentist. Compared to medical coverage, the average cost of dental services is lower and the utilization of services is more predictable. Unlike medical coverage, dental coverage generally does not cover catastrophic risks. Dental care is provided almost exclusively on an outpatient basis and, according to a 1990 ADA survey, over 80% of all dental services are performed by general dentists. Also, dental plans generally do not include coverage for hospitalization, typically the most expensive component of medical services. Common features of dental indemnity plans include deductibles, maximum annual benefits of less than $2,000 per person and significant patient cost-sharing. Patient cost-sharing typically varies by type of dental procedure ranging from no cost sharing for preventive procedures to 50% cost-sharing for dentures and even greater cost-sharing for orthodontic care. This high patient cost-sharing and the relatively predictable nature of dental expenditures substantially limits the underwriting risk of a dental plan when compared to the underwriting risk of a medical plan which covers catastrophic illness and injuries. Furthermore, since most dental problems are neither life threatening nor represents serious impairments to overall health, there is a higher degree of patient cost sensitivity and discretion associated with obtaining dental services. Many dental conditions also have a range of appropriate courses of treatment, each of which has a different out-of-pocket cost for patients. For example, a deteriorated amalgam filling may be replaced with another amalgam filling (a low-cost alternative) a pin-retained crown build-up (a more costly alternative) or a crown with associated periodontal treatment (the most costly alternative). The level of coverage provided to the patient and the dental plan's reimbursement methodology may influence the type of services selected by the patient or rendered by the dentist. Under a traditional indemnity insurance plan or fee-for-service arrangement, the insurer and the patient each pays a percentage of the fee charged by the dentist, subject to cost-sharing, maximum benefit allowances and usual and customary limits. Under such an indemnity plan, dentists have little incentive to reduce total charges because they are compensated on a fee-for-service basis. By contrast, under a managed dental care plan capitation payments are fixed and co-payments for additional services are pre-negotiated by the Company. The co- payments generally are designed to exceed the dentist's variable costs, but are typically less than the dentist's usual and customary fee. Fixed capitation payments that do not vary with the frequency of services provided create an incentive for dentists to emphasize preventive care, control costs and maintain a long-term patient relationship that generates consistent capitation revenue. 2 Fixed capitation payments also substantially reduce the underwriting risk to the Company associated with the high utilization of dental services. (b) Financial Information about Industry Segments. The Company operates in a single industry segment, providing both managed care and indemnity dental benefits. (c) Narrative Description of Business. GENERAL DESCRIPTION OF THE COMPANY The Company contracts with large and medium sized governmental or private sector employers, and multiple employer trusts. In addition, over the last several years the Company has focused its marketing efforts on mid-sized and small employer groups, usually with less than 1,000 employees. At the end of 1995, dental care under the Company's plans, is provided by a panel of approximately 2,600 independent dental offices (including 33 Company-owned dental offices, consisting of approximately 3,300 dentists.) As of December 31, 1995, the Company had contracts with approximately 2,700 employer clients providing benefits to approximately 761,000 members, representing a 5.5% increase in membership from 721,000 at December 31, 1994. This increase in membership resulted primarily due to the growth in new small and mid-sized clients, an increase in the number of persons covered under indemnity insurance products offered by the Company's insurance subsidiary, and an increase in the number of members covered as a result of strategic relationships with other health care providers. Enrollment increases as a result of sales to new groups entirely offset the continued workforce reduction in a number of the Company's major group clients. The Company's managed care contracts with its clients generally require the client to pay a monthly per capita fee that is usually fixed for a period of one to three years. The typical fee for a managed care program for an employee and his or her dependents, averages $19.50 per month and varies depending on the level of dental benefits, dependent coverage and member co-payment requirements stipulated in the contract. Each employee or dependent member receives covered services from a dental office selected by the member or dependent which is on the Company's panel of providers, whereas the individual is ordinarily free to select any dentist under a traditional indemnity insurance program. The Company's managed care plans do not require the member to pay deductibles, file claim forms, or be subject to an annual dollar limitation on the amount of dental care for which they are eligible. Under the Company's indemnity dental insurance programs, members are required to pay small deductibles and copayments which are traditionally higher than that which are required by the Company's managed care dental products. However, members may select any dentist of their choice for their dental care under these plans. The typical fee for an indemnity dental program for an employee and his or her dependents averages $38 per month, depending upon the level of dental benefits provided in the contract. PRODUCTS MANAGED DENTAL PLANS. The Company offers a variety of managed dental care plans under the name Safeguard Health Plans-Registered Trademark- and Safeguard Dental Plans-TM-. The Company's managed dental care plans operate similarly in each state in which business is conducted. Under the Company's managed dental care plans, a premium is paid to the Company on behalf of the subscriber by the employer from the date the subscriber enrolls in the plan. A portion of this contribution is used by the Company to "prepay" for dental care for members through regular monthly capitation payment by the Company to a specific selected primary care dentist. The capitation rate does not vary with the nature or the extent of services utilized. In exchange for the capitation payments, the selected provider is obligated to provide all necessary dental services to plan members. Members covered under the Company's managed dental care plans obtain certain basic dental procedures, such as examinations, x-rays, cleanings and fillings, at no additional charge, other than, in some cases, a small per office visit copayment. The plan's established copayments for more complicated procedures provided by the selected primary care dentist, such as root canals and crowns, which vary in accordance with the complexity of the service and the level of benefits provided. The Company's managed dental care plans also cover services provided by specialists participating in the panel rather than the primary care dentists selected by the subscriber, including oral surgery, endodontics, periodontics, orthodontics, and pedodontics. The Company assumes responsibility under its managed dental care plans for such specialty care arrangements and is responsible for such payments, usually at a discounted fee-for-service basis. 3 DUAL CHOICE PLANS. The Company's products also include dual choice dental plans which allow subscribers to choose between a managed dental care plan and an indemnity dental insurance plan. The Company believes that its ability to offer dual choice plans is an important element of its business success because it enables the Company to offer perspective customers flexibility, particularly when there are potential subscribers outside the area served by the Company's managed dental care panel. Certain states, such as Nevada, require that managed dental care plans be offered only as part of a dual choice plan and other states may do so in the future. Dual choice plans are particularly effective as part of the Company's growth strategy in areas in which the Company's dental panel is less well developed and members may value the ability to choose non-panel dentists. The Company also believes that securing customers through dual choice arrangements provides an opportunity to cross sell managed dental care plans. PREFERRED PROVIDER ORGANIZATIONS. The Company's products also include a dental plan which provides for an increased level of benefits in the event a member utilizes a dentist participating on its Preferred Provider Organization ("PPO") panel. The level of benefits provided to members who select a PPO dentist is usually increased by at least 10% and usually provides for a waiver of annual deductibles required to be paid by plan members. In exchange, the dentist has contracted to provide dental benefits to plan members at a fee which is usually discounted by at least 30% off of the dentist's usual and customary fee or the Company's fee allowance, whichever is less. Additionally, the cost savings through reduced fees charged by PPO dentists are shared equally between the Company and the member. In the event the member utilizes a PPO dentist, the member also receives the same level of discount off of the provider's usual and customary fee, as applied to the member's coinsurance. The indemnity insurance portion of the Company's Dual Choice and PPO dental plan is underwritten by SafeHealth Life, a subsidiary of the Company. These plans subject the Company to underwriting risks associated with over utilization and pricing variances which are different from those pricing and reimbursement mechanisms utilized by the Company's managed dental care plans. For self-insured employers, the Company provides claims administration under an Administrative Services Organization ("ASO") arrangement whereby the Company does not assume the underwriting risk for the indemnity claims. The Company receives an administrative fee to process claims and the underwriting risk is retained by the employer sponsoring the self-insured plan. The Company also provides access to its PPO network for a fee to clients. Under this program, the PPO network providers offer a reduced fee schedule for services performed. Eligible participants pay reduced fees when they receive dental services from a PPO network provider. The Company charges its PPO network clients a monthly fee for each participant eligible to access the Company's PPO fee arrangements. The Company does not make any payment to its PPO network providers on behalf of the participant eligible to access the reduced fee arrangement. In terms of product strength, the Company has several distinct advantages over its competition. First, the Company has the advantage of having no debt allowing its bids to be most competitive. Secondly, its Company-owned dental offices in California are strategically located to meet the needs of its clients. Thirdly, the Company provides a vast array of dental and vision products. The Company's ability to design a program to meet a client's specific needs in many product areas allows it to be extremely flexible and responsive. Many of the Company's competitors offer standard plans only. In the area of service, the Company continues to improve its client service approach keeping clients well informed and serviced. In the marketing area, the Company projects a highly favorable image of being on the cutting edge with its approach to the business. Its pricing is known to be extremely competitive in the industry. In the corporate area, the Company is supported by a state-of-the-art computer system. PROVIDER RELATIONS The Company believes that the most essential element in its managed care enrollment growth is a stable panel of quality focused dentists in convenient locations. The Company also requires that all managed care and PPO providers meet all Quality Assessment program standards. The program includes current license verification, current liability insurance, and a risk management review of the dental facility to ensure that all OSHA and regulatory requirements are met, an inspection of the office's sterilization practices, and a review of the facilities location -- parking availability and handicap access. See "QUALITY REVIEW." The Company believes that dental providers on the Company's managed care and PPO panels are willing to provide their services at a lower capitated (fixed) rate per month in exchange for the relatively steady, extended stream of revenue generated by panel participation. Furthermore, this contractual revenue source for the provider is free from the collection problems and administrative costs sometimes associated with other forms of dental coverage. Thus, qualified dentists and/or dental groups have generally been available and willing to participate on the Company's panels and supplement their fee-for-service practice. 4 The Company compensates each panel dental office on its managed care plans on a monthly capitation rate for each member who selects that office, regardless of the amount or character of service provided during the month. The capitation rate does not vary with the nature or extent of services utilized. The total amount paid to each dental office is determined by the capitation rate per each client contract applicable thereto, and the number of eligible members served by the participating dental office. For dentists who provide services to the Company's insured members, compensation is based upon a percentage of the provider's usual and customary fee based upon established tables of allowances utilized by the Company in its claims paying processing systems. Benefits are provided in accordance with percentages that are established for each member's benefit program. Providers who participate on the Company's PPO program are compensated at a fee which is less than the provider's usual and customary fee, usually at a discount of up to 30%, or 30% off of the Company's usual and customary fee for the area, whichever is less. The Company currently employs 15 Provider Relations Representatives nationally. All have extensive dental office management backgrounds and act as consultants to assist our panel providers with the administration of the plan in the day-to- day operation of their offices. Should a dental office terminate its contract with the Company, if necessary a new provider will be recruited in a timely manner to meet the needs of the members assigned to that office, and so there will be no delay in the member's care. No dental office, other than the 33 Guards dental offices as a group, provided service to more than 10% of the Company's members at December 31, 1995. The Company's panel dental offices are free to contract with other dental plans and both they and the Company can terminate the contract at any time upon 120 days notice. In accordance with the contract, the Company may also terminate the contract "for cause" upon 15 days written notice. The Company may also, at anytime, change the terms, rates, benefits and conditions of the various plans serviced by its providers with ten (10) days notice to the provider. The Company's contracts with panel dental offices require them to maintain their own professional liability insurance for a minimum of $100,000 per claim, and $300,000 per annual aggregate and to indemnify the Company for claims arising from their acts or omissions. At December 31, 1995, approximately 2,600 primary care and specialty care dental offices, consisting of 3,300 dentists were participating panel providers on the Company's managed care plans. General dentists are required to render all basic dental care and refer members to specialists only as required. Under its policy, the Company offers nearly all specialty dental services, including oral surgery, endodontics, periodontics, orthodontics, and pediatric dentistry. If the specialty care falls within the Company's guidelines, all or a substantial portion of the specialists fees is paid by the Company. Such payments were 5.5% and 4.8% of the Company's health care services expenses in 1995 and 1994, respectively. At December 31, 1995, the Company contracted with approximately 9,700 primary care and specialty care dentists on the Company's PPO panel. MANAGEMENT INFORMATION SYSTEMS During 1995, the Company continued to enhance its proprietary in-house management information system to better manage its operational resources and to provide better analysis of data. However, a review was performed to determine the future needs of the Company and how well the Company is equipped to compete with new technologies. With this in mind, the Company made a decision in September 1995 to purchase a new software system for the Company operations that operates in a more open environment (UNIX) and that takes advantage of the power of personal computers on the work desk. This new system provides a much easier and more efficient interface using Windows based screens. Data extraction via queries is easier and allows each individual to customize his or her queries for their own needs. Reports can be printed to the screen or to a printer, and both report and query data can be easily downloaded into a word processor and/or spreadsheet. The new system has integrated accounts receivable and accounts payable components that will allow the Company to more easily track, report and perform analysis on revenue and expense. The Company expects to implement the new system in May 1996 for its managed dental care plans. In December 1995, the Company also purchased a personal computer networked based general ledger system. The new general ledger system provides better reporting and analysis tools. It also allows the Company to extract and download data to word processors and spreadsheets. The Company also expanded the use of its electronic mail system, and will expand it to its regional offices during 1996. In conjunction with the new operations system (using UNIX and Windows based screens), the general ledger system, and the expanded electronic mail, the Company has installed a new network cabling system to provide a stronger data backbone for the Company's increased data transmission needs. The new network cabling system can be expanded as the Company grows without having to replace it with more expensive technologies. 5 As the Company's indemnity and PPO client base has grown, it also upgraded its current network server to handle the increased activity. The managed dental plan, accounting, indemnity and PPO, and electronic mail environments are all interconnected at this time. With the implementation of the new general ledger system, and as the Company implements the new UNIX system (which will later include the indemnity and PPO processes) the entire network will be more tightly integrated. These newly purchased systems demonstrate the Company's proactive position in automating its computer operations and allowing it to remain competitive in this area. DENTAL OFFICE OPERATIONS - COMPANY-OWNED DENTAL FACILITIES On December 31, 1995, the Company owned 33 dental offices located throughout California. Guards dental offices are established primarily for the purpose of supplementing, where needed, plan coverage provided by independent panel offices. Revenue from the Guards dental offices accounted for 26% and 24% of the Company's total revenue in 1995 and 1994, respectively. During 1995, the Company opened two new dental offices and relocated several offices to enhance its direct control over general and specialty care services. All of the dental offices currently owned by the Company are in leased space with the exception of one dental office where the underlying real property is owned by the Company. These Guards dental offices are included on the Company's panel providing general dental care, selected specialty care and, to a lesser extent, fee-for- service dental care to non-plan patients. In addition, the Company expanded its specialty care offices to provide enhanced specialty dental services. These offices are established in dental offices owned by providers under contract to the Company and are rented from such providers on a per diem basis. The Company is responsible for providing all of its own supplies and staff for these specialty care offices; however, the Company utilizes existing equipment already in place in these leased dental offices. Ownership of the Guards dental offices continues to provide the Company with additional direct control over plan dental services and related costs in the areas served. However, such ownership directly exposes the Company to the risks inherent in having to meet fixed costs and provide necessary levels of dental care service, which the Company normally transfers to independent dental providers on the panel. These risks include the possibility of incurring significant losses from operations until such time as dental offices opened by the Company attain significant enrollment and revenue to offset fixed operating expenses. These risks continue to be taken in order to meet specific plan client needs in areas where independent dental provider coverage is limited, or otherwise unavailable. In the last quarter of 1995, new senior management was appointed to the dental office operations. Significant steps were taken to reduce costs, streamline administrative processes and evaluate technology to achieve efficiencies. The Company plans to open another new dental office and strategically relocate seven offices in 1996. This expansion will allow for continued growth of general and specialty care programs. Over the last year, the Company intensified its delivery of specialty dental care services by utilizing more specialists in its Company-owned dental offices. This allows for cost savings in health care premium and assists in effectuating quality specialty care services in a staff model environment. By providing a greater amount of the specialty care services required under the various contracts between the Company and employer groups, the Company has experienced a reduction in its out-of-pocket expense for specialty care services and an increase in the amount of copayment revenue derived from the provision of such services. The Company is of the opinion that the provision of specialty care in a staff model environment helps reduce health care expense to the Company; therefore, continued expansion of specialty dental care operations is planned for 1996. The Company also maintains an individual dental plan primarily designed to attract members to its Guards dental offices. Marketing efforts are focused on individuals and small local employers who are located within close proximity to the Guards offices, who otherwise do not provide a dental benefits program. While not a significant contributor to revenue, this plan now has approximately 13,000 members enrolled as of December 31, 1995. The Company's strategy is to maintain Guards dental offices as a supplement to the coverage of the independent dental offices. See Part II, Item 7- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and Item 8-"FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." 6 QUALITY REVIEW The Company has a series of quality review procedures that start with the screening of prospective panel providers and continue through quality reviews, member complaint monitoring and computerized analysis of data regarding procedures performed. Screening procedures include license verification, interviews and on-site evaluations of the applicant's facility. As part of its continued efforts to enhance the quality of its provider services, the Company also maintains a provider self review program. This program allows a certain number of qualified dental providers the opportunity to participate in a provider self review program. Effective October 1995, the Quality Review Department was reorganized to better service the Company's members and providers. To ensure unbiased Quality Reviews, the Company has contracted with three private vendors to perform all of the Company's dental and vision reviews. After acceptance to the Company's panel and completion of an orientation program, each dental office participates in an ongoing quality review program. Each dental office is reviewed periodically by licensed dentists specifically trained in the area of quality review. These reviews include a facility review, inspection of sterilization practices, and a patient record evaluation to ensure that quality of care standards are achieved for all members. In order to be beneficial to the patient, the review includes an analysis of the initial appointment and continues throughout diagnosis, treatment planning and dental procedures of a patient. The Company views the patient record as an extremely important tool in quality assessment. If deficiencies are identified in the review process, the Company's Provider Relations Department works with the provider to remedy them, and a follow-up review is conducted within six months. In addition, the Vice President of Provider Relations analyzes all complaints lodged against providers quarterly and, in conjunction with the Company's dental professionals, resolves clinical concerns of the plan members. The Company also conducts special reviews of dental offices that provide services to a large number of members or have been the subject of patient complaints exceeding Company thresholds as to type and/or quantity. The Company's stated goal is to resolve 98% of member inquiries or complaints within 72 hours of receipt. The Company continues to improve its review system to insure members are receiving quality care and providers are receiving training and guidance as needed. The Company employs a team concept, combining its Quality Review, Benefit Services and Provider Relations departments, to benefit both the member and provider. In addition, the Company provides its panel providers with specifications of new laws affecting the provider. UTILIZATION REVIEW The Company uses computerized analysis to monitor the dental treatment provided to members. The computerized analysis of provider utilization and cost data enable the Company and its clients to determine the type of procedures performed by plan dental offices and ascertain the savings to both clients and members compared to competitive dental indemnity insurance coverage. The computerized analyses are also used by the Company to identify unusual patterns of dental care utilization or complaints which may trigger special or comprehensive dental reviews. The computer system greatly enhances the Company's ability to monitor member utilization and appropriate dental treatment and to provide essential statistical information. The Company is also expanding its use of its indemnity claims paying processing system to include utilization review and case management for its indemnity insurance subsidiary. As part of the expansion of its PPO activities, the Company has developed a sophisticated reporting system to demonstrate cost savings for clients and members when PPO dentists are utilized. These reports compare practice patterns that vary from established norms, identify patient costs trends, provides detailed claims and group experience, and case and claims management through a thorough preauthorization process. Repricing services are also provided through the Company's PPO program. The Company compares utilization patterns for dentists rendering dental services to the Company's insureds to determine whether such dentists are over utilizing the benefits provided. In the event that an unusual practice pattern is ascertained, the Company conducts a review of the dentist's facility to determine the basis for such practice patterns and reviews its findings with the dentist on a regular basis to eliminate any potential for abuse. RISK MANAGEMENT The Company has sufficient general and professional liability insurance coverage to manage the ordinary exposure of operating its managed care dental plan business and its indemnity dental plans. Generally, the Company is indemnified against professional liability claims by its contracting providers and the independently contracted dentists practicing at the Guards dental offices. In addition, each dentist is required to maintain professional liability insurance with specified minimums of coverage. The Company also maintains arbitration provisions in its contracts with providers. 7 Considering the Company's exposure to future claims for failure to provide coverage in addition to the secondary risk to professional liability claims, the Company carries its own professional liability insurance coverage in the amount of $5,000,000, which it views as being adequate. However, no guarantee is made that sufficient professional liability insurance coverage will be available to the Company at an acceptable cost. During 1995, as a result of its favorable claims history, the Company continued to lower its risk management costs. CLIENTS AND CONTRACTS Substantially all of the Company's 761,000 members at December 31, 1995, participate through over 2,700 group plans paid for by governmental and private sector employers, multiple-employer trusts and educational institutions or, to a minor extent, through individual plans. The Company's 10 largest clients accounted for approximately 20% and 24% of the Company's health care revenues for 1995 and 1994, respectively. Significant clients served in 1995 by the Company include the Bank of America, City of Dallas, City of Los Angeles, County of Los Angeles, several contracts with McDonnell Douglas Corporation, Southern California Edison Company, Southern California Gas Company, Rockwell International Corporation, Joint Council #42 Welfare Trust, and the State of California. In the opinion of management, the loss of any single client would not have a material adverse effect on the Company's financial condition or results of operations. The Company takes a proactive approach to better service its clients and members. The Company maintains a sophisticated multi-faceted plan to address the specific needs of its clients by assigning a specialty trained client services representative to all clients. Each client services representative has dental care and field experience. The Company also provides a customized service plan to its clients. The Company also maintains multiple benefits services teams, comprising 35 individuals, each one cross-trained to serve clients, members and providers. Scheduling has been adjusted to maximize telephone coverage, with special consideration to peak times of the day. Most teams are provided with a Registered Dental Assistant leader for technological support and each supervisor is trained in both technological support and customer service. The Company's customer service complaint system has been enhanced by the Company's computer network which provides each representative with full access to client, member and provider records. The Company's network also benefits its multi-state clients. Given the increasingly competitive nature of the dental care market, it is not unusual for the Company to obtain a new client from competing indemnity insurers or other managed care dental plans, or to lose an existing client to others. The Company is also sensitive to the requirement that there be adequate levels of compensation to its panel of participating providers so as to ensure that there is an adequate panel of providers from which the client's members may select for managed dental care benefits. As a result, the Company has been obtaining price increases up to 12% per year. See "MARKETING" and "COMPETITION." The Company's contracts generally provide for a defined dental benefit program to be delivered to plan members for a period of one to three years at a fixed monthly per-capita rate to the client. The contracts normally allow the client the right to terminate on 60 days written notice of a deficiency in performance; the Company has the right to extend the 60-day period to correct the deficiency. MARKETING In the past, the Company's primary marketing strategy has been to contract with large employer groups. While this strategy has served the Company well in the past, several years ago the Company broadened its market strategy to seek out and contract with employers with between 250 and 1,000 employees. While in the past, the Company's managed care dental plan had been offered as an alternative to the primary dental insurance included in the employer's health care benefit program, with the acquisition of the Company's indemnity insurance subsidiary, the Company is now able to contract with the employer to provide both the managed care dental plan and the indemnity dental insurance program through one relationship. By targeting the mid-sized employer groups described above, and by offering both the managed care and indemnity dental products to the employer, the Company is able to obtain a higher per member per month rate then it could previously by only offering its managed dental care plan. Before submitting a proposal to a prospective employer-client, the Company analyzes a demographic profile of the potential new plan members, the current and desired dental benefit levels, availability of adequate provider coverage and timely access, and other factors. 8 The Company markets its dental benefit plans through a network of over 2,000 independent insurance agents and brokers and a direct sales force of 17 employees. This dual distribution system is designed to reach group purchasers of all sizes in an efficient and cost effective manner. The Company believes that its marketing strategy provides it with a competitive advantage by enabling it to market to a wider range of potential groups more effectively than companies relying upon a single distribution system. The Company's direct sales force targets larger employers and groups which are more likely to contribute towards the cost of dental benefits for their employees. In marketing to large groups, the Company's sales force focuses on selling both the managed care dental plan and an indemnity/PPO product. The Company pays its direct sales force through a combination of salary and bonus based upon the number of members enrolled for new groups. As part of its growth strategy, the Company intends to increase its internal sales and marketing staff during 1996. The Company's independent insurance agent and broker network focuses on offering managed dental care products to medium and smaller sized employers which may or may not contribute towards or offer dental benefit plans to their employees. The Company believes that there are significant opportunities for the Company to expand managed dental care and indemnity coverage to medium and smaller sized employers by expanding its network of independent brokers who can effectively sell dental benefit programs to the medium and smaller sized market. Brokers and agents typically do not market the Company's dental plans on an exclusive basis. Brokers and agents generally receive a flat percentage of premium collected as commission for the initial sale and for each renewal thereafter. Brokerage commissions paid by the Company were 2.4% and 1.9% of health care revenues for 1995 and 1994, respectively. The Company also works with "in- house" employee benefits managers in its marketing efforts. Recognizing the shifting employee population base away from larger multi-state corporations towards smaller, localized employers, the Company also embarked upon a small group client program during the last two years. New plan benefit programs were designed to specifically respond to the needs of the smaller group employer, traditionally less than 250 employees. Marketing of dental plans to the small group employer is in part directed to specific groups surrounding the geographical locations of the Company-owned dental offices and the Company's regional offices in other states. Once plan participation is to be made available to employees, the Company's marketing efforts shift to the potential plan members. During a designated annual open enrollment period, usually lasting one month, participants may elect the Company's managed care dental plan or opt for the other form(s) of dental benefits being offered, generally dental indemnity insurance, either offered by the Company or another insurance carrier. Generally, participating employees can enroll into or drop out of the Company's plans only during this enrollment period. Management believes that with larger group clients, an average of approximately 10% to 15% of eligible employees select the Company's managed care dental plan during the first open enrollment period in which it is offered and that with smaller group clients, an average of approximately 20% with voluntary plans and 90% with employer paid plans of eligible employees select the Company's managed care dental plan during the first open enrollment period in which it is offered. The net percentage of participation in the Company's managed care dental plan tends to increase each year thereafter within most employer groups. The Company believes that it has an opportunity to obtain new contracts from employers with between 250 and 1,000 employees in the markets in which the Company operates. The Company believes that this represents a significant under penetrated market segment for the products offered by the Company. The Company intends to build upon its current market position and increase its sales activities by applying market segmentation and quality management principles to identify the highest potential of customers and proactively anticipating their needs in the marketing process. The Company intends on accomplishing this by identifying its core capabilities and competitive advantages that it has over its competitors. By adding incremental service levels provided by the Company, and applying technological advances to the marketing process, the Company's goal is to lower per member acquisition costs, and eliminate unnecessary sales and administrative expenses while increasing production capabilities of the Company's marketing forces. In the situation where the Company is successful in selling its dual choice or triple choice products to the employer, all employees are enrolled in one of the plan's offered by the Company. The Company believes that the ability to offer a dual choice or triple choice option program increases the amount of revenue generated from each sale by providing the employer with the entire insurance program which may be available to its employees. This has the effect of increasing the overall per member per month rate paid by the employer for each employee since the per member per month premium for the Company's indemnity dental program is significantly higher than that which the Company charges for its managed dental care plans. This has the overall effect of increasing the revenue generated from each dollar of expense associated with the selling of the Company's products. 9 In recent years, the Company has obtained contracts with large employers that offer what are known as flexible benefits plans or cafeteria type benefit programs. Typically, such arrangements provide for the employer to establish a dollar value for all benefits to be provided to the employee who is then requested to select the program of benefits desired and designate whether dependent coverage is needed. The premium cost is then deducted from the employer's set contribution to benefits expenses. By making the employee more aware of the actual premium cost of the benefits provided, there appears to be a greater attractiveness of the lower cost programs, such as the Company's managed care dental plans. No assurance, however, can be given that such benefit programs will result in increased enrollment in the Company's plans. The following table sets forth enrollment by state (in thousands) as of the date indicated, and the percentage of total enrollment accounted for by each state:
MEMBERS ENROLLED PERCENT PERCENTAGE OF TOTAL STATE AT DECEMBER 31, CHANGE ENROLLMENT AT DECEMBER 31, - ---- ---------------- ------- -------------------------- 1995 1994 1995 1994 ---- ---- ---- ---- Arizona 1 3 N/M 0.1 0.4 California 652 626 4.2 85.7 86.8 Colorado 15 13 15.4 2.0 1.8 Illinois 5 6 (16.7) 0.6 0.8 Kansas * * N/M - - Missouri 29 27 7.4 3.8 3.7 Nevada 4 2 50.0 0.5 0.3 Ohio * * N/M - - Oklahoma 2 1 50.0 0.3 0.2 Oregon * * N/M - - Texas 53 43 23.3 7.0 6.0 Utah * * N/M - - Washington * * N/M - - ---- ---- ------- ----- ----- Total 761 721 5.5 100.0 100.0 - ------------- * Less than 1,000. N/M - Not meaningful.
The Company's vision plan maintained in California since early 1980, has not produced significant revenues to date. Therefore, in an effort to expand upon its vision plan offerings, the Company made available to its present and potential clients a new vision program called the Premier Vision Care Plan (the "Premier Plan"). The Company developed the Premier Plan with the intention of enhancing the vision care component of its benefit programs in California. All of the Company's clients participating in its vision programs have enrolled in the Premier Plan. The Premier Plan features a convenient open provider option that allows members to select any optometrist under contract with the Company at the time they seek care. This open panel option is underwritten by the Company's indemnity insurance subsidiary in California. The entire vision plan is underwritten by this subsidiary in all other states in which it is provided. No preselection is required. There are no cards to mail or forms to present before receiving care so members can enjoy immediate access. With the Premier Plan, the Company also offers a Provider Advantage Plus Program which allows members to obtain services from any vision care professional and receive reimbursement from the Company according to a set schedule of benefits. As of December 31, 1995 there were approximately 30,000 members enrolled, and approximately 1,400 providers on the Company's Premier Plan vision panel. While the Premier Plan did not generate significant revenues during 1995, it is anticipated that these new vision plans will be a positive revenue and net income generator during 1996 and beyond. Moreover, in an effort to continue to improve upon the quality assurance aspect of the Company's vision program, the Company has affiliated itself with an administrative organization which demonstrated a keen awareness of the specific quality assurance needs of a managed vision care program. The Company's business affiliation with this organization has accomplished expeditious development of a high quality optometric provider network to augment the areas where the Company has vision care providers; complete administrative knowledge of vision care programs including claims handling, provider relations issues and assistance in complaint resolution; augmentation of the Company's quality assurance program and utilization review system so as to improve upon the quality assurance provided by the Company; and a cost effective benefit program to compete with larger vision care providers. 10 Smaller group employers find especially attractive the Company's ability to offer one-stop shopping with its dual choice dental package of indemnity dental insurance and managed care dental plans, its expanded vision plans and its life insurance plans. The Company continues to increase its efforts to expand its business through strategic alliances. As a result, the Company maintains a relationship with several Health Maintenance Organizations ("HMOs") to provide dual choice indemnity and managed dental care plans to segments of members enrolled in the HMO. INDEMNITY INSURANCE PLANS - INDEMNITY INSURANCE BENEFITS As a result of its desire to respond to the changing marketplace, the Company expanded its business to include indemnity dental plans. In September 1992, the Company acquired a California domiciled life and health insurance company and renamed it SafeHealth Life Insurance Company ("SafeHealth Life"). SafeHealth Life is regulated by the California Department of Insurance and currently holds a Certificate of Authority as a life, health and disability insurer in the states of Arizona, California, Colorado, Illinois, Kansas, Missouri, Nevada, Ohio, Oregon, Texas and Wisconsin. SafeHealth Life has applied for a certificate of authority in the states of Alabama, Georgia, Florida, Indiana, Maryland, New Mexico, Michigan, Minnesota, Oklahoma and Utah. The Company intends to expand its operation by making applications to qualify SafeHealth Life to transact the business of insurance in the states of Kentucky, Pennsylvania, South Carolina, Tennessee and Virginia by the end of 1996. SafeHealth Life has collaborated with other subsidiaries of the Company to develop certain innovative marketing concepts with the intent of offering consumers a multiple choice product consisting of a flexible indemnity plan, a PPO plan, and a comprehensive managed care plan in the states where it holds a Certificate of Authority. The ability to offer fee-for-service dental plans along with managed care benefits, better serves new and existing clients. The Company also offers a vision plan through Safeguard in California, and SafeHealth Life in Colorado, Illinois, Missouri, Nevada and Texas. During 1993, SafeHealth Life had begun marketing dual choice dental programs through independent agents and brokers that generated approximately $600,000 in premium revenue its first full year of operations. This revenue was derived from business produced in California, Texas, and Colorado. SafeHealth Life utilizes independent agents and brokers who specialize in the employee benefits area and appreciate the ability of SafeHealth Life to custom design plans as needed. Premium revenue grew to over $6 million in 1995, and SafeHealth Life was a positive contributor to net income of the Company. SafeHealth Life's client base includes small employer groups as well as governmental agencies and political subdivisions. During 1995, the number of insureds covered by SafeHealth Life grew 130.5% from 36,257 to 83,577. SafeHealth Life anticipates increasing production of its multiple choice dental programs in other states in which it is admitted to do business, with a majority of business to continue to be in California for the foreseeable future. SafeHealth Life is also offering group term life insurance as a participant in a reinsurance pool. The ownership of an indemnity insurance company exposes the Company to risk for over utilization and claims costs in excess of premium revenue. To minimize its risks, the Company conducts thorough claims review using the sophisticated techniques of the computer system purchased by the Company for its indemnity insurance business. Additionally, the Company has contracted with several well- known actuarial consultants who assist the Company in developing its benefit programs, rates and payment schedules. PREFERRED PROVIDER ORGANIZATION During 1993, SafeHealth Life developed it's PPO in response to the market demands to offer a more cost-effective alternative to traditional indemnity insurance, and more freedom of choice than the managed dental care network/product alternatives. The PPO Network program was developed to complement and also be used as a cost containment mechanism for current and future indemnity dental plan clients. The negotiated fee arrangements enable the Company to offer indemnity dental and SafeHealth Life PPO Network Plans that reduce benefit costs for participating client groups and members. SafeHealth Life PPO Network Plans are designed to encourage a greater level of participation from participating network dentists due to lower levels of benefits for the Out-of-Network option. 11 The Company also offers PPO Network Lease Services which offer the network as a stand alone option for a per-member per-month fee. The Network Lease Service is intended to be an option that is marketed to Health and Welfare Trusts, Third- Party Administrators and Self-funded Employer Groups, again promoting the cost containment features of the negotiated discounts. The Company assumes no risk for clients that lease the PPO network. At December 31, 1995, SafeHealth Life had contracted with over 9,700 participating general and specialty dentists in the markets in which it operates. The overall geographical distribution of the dental network was developed to allow members easy access to network dentists to take advantage of negotiated discounts. All participating dentists have passed a strict qualification process and undergo annual quality reviews as part of ongoing compliance with network participation. The PPO offers savings to the Company in the form of lower dollar levels of claims costs, and savings to the insured in lower out-of-pocket costs due to the PPO contracted fees. Administrative review protocol that utilizes a sophisticated case management system insures that the individual needs of a member are matched to treatment plans. The necessity and appropriateness of the treatment plans are continually monitored to assure a professional and appropriate treatment conclusion. The combination of the waiver of deductibles, negotiated provider fees and case management review system can result in significant member and claim costs savings. During 1995, the Company began recruitment efforts to develop an alternative dental network, the "Choice Dental Plan" in the State of Texas that would offer clients the option of greater discounts similar to those under the PPO network, but not part of a PPO program. Approximately 600 dentists were contracted in this plan as of December 31, 1995. The Choice Dental Plan is not an insured product, but simply a discount program, whereby members receive a discount for services from participating providers. The Company assumes no risk for this product, and there is no out of network coverage. While recruitment activities are ongoing, this plan has not yet been activated. Recruitment efforts in 1995 far exceeded management's expectations for growth adding almost 4,000 dentists to its network in operational areas. The Company continues to actively recruit dentists for its PPO plan, and intends to add substantially more dentists throughout 1996. GEOGRAPHIC EXPANSION The Company's strategy regarding geographic expansion is presently undergoing a strategic review to identify and capitalize upon opportunities that may exist in states in which the Company is not presently operating. In the past, the Company's strategy generally has been to enter new states only after obtaining a major contract, either by expanding the geographic scope of service to existing clients, by entering into contracts with new clients, or by establishing marketing agreements with other organizations. While the Company generally prefers not to expand into new states until an adequate base of client business exists to help defray the start-up costs of operations in those new states, the Company is currently reviewing its strategic opportunities to provide managed care and dental indemnity benefits in other states and markets in which the Company does not presently operate. A number of opportunities exist through strategic affiliations which the Company is pursuing. Once a decision to expand has been made, the Company usually establishes a sales and marketing office to provide sales, marketing and provider services support in the local market. All basic administrative services are provided by the Company at its corporate headquarters, with the exception of the Company's Texas operations which due to regulatory constraints, requires that administrative services also be provided in the Company's Texas facilities. By using strategically located regional sales and marketing offices instead of separate full-service offices in each state, the Company has better controlled administrative expenses associated with new plan start-ups, and can more efficiently and effectively service a greater number of members in each market. The Company's managed care dental plans are operating or have been granted regulatory approval to operate in Arizona, California, Colorado, Illinois, Kansas, Kentucky, Missouri, Nevada, Ohio, Oklahoma, Oregon, Texas, Utah and Washington. The Company's indemnity insurance subsidiary has been granted a Certificate of Authority in Arizona, California, Colorado, Illinois, Kansas, Missouri, Nevada, Ohio, Oregon, Texas and Wisconsin. The Company will most likely seek regulatory approvals in additional areas. GOVERNMENT REGULATION Many states have laws establishing the requirements for, and regulating the conduct of, the Company and other managed care dental plans. Such laws vary from state to state and they generally require a state license, frequently prescribe requirements for contracts, establish minimum benefit levels, impose financial tests and maintain standards for management and other personnel. There is currently no regulation of the Company's plans at the federal level. 12 Since some states will only license full service health plans, the Company cannot enter those states except in conjunction with SafeHealth Life, its indemnity insurance subsidiary, or with a full service HMO. Other states permit only nonprofit corporations to become licensed as managed care dental plans, again limiting the Company's access. The heavily regulated nature of the Company's industry imposes a variety of potential obstacles to management's plans for further geographic expansion and could limit the Company's future growth. On the other hand, this regulatory environment also governs the conduct and expansion prospects of existing and new competitors. The Company's managed dental care plans are licensed and regulated by pertinent state authorities. Among the areas regulated, although not necessarily by each state, are the scope of benefits available to members, the content of all contracts with clients, providers and others, tests of financial resources, including maintenance of minimum stipulated financial reserves for the benefit of plan members, procedures for review of quality assurance, enrollment requirements, minimum loss ratios, "any willing provider" requirements which may limit the Company's right to restrict the size of its provider network, the relationship between the plan and its providers, procedures for resolving grievances, and the manner in which premiums are determined or structured. The Company's indemnity insurance operations are regulated by the California Department of Insurance, and the Department of Insurance of the other states in which the Company is licensed to transact insurance business. These regulations include specific requirements with regard to minimum capital and surplus, permitted investments, advertising, policy forms and claims processing requirements. The Company's insurance operations are also licensed to transact business in other states which traditionally follow the compliance requirements of the insurance company's domiciled state, while sometimes imposing minimal specific policy and deposit requirements for the Company's operations in those states. Insurance companies are heavily regulated and require significant cash deposits for capital and surplus. The Company's ability to expand its insurance operations into states in which it is not currently licensed is dependent for the most part on the regulatory review process which is conducted by the Department of Insurance in each state in which the Company is applying. Such reviews may take anywhere from six to twenty-four months. TRADEMARKS, SERVICE MARKS AND TRADENAMES The Company has filed and received approval from the United States Patent and Trademark office for certain trademarks and tradenames for names and products used by the Company in its ordinary course of business. The Company has received a trademark, service mark or tradename for the following words and phrases used with and without distinctive logos maintained by the Company: - - Safeguard-Registered Trademark- used with a distinctive logo depicting three superimposed figures used in connection with its managed care dental plans; - - Safeguard Health Plans-Registered Trademark- used in descriptive material to describe the products offered by the Company; - - Safeguard Dental Plans-TM- used to describe the various managed care dental plans offered by the Company; and - - SafeHealth Life-Registered Trademark- used with a descriptive logo depicting three superimposed figures used by the Company to describe its indemnity insurance and PPO products. Collectively, these trademarks, service marks and tradenames were first used in commerce in 1984 and have been continuously used thereafter. COMPETITION The Company operates in a highly competitive environment. Its competitors principally include large insurance companies, which offer managed dental care and indemnity dental products in most of the Company's markets, and public and private independent companies, offering managed dental care plans similar to those offered by the Company, which typically compete in particular markets. The Company also competes with for-profit and not-for-profit HMOs, self-funded plans, PPO's and discounted fee-for-service dental plans. Many of the Company's competitors are significantly larger and have substantially greater financial and other resources than the Company. The major competitive factors for both client contracts and membership enrollment are the cost of services, the reputation of the plans for providing quality dental care, the size of the plan's dental panel and the reputation of the plan itself. 13 Indemnity insurance coverage offered by insurance carriers other than the Company, has a competitive advantage since many indemnity carriers are more mature and better known than the Company. As contrasted to managed care dental plans offered by the Company, indemnity insurance coverage has the benefit of allowing a beneficiary to select most any licensed dentist while managed care dental plan participants must select a dentist from the Company's panel. Management believes the Company's primary competitive advantage of its managed care plans has been, and will continue to be, the Company's ability to deliver services at a lower cost to both clients and members while providing quality dental care. Management believes that the Company's competitive advantage of its indemnity dental insurance plans is the Company's ability to provide comprehensive dental coverage, applying managed dental care principles, including the concepts associated with the Company's PPO plans. The Company has also experienced increased competition from indemnity insurance companies through direct entry into the managed dental care benefits market. It is likely that these efforts will intensify in the future. Frequently, such plans are being offered in tandem with indemnity dental coverage and/or PPO alternatives. In addition, an increasing number of medically-oriented HMOs and PPOs are including dental care benefits as part of their benefit programs. Other than for technological expenses associated with the provision of managed care and indemnity dental benefit programs, the Company's business does not require substantial amounts of capital. Other than government regulation and the related operating costs of start-up, there are no significant barriers to new companies entering into the market. There can be no assurance that the Company will be able to compete successfully with new market entrants. Any such additional competition could adversely impact the Company's revenues, net income and growth prospects through fee reductions, loss of providers or clients, or market share. EMPLOYEES At December 31, 1995, the Company had 558 employees, of whom 10 were executives, 3 were Executive Directors of Regional offices, 17 were sales personnel, and 441 were administrative and clerical personnel. In addition, as of that date, the Company had 87 independent dentists under contract at its Guards dental offices. Most all administrative services are provided at the corporate offices in Anaheim, California, with the exception of certain administrative functions which are performed in the Company's Dallas, Texas office, as required by applicable Texas statutes and regulations. Billing and other paperwork processing for Guards is also centralized at the corporate offices. Approximately 234 clerical and auxiliary employees are represented by two labor unions. No other employees or dentists are union members. The Company considers its relations with its employees to be good. The Company maintains a 401(k) plan which allows for a pre-tax contribution from an employee's earnings. Employees are eligible to participate in the 401(k) plan upon completion of six months of service with the Company. Under the 401(k) plan, an employee may defer up to 15% of his or her gross compensation each pay period and the Company may, at its option, make an additional discretionary contribution to be allocated among employees in the plan in proportion to the compensation deferred. Employees are 100% vested in their interest in the 401(k) plan at all times. The Company also maintains a pre-tax medical insurance option within the meaning of Paragraph 106 of Section 125 of the Internal Revenue Code for its employees insuring dependents. 14 DIRECTORS AND/OR EXECUTIVE OFFICERS OF THE REGISTRANT The current directors and/or executive officers of the Company are as follows:
NAME AGE POSITION - ---- --- -------- Steven J. Baileys, D.D.S. 42 Chairman of the Board of Directors, President and Chief Executive Officer (4) John E. Cox 44 Executive Vice President and Chief Operating Officer Ronald I. Brendzel, J.D. 46 Senior Vice President, Chief Financial Officer, Secretary and Director (4) Wayne K. Butts 42 Senior Vice President, Director of Regional Operations Judith M. Deal 44 Vice President-Provider Relations Thomas C. Tekulve, C.P.A. 44 Vice President-Accounting, Finance and Information Services Kenneth E. Keating 32 Vice President-Guards Dental Office Operations John D. Lyon 47 Vice President-Marketing and Sales Carlos Ferrera 32 Vice President-SafeHealth Life Operations Susan M. Klarner 41 Vice President -Quality Programs Michael M. Mann, Ph.D. 56 Director (1)(2)(3)(4) William E. McKenna 76 Director (1)(2)(3)(4) George H. Stevens 42 Director (1)(2)(4) Bradford M. Boyd, D.D.S. 44 Director (1)(2)(3)(4) (1) Member, Compensation and Stock Option Committee (2) Member, Audit Committee (3) Member, Nominating Committee (4) Directors hold office from the Annual Meeting of Stockholders for staggered terms of three years (until re-elected or until successors are elected and qualified), as follows: Dr. Baileys and Mr. Stevens - May, 1996 Mr. McKenna - May, 1997 Mr. Brendzel, Dr. Mann and Dr. Boyd - May, 1998
Officers are elected annually and serve at the pleasure of the Board of Directors, subject to all rights, if any, under certain contracts of employment. See Part III, Item 11-"EXECUTIVE COMPENSATION." Dr. Baileys is the brother-in- law of Mr. Brendzel. Dr. Baileys is Chairman of the Board of Directors, President, and Chief Executive Officer. He has been President since 1981, Chief Executive Officer since May 1995, and Chairman of the Board since August 1995. From 1975 until 1981, Dr. Baileys served in a variety of executive and administrative capacities with the Company. Dr. Baileys is also licensed to practice dentistry in the State of California. 15 Mr. Cox joined the Company as Executive Vice President and Chief Operating Officer in May 1995. From 1985 to 1995, he served in various executive capacities for CIGNA Dental Health, including Vice President, Sales and Account Services, Western Regional President, Chief Financial Officer and Controller. Mr. Brendzel is Senior Vice President, Chief Financial Officer, Secretary and a Director of the Company. He was Vice President - Corporate Development from August 1980 until April 1986, General Counsel from August 1980 until May 1987 and held various executive and administrative positions from July 1978 until August 1980. Mr. Brendzel is a member of the California State Bar and is licensed to practice law in the state of California. He is also a member of the California Knox-Keene Health Care Service Plan Advisory Committee, which assists the California Department of Corporations in regulating managed care health plans. From 1989 to 1991, Mr. Brendzel was also a member of the Texas Health Maintenance Organization Solvency Surveillance Committee which assists the Texas Department of Insurance in regulating health maintenance organizations. Mr. Butts was appointed Senior Vice President - Director of Regional Operations in December 1995. Prior thereto, he was Vice President-National Sales Director since February 1988. Prior to joining the Company, he was a Senior Account Executive with Equicor-Equitable HCA Corporation in Los Angeles from November 1985 to February 1988. Preceding that, Mr. Butts was a Senior Sales Representative with the Company from February 1983 to November 1985. Mr. Butts' background in the insurance/benefits area began in 1978 with Blue Cross of California. Ms. Klarner is the Vice President-Quality and Service Programs for the Company. From November 1993 to February 1996, she was Vice President-Network Programs for the Company's indemnity insurance subsidiary. From May 1989 until October 1993, she was the Company's Director of Provider Relations. Prior to joining the Company, Ms. Klarner was Manager of Provider Relations for a managed dental care company from July 1986 to April 1989. Ms. Deal was appointed Vice President-Provider Relations in January 1995. Prior to joining the Company, Ms. Deal was the Director of Provider Relations for CIGNA Dental Health from November 1988 to January 1995. Preceding that, Ms. Deal was the Dental Office Manager of a large group dental practice from November 1974 to November 1988. Mr. Tekulve was appointed Vice President, Accounting, Finance and Information Systems of the Company in April 1995. He was Director of Finance, International Operations for Beckman Instruments, Inc. from 1992 to 1995. During the period from 1984 to 1992, he also served as corporate Controller and Director of Corporate Accounting and Planning for Beckman Instruments, Inc. Mr. Tekulve is also a Certified Public Accountant. Mr. Keating is the Vice President-Guards Dental Office Operations for the Company. He was Vice President-SafeHealth Life Operations from August 1995 until October 1995 when he was appointed to his present position. From March 1987 to July 1995, Mr. Keating served in various executive capacities for CIGNA Dental Health, including Director of Sales and Account Services, Director of Network Development and Director of Staff Model Operations. Mr. Lyon is the Vice President-Marketing and Sales for the Company. He joined the Company in July 1995. From September 1993 to April 1995, Mr. Lyon was Vice President-Marketing of Scan Health Plan. From October 1990 to July 1993, he was Associate Vice President-Marketing of FHP Health Care. Preceding that, he was Vice President-Project Director of Fessel International from February 1989 to September 1990. Mr. Ferrera is the Vice President-SafeHealth Life Operations for the Company. He joined the Company in October 1995. From March 1988 to October 1995, Mr. Ferrera served as Director of Provider Relations and Product Consultant for CIGNA Dental Health. Preceding that, he was a Staff Sergeant in the United States Air Force. Dr. Mann has been a Director of the Company since May 1987. He is also Chairman of Blue Marble Partners, and Chairman, President and Chief Executive Officer of Blue Marble Development Group, Inc. international corporate development and consulting firms. From August 1986 until September 1987, Dr. Mann was a Partner of Mann, Kavanaugh, Chernove & Associates, a business development firm. He was President, Chief Executive Officer and a Director of Helionetics, Inc., a defense, energy and signal information processing company, from December 1984 to July 1986, and Executive Vice President from April to December 1984. Dr. Mann is currently the Chairman of the Board of Encompass Technologies, Inc., and a Director of Datum, Inc. and Management Technology, Inc. 16 Mr. McKenna has been a Director of the Company since September 1983. Since December 1977, Mr. McKenna has been a general partner of MCK Investment Company, a private investment company. Mr. McKenna was Chairman of the Board of Technicolor, Inc. from 1970 to 1976 and was formerly Chairman of the Board and Chief Executive Officer of Hunt Foods & Industries, Inc. and its successor, Norton Simon, Inc. From 1960 to 1967, Mr. McKenna was associated with Litton Industries, Inc. as a Director and in various executive capacities. He is currently a Director of California Amplifier, Inc., Calprop Corporation, Drexler Technology Corporation, Midlantic Corporation, Midlantic National Bank, WMS Industries, Inc., and Williams Hospitality Group, Inc. Mr. Stevens has been a Director of the Company since May 1989. He has been President of Belle Haven Marina, Inc., a privately held leisure and recreational organization located in Virginia, since 1982. He is also President of Kingfish Corporation, a privately held corporation which is engaged in the business of chartering pleasure yachts in the mid-Atlantic region. Mr. Stevens is also the owner of Mariner Sailing School located in Virginia. Mr. Stevens' combined organization is the largest operator of recreational vessels in the Washington D.C. area. Dr. Boyd has been a Director of the Company since May 1995. He is licensed to practice dentistry in the State of California since 1983, and has been the sole proprietor of Bradford M. Boyd, D.D.S., located in Lancaster, California. Dr. Boyd also is private investor. He is a member of the American Dental Association, California Dental Association, and San Fernando Valley Dental Society. He is also a member of the Board of Directors of High Desert Children's Dental, a charity organization providing free dental services to underprivileged children ITEM 2. PROPERTIES The Company owns a 60,000 square foot building in Anaheim, California which it utilizes as its corporate headquarters and executive offices. In addition, the Company leases branch sales and marketing offices in Sacramento, California; San Diego, California; Walnut Creek, California; Denver, Colorado; Kansas City, Kansas, St. Louis, Missouri; Dallas, Texas; and Houston, Texas. The Company leases all but one of its Guards dental offices. Those leases expire on dates ranging through July 2005. A Guards facility in Riverside, California is leased from an affiliate. See Part III, Item 13-"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." In the opinion of management, the Company's facilities are adequate for its current needs. ITEM 3. LEGAL PROCEEDINGS The Company is subject to various claims and legal actions in the ordinary course of business. The Company believes all pending claims either are adequately covered by insurance maintained by panel providers or the Company, or will not have a material adverse effect on the Company's results of operations or financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1995. 17 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS (a) MARKET INFORMATION The Company's common stock is traded on the NASDAQ National Market System under the symbol SFGD. The following table sets forth the high and low prices at which the Company's common stock traded as reported. The bid quotations represent inter-dealer prices, without retail markups or commissions, and do not necessarily represent actual transactions.
HIGH LOW ---- --- Fiscal Year ended December 31, 1995 First Quarter.................... $ 9.75 $ 8.25 Second Quarter.................... $11.50 $ 8.88 Third Quarter................... $12.25 $10.50 Fourth Quarter..................... $13.25 $11.25 Fiscal Year ended December 31, 1994 First Quarter.................... $15.50 $13.25 Second Quarter.................... $15.00 $12.50 Third Quarter................... $13.75 $ 9.63 Fourth Quarter..................... $10.63 $ 8.50
(b) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
APPROXIMATE NUMBER OF RECORD HOLDERS TITLE OF CLASS (AS OF DECEMBER 31, 1995) - -------------- ------------------------- Common Stock, $.01 Par Value 1,000
(c) DIVIDENDS No cash dividends have been paid on the Company's common stock. It is the policy of the Board of Directors to retain the Company's earnings for use in its business, and the Company does not anticipate paying cash dividends in the foreseeable future. (d) STOCKHOLDER RIGHTS PLAN On March 22, 1996 ("RIGHTS DIVIDEND DECLARATION DATE"), the Company's Board of Directors declared a dividend of one right (a "RIGHT") to purchase fractions of the shares of its Series A Junior Participating Preferred Stock, par value $.01 per share having the rights, preferences, privileges and restrictions described below ("PREFERRED STOCK"), and, under certain circumstances, other securities, for each outstanding share of the Company's common stock, par value $.01 per share ("COMMON STOCK"), to be distributed to stockholders of record at the close of business on April 12, 1996 ("RECORD DATE"). The description and terms of the Rights are set forth in a Rights Agreement (the "RIGHTS AGREEMENT"), dated as of March 22, 1996, between the Company and American Stock Transfer and Trust Company, as Rights Agent. The following is a brief description of the Rights. It is intended to provide a general description only and is qualified in its entirety by reference to the Rights Agreement which has been filed as an exhibit to the Company's Registration Statement on Form 8-A filed with the Securities and Exchange Commission. ISSUANCE OF THE RIGHTS Each share of Common Stock outstanding at the close of business on the Record Date will receive one Right. In addition, prior to the earliest of the Distribution Date, a Section 13 Event or the Expiration Date (as each is hereinafter defined), one additional Right (as such number may be adjusted pursuant to the provisions of the Rights Agreement) shall be issued with each share of Common Stock issued after the Record Date. Following the Distribution Date and prior to the expiration or redemption of the Rights, the Company will issue one Right (as such number may be adjusted pursuant to the provisions of the Rights Agreement) for each share of Common Stock issued pursuant to the exercise of 18 stock options or under employee plans or upon the exercise, conversion or exchange of securities issued by the Company prior to the Distribution Date. A "SECTION 13 EVENT" shall mean any event in which (i) the Company merges or consolidates with another and the Company is not the surviving corporation; (ii) the Company merges or consolidates with another, the Company is the surviving corporation, and all or part of the Company's common stock is exchanged for other securities, cash or property; or (iii) the Company sells or transfers more than 50% of its assets or earning power. The "EXPIRATION DATE" shall mean the earliest of (i) March 21, 2006; (ii) the date of redemption of the Rights; (iii) the date the Board orders an exchange of Rights; or (iv) the date of consummation of a tender offer approved as fair to and in the best interests of the Company and its stockholders, and adequately priced with each stockholder receiving the same consideration per share in the same manner. COMMON STOCK CERTIFICATES REPRESENT THE RIGHTS PRIOR TO THE DISTRIBUTION DATE Prior to the Distribution Date (as hereinafter defined), no separate Rights certificates will be issued. Instead, the Rights will be evidenced by the certificates for the Common Stock to which they are attached and will be transferred with and only with such Common Stock certificates. The surrender for transfer of any certificates for Common Stock outstanding will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. New Common Stock certificates issued after the Record Date will contain a legend incorporating the Rights Agreement by reference. DISTRIBUTION DATE; ISSUANCE OF RIGHTS CERTIFICATES The Rights will separate from the Common Stock and become exercisable and a Distribution Date will occur ("DISTRIBUTION DATE") upon the earlier of ten days after (i) public announcement that a person or group of affiliated or associated persons has acquired beneficial ownership of 15% or more of the outstanding shares of Common Stock (an "ACQUIRING PERSON") or such earlier date as a majority of the Directors shall become aware of the existence of an Acquiring Person ("STOCK ACQUISITION DATE"); or (ii) the commencement of a tender or exchange offer by any person or group, if upon consummation thereof, such person or group of affiliated or associated persons would be the beneficial owner of 15% or more of the shares of Common Stock then outstanding. As soon as practicable after the Distribution Date, Rights certificates will be mailed to holders of record of the Common Stock as of the close of business on the Distribution Date and, thereafter, the separate Rights certificates alone will represent the Rights. EXERCISE OF THE RIGHTS RIGHTS INITIALLY NOT EXERCISABLE. Prior to the Distribution Date, the Rights are not exercisable. EXERCISE OF THE RIGHTS TO PURCHASE PREFERRED STOCK OF THE COMPANY. At any time after the Distribution Date but prior to the earlier of the expiration or redemption of the Rights, each Right may be exercised at the stated purchase of $75.00 (subject to adjustment, the "EXERCISE PRICE") for one one-thousandth of a share of the Preferred Stock, provided, however, that upon the occurrence of any of the events described below the Rights may no longer be exercised for the Preferred Stock and may only be exercised for certain other securities described below. EXERCISE OF THE RIGHTS TO PURCHASE COMMON STOCK OF THE COMPANY. In the event that at any time following the Rights Dividend Declaration Date, a person, alone or with affiliates, becomes the beneficial owner of 15% or more of the then outstanding shares of the Company's Common Stock (except pursuant to an offer for all outstanding shares of Common Stock which is determined by both (i) the Board of Directors acting by Special Vote, and (ii) a majority of the Directors who are not associated with an Acquiring Person ("CONTINUING DIRECTORS") and who are also not employees of the Company, to be fair to and otherwise in the best interests of the Company and its stockholders (a "PERMITTED OFFER"), then each holder of a Right will thereafter have the right to exercise the Right for Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the Exercise Price of the Right. If the Company does not have sufficient Common Shares available for all Rights to be exercised, the Company may substitute for all or any portion of the Common Stock that would be issuable upon exercise of the Rights, cash, assets, or other securities having the same aggregate value as such Common Stock. The Rights are exercisable as described in this paragraph only after the Company's right of redemption (as described below) has expired. Notwithstanding any of the foregoing, following the occurrence of the event set forth in this paragraph (a "SECTION 11(a)(ii) EVENT"), all Rights that are, or under certain circumstances specified in the Rights Agreement were, beneficially owned by an Acquiring Person will be null and void. A "SPECIAL VOTE" of the Board of Directors is approval by both a majority of the Continuing Directors and a majority of the entire Board, including the Continuing Directors. 19 EXERCISE OF THE RIGHTS TO PURCHASE COMMON STOCK OF AN ACQUIRING COMPANY. In the event that, at any time following the Stock Acquisition Date, (i) the Company is merged or consolidated with another company in a business combination transaction in which the Company is not the surviving corporation or in which the Company is the surviving corporation and all or part of the Common Stock of the Company is exchanged for stock of any other person, cash or any other property (other than a merger which follows an offer described in the preceding paragraph), or (ii) more than 50% of the assets or earning power of the Company and its subsidiaries (taken as a whole) is sold or transferred, then each holder of a Right (except Rights which previously have been voided as set forth above) shall thereafter have the right to exercise the Right for common stock of the acquiring company having a value equal to two times the Exercise Price of the Right. (An event described in this paragraph is a "SECTION 13 EVENT.") ADJUSTMENT OF NUMBER OF RIGHTS, PURCHASE PRICE AND NUMBER OF UNITS OF PREFERRED STOCK. The Exercise Price payable and/or the number of shares of Preferred Stock or other securities or property issuable upon exercise of the Rights are subject to proportionate adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of the Preferred Stock, (ii) in the event holders of the Preferred Stock are granted certain rights or warrants to subscribe for Preferred Stock or convertible securities at less than the current market price of the Preferred Stock, or (iii) upon the distribution to holders of the Preferred Stock of evidences of indebtedness or assets (excluding regular quarterly cash dividends) or of subscription rights or warrants (other than those referred to above). If at any time after the Rights Dividend Declaration Date and prior to the Distribution Date the Company declares a stock dividend on, subdivides or combines the outstanding shares of Common Stock, the number of Rights associated with each share of Common Stock shall be proportionately adjusted. FRACTIONAL RIGHTS AND FRACTIONAL SHARES The Company is generally not required to issue fractional Rights, fractions of shares of Preferred Stock (other than fractions which are integral multiples of one one-thousandth share), or fractions of shares of Common Stock and, in lieu thereof, an adjustment in cash will be made on the market price of the Rights, Preferred Stock, or Common Stock, respectively. REDEMPTION OF THE RIGHTS In general, the Company may redeem all (but not less than all) of the Rights at a price of $0.01 per Right (subject to adjustment to reflect stock splits, stock dividends, or similar transactions), at any time until the earlier of the tenth day following the Stock Acquisition Date or March 21, 2006 (provided that any redemption after any person becomes an Acquiring Person may be effected only by the Board of Directors acting by Special Vote). This redemption period may be extended by the Board of Directors by amending the Rights Agreement as described below prior to the time when the Rights become nonredeemable. The redemption price may be paid in cash, shares of Common Stock, or any other consideration the Board of Directors deems appropriate. Immediately upon the action of the Board of Directors ordering redemption of the Rights, the Rights will terminate and the only right of the holders of Rights will be to receive the $0.01 redemption price. EXCHANGE OF THE RIGHTS At any time after a Section 11(a)(ii) Event or a Section 13 Event and before any person or group acquires 50% or more of the outstanding Common Stock, the Board of Directors of the Company, acting by Special Vote, may cause the Company to exchange some or all of the outstanding and exercisable Rights for Common Stock at a one-to-one exchange ratio (appropriately adjusted to reflect stock splits, dividends or similar transactions). Rights may not be exercised after the Board orders their exchange. If there is not sufficient authorized unissued Common Stock to fund an exchange, the Board, acting by Special Vote, may fund the exchange through other consideration, including issuance of debt and/or equity. In addition, at any time before any person or group becomes an Acquiring Person, the Board, acting by Special Vote, may exchange some or all of the Rights for rights of substantially equivalent value. AMENDMENTS Other than those provisions relating to the redemption price or the final expiration date of the Rights, any of the provisions of the Rights Agreement may be supplemented or amended by the Board of Directors of the Company prior to the Distribution Date, without approval of the Rights holders, whether or not a supplement or amendment is adverse to the Rights holders. After the Distribution Date, any provisions of the Rights Agreement (other than those provisions relating to the redemption price or the final expiration date of the Rights) may be amended by the Board of Directors acting by Special Vote in order to (i) cure any ambiguous, defective or inconsistent provision, (ii) shorten or lengthen any time period hereunder, or (iii) otherwise change a provision which the Board of Directors acting by Special Vote 20 may deem necessary or desirable and which does not materially and adversely affect the interests of holders of Rights (other than any Acquiring Person); provided, the Rights Agreement may not be amended to (A) make the Rights again redeemable after the Rights have ceased to be redeemable, or (B) change any other time period unless such change is for the purpose of protecting, enhancing or clarifying the rights of, and/or the benefits to the holders of the Rights (other than any Acquiring Person). EXPIRATION The Rights will expire upon the earliest to occur of the close of business on March 21, 2006, the exchange or redemption of the Rights by the Company, or the consummation of a Permitted Offer transaction followed by a merger or consolidation of the Company with another company in which all stockholders of the Company receive the same consideration and terms as in the Permitted Offer. NO STOCKHOLDER RIGHTS PRIOR TO EXERCISE Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. TERMS OF THE PREFERRED STOCK The Company has initially reserved 30,000 shares of Preferred Stock for issuance upon exercise of the Rights, such number to be subject to adjustment from time to time in accordance with the Rights Agreement. The Preferred Stock will be nonredeemable. The dividend, liquidation and voting rights, and the rights upon consolidation or merger of the Preferred Stock are designed so that the value of the one one-thousandth interest in a share of Preferred Stock purchasable with each Right will approximate the value of one share of Common Stock. Each whole share of Preferred Stock will be entitled to receive a quarterly preferential dividend of 1,000 times the dividend declared on the Common Stock. In the event of liquidation, the holders of the Preferred Stock will be entitled to receive a preferential liquidation payment of $1,000 per share plus the amount of accrued unpaid dividends thereon, the holders of the Common Stock will then be entitled to receive a liquidation payment equal to $1.00 per share (subject to proportionate adjustment to reflect stock splits, dividends or combinations), and the holders of the Preferred Stock and Common Stock will then share ratably in all assets remaining available for distribution to stockholders. Each share of Preferred Stock will have 1,000 votes (subject to proportionate adjustment to reflect stock splits, dividends and combinations), and will generally vote together with the Common Stock. Finally, in the event of any merger, consolidation or other transaction in which shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or other property, each share of Preferred Stock will be entitled to receive 1,000 times the amount received per share of Common Stock (subject to proportionate adjustment to reflect stock splits, dividends and combinations). ANTI-TAKEOVER EFFECTS The Rights are designed to protect and maximize the value of stockholders' interests in the Company in the event of an unsolicited attempt to take control of the Company in a manner or on terms not approved by the Board of Directors. Attempts to take control of a company frequently include coercive tactics to deprive the Board of Directors and stockholders of any real opportunity to determine the destiny of the Company. The Rights have been declared by the Board in order to deter such tactics, including a gradual accumulation in the open market of a 15% or greater position, followed by a merger or a partial, or two-tier tender offer that does not treat all stockholders equally. These tactics can unfairly pressure stockholders, squeeze them out of their investment without giving them any real choice, and deprive them of the full value of their shares. The Rights are not intended to prevent a takeover of the Company and will not do so. The rights may be redeemed by the Company as described above, and accordingly, the Rights should not interfere with any merger or business combination approved by the Board of Directors. Issuance of the Rights does not weaken the Company or interfere with its business plans. The issuance of the Rights themselves has no dilutive effect, will not affect reported earnings per share, should not be taxable to the Company or to its stockholders, and will not change the way in which the Company's shares are presently traded. The Company's Board of Directors believes that the Rights represent a sound and reasonable means of addressing the complex issues of corporate policy created by the current takeover environment. 21 However, the Rights may have the effect of rendering more difficult or discouraging an acquisition of the Company deemed undesirable by the Board of Directors. The Rights may cause substantial dilution to a person or group that attempts to acquire the Company on terms or in a manner not approved by the Company's Board of Directors, except pursuant to an offer conditioned upon the negation, purchase or redemption of the Rights. ITEM 6. SELECTED FINANCIAL DATA The financial data included in the table for the five years ended December 31, 1995 have been derived from financial statements audited by the Company's independent accountants, Deloitte & Touche LLP. This data should be read in conjunction with such financial statements and notes thereto. SELECTED OPERATING, STATISTICAL AND BALANCE SHEET DATA
Year Ended December 31 1995 1994 1993 1992 1991 - ----------------------------------------------------------------------------- OPERATING DATA (IN $000'S EXCEPT INCOME PER SHARE): Health care revenues $81,577 $70,503 $62,776 $60,642 $60,837 ------- ------- ------- ------- ------- Expenses: Health care services 65,578 56,631 45,556 44,717 45,653 Selling, general and administrative 13,451 12,778 11,692 10,308 11,378 ------- ------- ------- ------- ------- Total expenses 79,029 69,409 57,248 55,025 57,031 ------- ------- ------- ------- ------- Operating income 2,548 1,094 5,528 5,617 3,806 Other income, net 1,286 1,023 690 811 480 ------- ------- ------- ------- ------- Income before income taxes 3,834 2,117 6,218 6,428 4,286 Income taxes 1,446 825 2,256 2,507 1,672 Net Income $ 2,388 $ 1,292 $ 3,962 $ 3,921 $ 2,614 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Income per share Primary $ .52 $ .27 $ .83 $ .83 $ .58 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Fully Diluted $ .51 $ .27 $ .83 $ .83 $ .56 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Weighted average shares outstanding (000's) Primary 4,623 4,852 4,793 4,711 4,499 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Fully Diluted 4,725 4,852 4,793 4,711 4,656 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- STATISTICAL DATA: Membership (000's) 761 721 664 648 665 Clients 2,661 2,086 1,665 1,250 1,068 Employees 558 432 387 333 324 Dental offices 3,291 2,902 2,532 2,274 2,133 PPO dental offices 9,706 5,765 - - - Guards dental offices 33 30 29 23 22 BALANCE SHEET DATA (IN $000'S): Cash and short-term investments $14,746 $ 8,661 $17,869 $14,771 $13,030 Current assets 20,578 12,378 20,903 17,456 15,653 Current liabilities 5,941 3,043 2,107 1,362 3,784 Long-term debt - - - - - Stockholder's equity 31,929 27,469 27,224 22,763 18,097 Total assets 38,343 30,792 29,917 24,808 22,729
22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1995 1994 1993 Versus Versus Versus Results of operations (000's omitted) 1994 1993 1992 - ------------------------------------------------------------------------------ Health care revenues $11,074 $ 7,727 $ 2,134 Percentage change 15.7% 12.3% 3.5% - ------------------------------------------------------------------------------ Membership enrollment 40 57 16 Percentage change 5.5% 8.6% 2.5% - ------------------------------------------------------------------------------ Health care expenses $ 8,947 $ 11,075 $ 839 Percentage change 15.8% 24.3% 1.9% Percent of revenues 80.4% 80.3% 72.6% - ------------------------------------------------------------------------------ Selling, general and administrative expenses $ 673 $ 1,086 $ 1,384 Percentage change 5.3% 9.3% 13.4% Percent of revenues 16.5% 18.1% 18.6% - ------------------------------------------------------------------------------ Other income, net $ 263 $ 333 $ (121) Percentage change 25.7% 48.3% (14.9%) Percent of revenues 1.6% 1.5% 1.1% - ------------------------------------------------------------------------------ Net Income $ 1,096 $ (2,670) $ 41 Percentage change 84.8% (67.4%) 1.0% - ------------------------------------------------------------------------------
1995 VERSUS 1994 Health care revenues increased as a result of sales to new small and mid-size clients, increased revenue from the Company's dental office subsidiary and increased revenue from the Company's indemnity insurance subsidiary. Membership enrollment increased to 761,000 primarily from sales to new small and mid-size group clients and an increase in the number of persons covered under various dental indemnity insurance products offered by the Company's insurance subsidiary. Health care expense increased primarily due to increased expenses within the Company's dental office subsidiary, increased capitation, and increased indemnity benefits paid to insureds directly related to increased premium revenue. Health care expense also increased due to increased claims and claims reserve costs associated with the implementation of a number of new indemnity benefit programs offered by the Company's indemnity insurance subsidiary, geographic expansion, and to a lesser extent, the expansion of the Company's Preferred Provider Organization operations. General and administrative expenses increased at a lower rate due to increased operating efficiencies. Selling expenses increased primarily due to higher costs in the distribution of the Company's products through insurance related sources. Other income increased due to the favorable disposition by the Company of certain equity investments and dividend income. Net income increased due to the above factors. 1994 VERSUS 1993 Health care revenues increased as a result of sales to new small and mid-sized clients, the Company's indemnity insurance subsidiary, and a slowing of layoffs at the Company's major clients in the aerospace, defense and retailing industries. Membership enrollment increased primarily due to sales to new group indemnity clients and an increase in the number of persons covered under indemnity insurance products offered by the Company's indemnity insurance subsidiary. Enrollment increases as a result of sales to new groups offset entirely the continued workforce reduction in a number of the Company's major group clients. 23 Health care expenses increased primarily due to increased expenses associated with the opening of new Company-owned dental offices, and increases in capitation payments to participating providers in direct correlation with the increase in premium revenues. Health care expenses, as a percentage of revenues, increased primarily due to the increase costs associated with the expansion of the Company's dental office subsidiary and the increase in payments made to providers of care under the Company's indemnity insurance program, along with an increase in the reserve established for incurred, but not reported claims. General and administrative expenses remain virtually the same notwithstanding an increase in revenue and the number of persons to whom benefits were provided. Selling expenses increased primarily due to an increase in sales and marketing activities, along with an increase in the number of persons employed by the Company in sales and marketing positions. Selling, general and administrative expenses declined as a percentage of revenue due to increase efficiencies within the Company's administrative operations. Other income increased as a result of an increase in the Company's investment portfolio which was realized in 1994. Net income declined as a result of the above factors. 1993 VERSUS 1992 Health care revenues increased as a result of sales to new small and mid-sized clients, increased revenue from the Company's dental office subsidiary, increased revenue from the Company's indemnity insurance subsidiary, and a slowing of layoffs at the Company's major clients in the aerospace, defense and retailing industries. Membership enrollment increased primarily due to sales to new group indemnity clients and an increase in the number of persons covered under indemnity insurance products offered by the Company's indemnity insurance subsidiary. Enrollment increases as a result of sales to new groups offset entirely the continued workforce reduction in a number of the Company's major group clients. Health care expense increased primarily due to increased expenses associated with the opening of new Company-owned dental offices and increases in capitation payments to participating providers in direct correlation with the increase in premium revenues. Health care expenses, as a percentage of revenue, continued to decline as a result of increased utilization for primary and specialty care services by plan membership of Company-owned dental offices. General and administrative expenses remained virtually the same, despite an increase in revenue and the number of persons covered by the Company's benefit programs. Selling expense increased primarily due to an increase in the number of persons directly employed by the Company in sales and marketing positions. It is anticipated that the Company will continue to add additional sales staff during 1994. Other income declined due to a one time gain in the third quarter of 1992 from a litigation settlement. The Company's effective tax rate for 1993 declined slightly primarily due to the favorable tax treatment obtained as a result of the acquisition of the Company's indemnity insurance subsidiary. Net income increased slightly due to the above factors. GENERAL The Company's California dental plan contributes substantially all of the Company's operating earnings. Additionally, in 1995, Colorado, Illinois, Kansas, Missouri, Ohio, Oklahoma, Oregon, Texas, and Utah all contributed positively towards operating earnings. Management believes that each state plan is capable of being profitable once targeted enrollment levels are attained and stable provider panels are in place. The Company's dental office subsidiary was a profit contributor in 1995, despite incurring significant expenses, primarily due to the opening of new dental offices. The Company's indemnity insurance subsidiary contributed positively to net income in 1995. The Company's ability to attract clients is affected by the timing of labor- management contract negotiations, revisions in employee benefit programs, fluctuations in employment levels at major existing or prospective clients, increasing market competition and other factors. Guards' ability to bolster revenue from non-plan patients hinges upon continued quality care and Guards' ability to compete in an excess-capacity dental care environment. LIQUIDITY AND CAPITAL RESOURCES The Company's business has not been capital intensive. The Company's operational cash requirements have been met principally from operating cash flows and this is expected to continue. 24 At December 31, 1995 and December 31, 1994, the current ratio was 3.5 to 1.0 and 4.1 to 1.0, respectively. The Company's net worth was $32.0 million compared to $27.5 million the previous year. The Company had $14.7 million and $8.6 million of cash and short-term investments as of December 31, 1995 and December 31, 1994, respectively. As a result of its regulated nature, the Company is required to maintain various regulatory bank accounts in an aggregate amount of approximately $6.5 million to satisfy certain capital and surplus requirements imposed by various regulatory agencies. Due to the significant cash position maintained by the Company, these requirements do not pose a significant financial liquidity burden on the Company. The Company believes that income from operations, together with the existing cash on hand, and other available sources of financing, should be adequate to meet operating capital and regulatory needs for the foreseeable future. IMPACT OF INFLATION Management believes that the Company's operations are not materially affected by inflation. The Company believes that a majority of its costs are capitated or fixed in nature and are directly related to membership levels, and therefore related to premium levels. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and the related Notes and Schedules thereto filed as part of this 1995 Annual Report on Form 10-K are listed on the accompanying Index to Financial Statements on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in the Company's independent auditors or disagreements with such auditors on accounting principles or practices or financial statement disclosures. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by Item 10 set forth in the table, the notes thereto and the paragraphs thereunder, under the caption "ELECTION OF DIRECTORS" in the Company's Proxy Statement for its Annual Meeting of Stockholders, set for May 22, 1996, is incorporated herein by reference. Additional information related to Item 10 appears in Part I (c) of this 1995 Annual Report on Form 10-K under the caption "DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT," which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated by reference from the section "EXECUTIVE COMPENSATION" in the Company's Proxy Statement for its Annual Meeting of Stockholders, set for May 22, 1996. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated by reference from the section "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the Company's Proxy Statement for its Annual Meeting of Stockholders, set for May 22, 1996 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated by reference from "CERTAIN TRANSACTIONS" in the Company's Proxy Statement for its Annual Meeting of Stockholders, set for May 22, 1996. 25 PART IV EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ITEM 14(a) (1) - (2) AND (d). FINANCIAL STATEMENTS The consolidated financial statements and financial statement schedules of Safeguard Health Enterprises, Inc. filed as part of this 1995 Annual Report on Form 10-K are listed in the accompanying Index to Financial Statements on Page F-1. ITEM 14(a) (3) AND (c). EXHIBITS An "Exhibit Index" has been filed as part of this 1995 Annual Report on Form 10- K beginning on Page E-1. All Exhibits, except for Exhibit 24.1, are on file with the Securities and Exchange Commission. ITEM 14(b). REPORTS ON FORM 8-K There were no reports on Form 8-K filed by the Company during the year ended December 31, 1995. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Anaheim, State of California, on the 27th day of March, 1996. SAFEGUARD HEALTH ENTERPRISES, INC. STEVEN J. BAILEYS, D.D.S. ------------------------- STEVEN J. BAILEYS, D.D.S., Chairman of the Board, President and Chief Executive Officer RONALD I. BRENDZEL ------------------ RONALD I. BRENDZEL, Senior Vice President, Chief Financial Officer and Secretary 26 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. POWER OF ATTORNEY We, the undersigned directors and officers of Safeguard Health Enterprises, Inc., and each of us, do hereby constitute and appoint Steven J. Baileys, D.D.S. and/or Ronald I. Brendzel, as our true and lawful attorneys and agents, each with power of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated above, which said attorneys and agents, or any one of them, may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission, in connection with this 1995 Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments hereto; and we do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or any one of them, shall do or cause to be done by virtue hereof.
Signature Title Date STEVEN J. BAILEYS,D.D.S. Chairman of the Board, President and March 27, 1996 - ------------------------ Chief Executive Officer STEVEN J. BAILEYS,D.D.S. (Principal Executive Officer) RONALD I. BRENDZEL Senior Vice President, Chief Financial March 27, 1996 - ------------------ Officer, Secretary and Director RONALD I. BRENDZEL (Principal Financial and Accounting Officer) MICHAEL M. MANN Director March 27, 1996 - --------------- MICHAEL M. MANN WILLIAM E. MCKENNA Director March 27, 1996 - ------------------ WILLIAM E. MCKENNA GEORGE H. STEVENS Director March 27, 1996 - ----------------- GEORGE H. STEVENS BRADFORD M. BOYD, D.D.S Director March 27, 1996 - ----------------------- BRADFORD M. BOYD, D.D.S.
27 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION 3.1 Articles of Incorporation**** 3.2 Bylaws**** 10.2 1984 Stock Option Plan*** 10.3 Stock Option Plan Amendment* 10.3.1 Stock Option Plan Amendment+ 10.3.2 Stock Option Plan Amendment++ 10.41 Corporation Grant Deed, dated December 21, 1984, relating to a property located at 505 North Euclid Avenue, Anaheim, California** 10.60 Employment Agreement, as Amended, dated May 25, 1995, between Steven J. Baileys, D.D.S. and the Company. 10.61 Employment Agreement, as Amended, dated May 25, 1995, between Ronald I. Brendzel and the Company. 10.62 Employment Agreement dated May 25, 1995, between John E. Cox and the Company. 10.63 Employment Agreement dated May 25, 1995, between Wayne K. Butts and the Company. 10.64 Form of Rights Agreement, dated as of March 22, 1996, between the Company and American Stock Transfer and Trust Company, as Rights Agent. 21.1 Subsidiaries of the Company 24.1 Independent Auditors' Consent 25.1 Power of Attorney (Reference is made to Page 27 of the Report) * Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Registration Statement on Form S-1 filed on September 12, 1983 (File No. 2-86472). ** Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Registration Statement on Form S-1 filed on August 22, 1985 (File No. 2-99663). *** Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Registration Statement on Form S-1 filed on July 3, 1984 (File No. 2-92013). **** Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Annual Report of Form 10-K for the period ended December 31, 1987. + Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Annual Report of Form 10-K for the period ended December 31, 1989. ++ Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Annual Report of Form 10-K for the period ended December 31, 1992. E-1 28 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS PAGE ---- Independent Auditors' Report.............................. F-2 Financial Statements Consolidated Statements of Financial Position...... F-3 Consolidated Statements of Income.................. F-4 Consolidated Statements of Cash Flows.............. F-5 Consolidated Statements of Stockholders' Equity.... F-6 Notes to Consolidated Financial Stateme............ F-7 to F-15 Financial Statement Schedule Schedule I - Valuation and Qualifying Accounts..... F-16 All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Safeguard Health Enterprises, Inc.: We have audited the accompanying consolidated statements of financial position of Safeguard Health Enterprises, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1995. Our audits also included the financial statement schedule for the years ended December 31, 1995, 1994 and 1993 listed in the Index at item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Safeguard Health Enterprises, Inc., and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. DELOITTE & TOUCHE LLP Costa Mesa, California March 22, 1996 F-2 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ($000'S OMITTED, EXCEPT FOR SHARE DATA)
December 31, 1995 1994 - ----------------------------------------------------------------------------------- ASSETS Current assets: Cash $ 506 $ 503 Investments available for sale,at estimated fair value 14,038 4,898 Investments held to maturity, at cost 202 3,260 Accounts and notes receivable, net of allowances of $260 in 1995 and $206 in 1994 4,344 2,183 Income taxes receivable 45 255 Prepaid expenses and other current assets 1,181 1,032 Deferred income taxes 262 247 ------- ------- Total current assets 20,578 12,378 ------- ------- Property and equipment, net 13,055 11,256 Investments held to maturity, at cost 4,073 6,509 Other assets 226 229 Intangibles, net of accumulated amortization of $1,384 in 1995 and $1,293 in 1994 411 420 ------- ------- $38,343 $30,792 ------- ------- ------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 3,683 $ 1,966 Reserves for incurred but not reported claims 2,063 849 Deferred revenue 195 228 ------- ------- Total current liabilities 5,941 3,043 ------- ------- Deferred income taxes 473 280 Commitments and contingencies (Notes 3 and 8) Stockholders' equity: Common stock - $.01 par value; 30,000,000 shares authorized; 4,695,000 and 4,541,000 shares outstanding, stated at 21,092 19,212 Preferred stock - $.01 par value; 1,000,000 shares authorized; 0 shares outstanding - - Retained earnings 29,113 26,725 Net unrealized loss on investments available for sale (153) (345) Treasury stock, at cost (18,123) (18,123) ------- ------- Total stockholders' equity 31,929 27,469 ------- ------- $38,343 $30,792 ------- ------- ------- -------
See accompanying Notes to Consolidated Financial Statements. F-3 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME ($000'S OMITTED, EXCEPT PER SHARE DATA)
Year ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------- Health care revenues $81,577 $70,503 $62,776 Expenses: Health care services 65,578 56,631 45,556 Selling, general and administrative 13,451 12,778 11,692 ------- ------- ------- Total expenses 79,029 69,409 57,248 ------- ------- ------- Operating income 2,548 1,094 5,528 Other income, net 1,286 1,023 690 ------- ------- ------- Income before provision for income taxes 3,834 2,117 6,218 Provision for income taxes 1,446 825 2,256 ------- ------- ------- Net income $ 2,388 $ 1,292 $ 3,962 ======= ======= ======= Net income per common share and common share equivalent: Primary $ .52 $ .27 $ .83 ------- ------- ------- ------- ------- ------- Fully Diluted $ .51 $ .27 $ .83 ------- ------- ------- ------- ------- -------
See accompanying Notes to Consolidated Financial Statements. F-4 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ($000'S OMITTED)
Year ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 2,388 $ 1,292 $ 3,962 ------- ------- ------- Adjustments to reconcile net income to net cash provided by operating activities: (Gain) loss on sale of property and equipment (23) - 18 Depreciation and amortization 1,602 1,440 1,007 Deferred income taxes 178 (116) 162 Changes in assets and liabilities: Accounts and notes receivable, net (2,161) (379) (436) Income taxes receivable 805 167 348 Prepaid expenses and other current assets (149) (170) (248) Accounts payable and accrued expenses 2,931 1,039 558 Deferred revenue (33) (103) 187 ------- ------- ------- Net cash provided by operating activities 5,538 3,170 5,558 ------- ------- ------- Cash flows from investing activities: Purchase of investments - - (54,014) Proceeds from sale/maturity of investments - - 51,269 Purchase of investments available for sale (11,913) (20,070) - Proceeds from sales/maturity of investments available for sale 2,965 25,855 - Purchase of investments held to maturity (2,680) (4,532) - Proceeds from maturity of investments held to maturity 8,174 510 - Additions to property and equipment (3,320) (4,233) (2,469) Proceeds from sale of property and equipment 33 - - Payments received on notes receivable from sale of dental offices - - 13 Additions to intangibles (82) (51) (178) Other assets 3 (47) (40) ------- ------- ------- Net cash used in investing activities (6,820) (2,568) (5,419) ------- ------- ------- Cash flows from financing activities: Stock repurchases - (1,378) - Proceeds from exercise of stock options 1,285 406 214 ------- ------- ------- Net cash provided by (used in) financing activities 1,285 (972) 214 ------- ------- ------- Net (decrease) increase in cash 3 (370) 353 Cash at beginning of year 503 873 520 ------- ------- ------- Cash at end of year $ 506 $ 503 $ 873 ------- ------- ------- ------- ------- ------- Supplemental disclosure of non cash activities: Tax benefit from exercise of stock options $ 595 $ 270 285 Conversion of debt securities to equity securities $ 348 $ - $ - Supplementary information: Cash paid during the year for: Interest $ - $ 3 $ 2 Income taxes $ 586 $ 821 $ 1,823
See accompanying Notes to Consolidated Financial Statements. F-5 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (000'S OMITTED)
NET UNREALIZED LOSS ON INVESTMENT NUMBER OF SHARES SECURITIES ---------------- COMMON RETAINED TREASURY AVAILABLE COMMON TREASURY STOCK EARNINGS STOCK FOR SALE TOTAL - ------------------------------------------------------------------------------------------------------------------------ January 1, 1993 7,623 (3,128) $18,037 $21,471 $(16,745) $ - $22,763 Net income 3,962 3,962 Exercise of stock options (including tax benefits of $285) 46 499 499 ----- ------ ------ ------- -------- ------- ------- December 31, 1993 7,669 (3,128) 18,536 25,433 (16,745) 27,224 Net income 1,292 1,292 Stock repurchases for treasury (146) (1,378) (1,378) Exercise of stock options (including tax benefits of $270) 70 676 676 Net unrealized loss on investment securities available for sale (345) (345) ----- ------ ------- ------- -------- ------- ------- December 31, 1994 7,739 (3,274) 19,212 26,725 (18,123) (345) 27,469 Net income 2,388 2,388 Exercise of stock options (including tax benefits of $595) 230 1,880 1,880 Net unrealized gain on investment securities available for sale 192 192 ----- ------ ------- ------- -------- ------- ------- December 31, 1995 7,969 (3,274) $21,092 $29,113 $(18,123) $(153) $31,929 ----- ------ ------- ------- -------- ------- ------- ----- ------ ------- ------- -------- ------- -------
See accompanying Notes to Consolidated Financial Statements. F-6 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Safeguard Health Enterprises, Inc., a Delaware corporation (the "Company"), is a holding company which manages what is, collectively, one of the largest publicly traded managed care dental plans in the United States. Operations are conducted through wholly-owned subsidiaries in thirteen states. The Company was founded as a nonprofit entity in California in 1974 and converted to a for-profit entity at the end of 1982. Since then, the Company has expanded its operations into Arizona, Colorado, Illinois, Kansas, Missouri, Nevada, Ohio, Oklahoma, Oregon, Texas and Utah. The Company is also authorized to operate in Kentucky. In 1992, the Company acquired a California based indemnity insurance company licensed to transact insurance business in the states of Arizona, California, Colorado, Missouri, Oregon and Texas. Since then, the Company expanded its operations by qualifying its indemnity insurance company to transact the business of insurance in the states of Illinois, Kansas, Nevada, Ohio and Wisconsin. The Company provides managed care and indemnity dental benefits for approximately 761,000 members, through a panel of primary care dental offices and specialists, and a Preferred Provider Organization panel. At December 31, 1995, the Company also operates 33 dental offices in California under the name Guards Dental, Inc. ("Guards"). Guards offices are part of the Company's panel of dental providers and offer dental services to plan members and non-plan patients. BASIS OF CONSOLIDATION The consolidated financial statements include all the accounts of the Company and its subsidiaries, presented on a consolidated basis. Significant intercompany accounts and transactions have been eliminated in consolidation. REVENUE AND COST RECOGNITION Premiums collected for health care revenues are recognized in the period for which the member was entitled to service. Related costs for health care services are expensed in the period the Company provides such service. MAJOR CUSTOMERS In 1995, 1994, and 1993, one customer accounted for approximately 3.6%, 4.1% and 6.1% of revenues, respectively. INVESTMENTS On January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 ("FAS 115"), ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. The Company has classified its investment portfolio into "available-for-sale" and "held-to-maturity" categories. In accordance with FAS 115, investments classified as available-for-sale are carried at fair value, and unrealized gains or losses, net of applicable income taxes, are reported in a separate caption of stockholders' equity. Investments classified as held-to- maturity are carried at amortized cost. In 1995, the Company recorded net unrealized gains of $315,000 and increased stockholders' equity by $192,000 (net unrealized gains less deferred income taxes of $123,000) at December 31, 1995. In accordance with FAS 115, prior period financial statements have not been restated. Prior to the adoption of FAS 115, investments were stated at the lower of cost or market value. Investments consist principally of variable rate interest- bearing tax-exempt investments, taxable bonds, equity securities, treasury bills and notes, and certificates of deposit with maturities greater than three months. Investments are not considered cash equivalents for the consolidated statements of cash flows. The adjusted cost of specific securities sold is used to compute the gain or loss on sale of investments. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the respective property and equipment as follows: buildings - 30 years; leasehold and building improvements - 5 to 25 years; furniture, fixtures, dental equipment and other equipment - 3 to 10 years. F-7 Expenditures for maintenance and repairs are expensed as incurred, while major improvements which extend the estimated useful life of an asset are capitalized. Upon the sale or other retirement of assets, the accounts are relieved of the cost and related accumulated depreciation and amortization, and any resultant gain or loss is recognized. INTANGIBLES License acquisition costs associated with the purchase of an indemnity insurance company in October 1992 are amortized over a twenty year period. The Company periodically evaluates whether events and circumstances have occurred which may affect the estimated useful lives or the recoverability of the remaining balance of its intangibles. At December 31, 1995, the Company's management believed that no material impairment of goodwill or other intangible assets existed. INCOME TAXES In February 1992, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 109, ("FAS 109") ACCOUNTING FOR INCOME TAXES. This Statement mandates the liability method of computing deferred income taxes. Effective January 1, 1993, the Company adopted this Statement as required. The effect of adoption did not have a significant effect on the Company's financial position or results of operations and therefore has been included in the provision for income taxes in 1993. This Statement requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company's financial statements or tax returns. The measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and the tax bases of the Company's assets and liabilities result in a deferred tax asset, FAS 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized. As permitted under the new Statement, financial statements of prior years have not been restated. 401(K) PLAN The Company maintains a 401(k) plan which allows for a pre-tax contribution from an employee's earnings. Employees are eligible to participate in the 401(k) plan upon completion of six months of service with the Company. Under the 401(k) plan, an employee may defer up to 15% of his or her gross compensation each pay period and the Company may, at its option, make an additional discretionary contribution to be allocated among employees in the plan in proportion to the compensation deferred. Employees are 100% vested in their interest in the 401(k) plan at all times. The Company also maintains a pre-tax medical insurance option within the meaning of Paragraph 106 of Section 125 of the Internal Revenue Code for its employees insuring dependents. NET INCOME PER SHARE Primary earnings per share for the years ended December 31, 1995, 1994, and 1993 were computed by dividing net income by 4,623,000, 4,852,000 and 4,793,000 shares, respectively, which were the weighted average numbers of outstanding common shares and common share equivalents (stock options using the treasury stock method) during the respective periods. Fully diluted earnings per share in 1995 were computed using an additional 102,000 shares. RECLASSIFICATIONS Certain amounts have been reclassified in prior years to conform with the financial statement presentation for the year ended December 31, 1995. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-8 FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's balance sheet includes the following financial instruments: cash, trade accounts and notes receivable, and trade accounts payable. The Company considers the carrying amounts in the financial statements to approximate the fair value for these financial instruments because of the relatively short period of time between origination of the instruments and their expected realization. RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the FASB issued Statement of Financial Accounting Standards No. 121 ("FAS 121"), ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which becomes effective for fiscal years beginning after December 15, 1995. FAS 121 requires impairment losses to be recognized for long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows are not sufficient to recover the assets' carrying amount. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. The statement also requires that assets to be disposed of should be written down to fair value less selling costs. The Company will adopt this statement in fiscal year 1996 as required, and its adoption is not expected to have a significant effect on the Company's financial position or results of operations. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123 ("FAS 123"), ACCOUNTING FOR STOCK-BASED COMPENSATION, which becomes effective for fiscal years beginning after December 15, 1995. FAS 123 established new financial accounting and reporting standards for stock-based compensation plans. Entities will be allowed to measure compensation expense for stock-based compensation under FAS 123 or APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the accounting in APB Opinion No. 25 will be required to make pro forma disclosures of net income and earnings per share as if the provisions of FAS 123 had been applied. The Company is in the process of evaluating the Statement. The potential impact on the Company of adopting the new standard has not been quantified at this time. The Company must adopt FAS 123 no later than December 1, 1996. NOTE 2: COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS INVESTMENTS The following table summarizes the Company's investments as of December 31, 1995 (in $000's). The estimated fair value of investments is based on quoted market prices.
Cost/ Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value - ------------------------------------------------------------------------------------ Classified as Available for Sale: State obligations $ 840 $ 5 $ (9) $ 836 Corporate bonds 1,050 17 (153) 914 Equity securities 1,204 47 (158) 1,093 Funds and other short-term municipal obligations 11,195 - - 11,195 ------- ---- ----- ------- Total available for sale 14,289 69 (320) 14,038 ------- ---- ----- ------- Classified as Held to Maturity: U.S. Government and its agencies 3,127 25 (-) 3,152 State obligations 700 7 (6) 701 Municipal obligations 448 7 (1) 454 ------- ---- ----- ------- Total held to maturity 4,275 39 (7) 4,307 ------- ---- ----- ------- Total $18,564 $108 $(327) $18,345 ------- ---- ----- ------- ------- ---- ----- -------
F-9 The following table summarizes the Company's investments as of December 31, 1995 (in $000's). The estimated fair value of investments is based on quoted market prices.
Cost/ Amortized Estimated Cost Fair Value - --------------------------------------------------------------------------- Available for Sale: Due in one year or less $11,206 $11,206 Due after one year through five years 1,175 1,196 Due after five years through ten years 104 104 Due after ten years 600 439 ------- ------- 13,085 12,945 Equity securities 1,204 1,093 ------- ------- Total Available for Sale 14,289 14,038 ------- ------- Held to Maturity: Due in one year or less 202 205 Due after one year through five years 2,502 2,515 Due after five years through ten years 859 868 Due after ten years 712 719 ------- ------- Total Held to Maturity 4,275 4,307 ------- ------- Total $18,564 $18,345 ------- ------- ------- -------
The following table summarizes the Company's investment as of December 31, 1994 (in $000's). The estimated fair value of investments is based on quoted market prices.
Cost/ Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value - -------------------------------------------------------------------------------------- Classified as Available for Sale: State obligations $ 1,400 $ - $ - $ 1,400 Corporate bonds 1,325 3 (428) 900 Equity securities 1,016 - (141) 875 Funds and other short-term municipal obligations 1,723 - - 1,723 ------- --- ------ ------- Total available for sale 5,464 3 (569) 4,898 ------- --- ------ ------- Classified as Held to Maturity: U.S. Government and its agencies 4,750 - (307) 4,443 State obligations 3,227 - (62) 3,165 Municipal obligations 1,403 - (49) 1,354 Corporate bonds 389 - - 389 ------- --- ------ ------- Total held to maturity 9,769 - (418) 9,351 ------- --- ------ ------- Total $15,233 $ 3 $(987) $14,249 ------- --- ------ ------- ------- --- ------ -------
F-10 The contractual maturities of investments at December 31, 1994, are shown below (in $000's). Expected maturities may differ from contractual maturities:
Cost/ Amortized Estimated Cost Fair Value - ------------------------------------------------------------------------------ Available for Sale: Due in one year or less $ 3,123 $ 3,123 Due after one year through five years 449 279 Due after five years through ten years 141 144 Due after ten years 735 477 ------- ------- 4,448 4,023 Equity securities 1,016 875 ------- ------- Total Available for Sale 5,464 4,898 ------- ------- Held to Maturity: Due in one year or less 3,260 3,250 Due after one year through five years 2,492 2,464 Due after five years through ten years 2,173 1,990 Due after ten years 1,844 1,647 ------- ------- Total Held to Maturity 9,769 9,351 ------- ------- Total $15,233 $14,249 ------- ------- ------- -------
PROPERTY AND EQUIPMENT The Company's property and equipment consist of (in $000's):
December 31, 1995 1994 - ------------------------------------------------------------------------- Land $ 692 $ 692 Buildings and improvements 5,909 5,866 Leasehold improvements 6,232 4,814 Dental equipment 5,160 4,561 Furniture, fixtures and other equipment 7,140 5,620 Construction in progress 297 629 ------- ------- 25,430 22,182 Less - accumulated depreciation and amortization (12,375) (10,926) ------- ------- $ 13,055 $ 11,256 ------- ------- ------- -------
Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- Depreciation and amortization expense (in $000's) $1,511 $1,358 $989
ACCOUNTS PAYABLE AND ACCRUED EXPENSES The Company's accounts payable and accrued expenses consist of (in $000's):
December 31, 1995 1994 - ------------------------------------------------------- Accounts payable $2,862 $1,306 Accrued compensation 97 184 Other accrued expenses 724 476 ------ ------ $3,683 $1,966 ------ ------ ------ ------
F-11 NOTE 3: LEASE OBLIGATIONS The Company leases administrative and dental office space under various non-cancelable operating leases, including one lease with a related party. Rental expense (in $000's) was $1,609, $1,401 and $1,153 in 1995, 1994 and 1993, respectively. Future minimum rental payments required under operating leases that have initial or remaining lease terms in excess of one year as of December 31, 1995 are (in $000's): Year ending December 31: 1996 $1,561 1997 1,435 1998 1,414 1999 1,353 2000 1,364 Thereafter 4,448 The Company incurred rent expense (in $000's) to a related party of $12 in 1995, 1994 and 1993. NOTE 4: INCOME TAXES Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES ("FAS 109"), which requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been previously recognized in the Company's consolidated financial statements or tax returns. The measurement of the deferred items is based on enacted tax laws. The Company's provision for federal and state income taxes is (in $000's):
Year ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------- Provision for income taxes: Taxes currently payable: Federal $1,084 $ 688 $1,544 State 302 253 550 Tax effect of timing differences: Difference in depreciation methods 61 (80) (64) Difference in accounting method for revenue adjustments (23) (22) 61 Difference in accounting method for intangibles 2 (7) - Difference in accounting method for specialist costs 37 (103) 69 Difference in accounting method for prepaid expenses (6) (22) 37 Deferred State Taxes (32) 124 41 Other 21 (6) 18 ------ ----- ------ $1,446 $ 825 $2,256 ====== ===== ======
F-12 A reconciliation of the Federal income tax provision at the expected statutory rate compared to the actual income tax provision is as follows (in $000's):
Year ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------------- Expected $1,342 35.0% $ 741 35.0% $2,176 35.0% State taxes, net of federal effect 208 5.4 126 6.0 360 5.8 Tax-free income (159) (4.1) (111) (5.3) (95) (1.5) Other 55 1.4 69 3.3 (185) (3.0) ------ ----- ----- ---- ------- ---- $1,446 37.7% $ 825 39.0% $2,256 36.3% ====== ===== ===== ==== ======= ====
At December 31, 1995 and 1994, the Company's net tax deferred liability was $211,000 and $33,000, respectively. The major components of the Company's deferred taxes are as follows (in $000's):
December 31, 1995 1994 - ------------------------------------------------------------------------------- Current deferred tax assets (liabilities): Accrued specialist costs $ 157 $ 194 Reserve for revenue adjustments 112 89 Amortization of prepaid expenses (108) (116) State income taxes 90 55 Other 11 25 ------ ----- Net current deferred tax asset 262 247 ------ ----- Noncurrent deferred tax assets (liabilities): Book versus tax basis in property, including depreciation and amortization (605) (544) Unrealized loss on investments 98 221 Amortization of intangibles 34 43 ------ ----- Net noncurrent deferred tax liability (473) (280) ------ ----- Net deferred tax liability $(211) $ (33) ------ ----- ------ -----
The Company believes that the major components of its deferred tax asset will reverse in 1995. NOTE 5: OTHER INCOME, NET Other income, net, consists principally of interest income and dividends earned on investments, as follows (in $000's):
Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------ Interest income $ 796 $ 744 $584 Dividend income 233 - - Interest expense - (3) (2) Other 257 282 108 ------ ------ ---- $1,286 $1,023 $690 ------ ------ ---- ------ ------ ----
NOTE 6: CAPITAL STOCK STOCK INFORMATION Thirty million shares of Common Stock, $.01 par value, have been authorized since the Company's reincorporation in Delaware in August 1987. One million shares of Preferred Stock, $.01 par value, are authorized but no preferred stock has ever been issued. The Board of Directors may, without stockholder approval, establish rights, terms, preferences and privileges for these preferred shares. F-13 STOCK TRANSACTIONS Since October 1986, the Company has, at various times, announced plans to repurchase up to a total of 4,510,888 shares of its common stock through open market or private transactions. As of December 31, 1995, a total of 3,819,088 shares had been acquired. A total of 544,300 shares acquired prior to August 24, 1987 have been retired as required by California law. Shares acquired after the August 24, 1987 reincorporation in Delaware are being held as treasury stock, at an average cost of $5.54 per share. STOCK PLANS The Safeguard Health Enterprises, Inc. Stock Option Plan (the "Plan") authorizes both incentive and non-qualified stock options to be granted in an aggregate amount up to 1,200,000 shares of common stock. Options may be granted to executive officers or other key employees of the Company; non-employee directors of the Company are also eligible but only for nonqualified options. The option price must, at least, equal fair market value on the date the option is granted. The Plan is divided into a discretionary program for key employees and an automatic program for non-employee directors. The Plan is administered by the Compensation and Stock Option Committee of the Board of Directors. All stock options granted by the Company to employees through December 31, 1995 were incentive stock options. The following is a summary of stock option transactions:
Year ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------------------- Outstanding at beginning of year 538,000 623,669 485,667 Granted 285,000 6,000 185,000 Canceled (195,167) (21,668) (666) Exercised (230,333) (70,001) (46,332) ---------------- -------------- --------------- Outstanding at end of year 397,500 538,000 623,669 ---------------- -------------- --------------- ---------------- -------------- --------------- Exercisable at end of year 240,000 421,662 428,000 ---------------- -------------- --------------- ---------------- -------------- --------------- Price range of options outstanding $4.25 - $13.06 $4.25 - $13.06 $ 4.25 - $13.06 Price range of options exercised $4.625 - $11.875 $4.25 - $11.87 $ 4.25 - $ 8.75 Price range of options granted $9.00 - $11.50 $9.00 - $ 9.00 $10.25 - $13.06
NOTE 7: COMMITMENTS AND CONTINGENCIES The Company is a defendant in various litigations arising in the normal course of business. In the opinion of Management, the ultimate outcome of such litigation or any other contingencies would not have a material effect on the Company's consolidated financial position or results of operations. The Company has employment agreements with various executive officers requiring an annual payment of (in $000's): Year ending December 31, 1996 $910 1997 910 1998 910 1999 910 2000 379 F-14 NOTE 8: RESERVES FOR INCURRED BUT NOT REPORTED CLAIMS Activity in the liability for dental indemnity insurance claims, specialists claims, and claim adjustment expenses is summarized as follows (in $000's):
Policy Reserves Specialist Total - ------------------------------------------------------------------------ Balance at January 1, 1994 $ 164 $ 209 $ 373 Incurred related to: Current year - 1994 2,006 2,813 4,819 Prior years - 126 126 ------ ------ ----- Total incurred 2,006 2,939 4,945 Paid related to: Current year - 1994 1,633 2,364 3,997 Prior years 137 335 472 ------ ------ ----- Total paid 1,770 2,699 4,469 Balance at December 31, 1994 $ 400 $ 449 $ 849 ------ ------ ------ ------ ------ ------ Incurred related to: Current year - 1995 6,015 3,464 9,479 Prior years - 55 55 ------ ------ ------ Total incurred 6,015 3,519 9,534 Paid related to: Current year - 1995 4,353 3,101 7,454 Prior years 362 504 866 ------ ------ ------ Total paid 4,715 3,605 8,320 Balance at December 31, 1995 $1,700 $ 363 $2,063 ------ ------ ------ ------ ------ ------
NOTE 9: UNAUDITED SELECTED QUARTERLY INFORMATION Unaudited quarterly results of operations for the years ended December 31, 1995 and 1994 are set forth in the table below (000's omitted, except per share data).
Operating Net Weighted Net Income Income Income Average (Loss) Quarter Revenues (Loss) (Loss) Shares Per Share - ------------------------------------------------------------------------------ 1993 First $15,386 $1,365 $ 933 4,721 $.20 Second 15,478 1,384 973 4,724 .21 Third 15,887 1,365 1,031 4,773 .22 Fourth 16,025 1,414 1,025 4,807 .21 1994 First $16,933 $1,515 $1,057 4,911 $.22 Second 17,412 632 493 4,890 .10 Third 18,060 (980) (475) 4,844 (.10) Fourth 18,098 (73) 217 4,719 .05 1995 First $19,423 $ 602 $ 485 4,656 $.10 Second 20,042 653 550 4,668 .12 Third 20,834 585 649 4,777 .14 Fourth 21,278 708 704 4,820 .15
F-15 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES SCHEDULE I VALUATION AND QUALIFYING ACCOUNTS DECEMBER 31, 1995, 1994 AND 1993 (IN $000'S)
Balance at Charged to Balance at Beginning Cost and Beginning Cost and End Classification of Year Expenses Write Offs of Year - --------------------------------------------------------------------------------------- 1993: Allowance for doubtful accounts: Accounts receivable $297 $269 $(410) $156 1994: Allowance for doubtful accounts: Accounts receivable $156 $179 $(129) $206 1995: Allowance for doubtful accounts: Accounts receivable $206 $278 $(224) $260
F-16 EX-10.60 2 EMPLOYMENT AGREEMENT (BAILEYS AND THE CO.) AMENDMENT TO EMPLOYMENT AGREEMENT This Amendment to Employment Agreement is entered into as of August 16, 1995, by and between Safeguard Health Enterprises, Inc., a Delaware corporation ("Company") and Steven J. Baileys, D.D.S. ("Employee") and hereby specifically amends Paragraph 3(a) of the Employment Agreement between the parties dated May 25, 1995, as follows: 3. COMPENSATION TERMS (a) BASE SALARY. Effective August 14, 1995, and for the remainder of the term of employment, Employee shall receive a base salary of $400,000 per year. In all other respects, the terms and conditions of the Employment Agreement entered into by and between the parties dated May 25, 1995, shall remain the same. IN WITNESS WHEREOF, the parties have affixed their signatures to this Amendment to Employment Agreement as of the date set forth above. EMPLOYEE SAFEGUARD HEALTH ENTERPRISES, INC. /s/ Steven J. Baileys /s/ Steven J. Baileys - ------------------------------- By ---------------------------------- STEVEN J. BAILEYS, D.D.S. STEVEN J. BAILEYS, D.D.S., President /s/ Ronald I. Brendzel By ---------------------------------- RONALD I. BRENDZEL, Secretary EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into as of May 25, 1995, by and between Safeguard Health Enterprises, Inc., a Delaware Corporation ("Company") and Steven J. Baileys, D.D.S. ("Employee"). The Company desires to have the benefits of Employee's knowledge and experience as a full-time employee and considers such employment a vital element to protecting and enhancing the best interests of the Company, and Employee desires to be employed full time by the Company. The Company and Employee desire to enter into an agreement reflecting the terms under which the Company will employ Employee as its President and Chief Executive Office ("CEO") until May 31, 2000. Therefore, the Company and Employee agree to the following terms and conditions under which Employee will serve as CEO of the Company: 1. EMPLOYMENT SERVICES AND DUTIES The Company agrees to employ and retain the services of Employee as CEO and Employee hereby agrees to continue employment with the Company as its CEO for the term of this Agreement. During the term of this Agreement, Employee agrees to perform his duties as CEO faithfully, to the best of his ability and in the best interests of the Company, to perform both his regular duties and other projects as requested by the Board of Directors of the Company, and assume such other additional reasonable duties or capacities as the Board of Directors of the Company may provide. 2. TERM OF EMPLOYMENT The Company agrees to employ Employee, and Employee agrees to serve, as CEO for the period commencing the date of the execution of this Agreement until the earlier of May 31, 2000, the date of Employee's death, or the date of termination pursuant to Sections 6 and 7 of this Agreement. 3. COMPENSATION TERMS The Company agrees to compensate Employee for his services rendered as CEO under this Agreement as follows: (a) BASE SALARY. Effective May 25, 1995, and for the remainder of the term of employment, Employee shall receive a base salary of $300,000 per year. -1- (b) BONUSES. Employee shall receive such bonuses, if any, as determined by the Board of Directors of the Company in its sole and absolute discretion. (c) BENEFITS. Subject to satisfaction of all eligibility requirements, Employee and his dependents shall be entitled to and shall receive any and all benefits generally available to executive employees of the Company, including participation in health, dental, vision and life insurance programs and retirement plans. (d) INDEMNIFICATION. The Company shall indemnify Employee in accordance with the terms and conditions of its then current indemnification agreements with directors and/or officers of the Company. (e) NON-PERMANENT DISABILITY. In the event that Employee becomes disabled but not permanently disabled as set forth in Section 6(b)(iii) of this Agreement and is unable temporarily to perform his duties as CEO, he shall continue to receive as disability income the amount of his base salary under Section 3(a), but the Board of Directors may in its best judgment under the circumstances, elect another person to serve as interim CEO during the period of Employee's disability. 4. EXPENSES (a) BUSINESS EXPENSES. The Company authorizes Employee to incur the reasonable and necessary expenses for promoting the business of the Company and its subsidiaries according to the policies of the Company with respect thereto and as may be determined from time to time by the Board of Directors of the Company. In connection with such expenses, Employee shall have the use of a Company credit card and is authorized to incur charges necessary to promote the business of the Company. Additionally, the Company agrees to reimburse Employee for any such reasonable and necessary expenses paid out of Employee's own funds. (b) TRANSPORTATION. During the term of this Agreement, the Company shall furnish to Employee an automobile (including all expenses such as insurance, gasoline and maintenance) suitable for business transportation. Such automobile shall be selected at the discretion of the Employee. Every third year thereafter during the term of this Agreement, Employee, at his election, may replace the automobile with a new automobile selected at the discretion of Employee. -2- 5. VACATION Unless otherwise agreed to orally or by written agreement between Employee and the Company, Employee shall be entitled to four weeks of paid vacation during any fiscal year. Such vacation may be taken at such times as are mutually agreed upon by Employee and the Company, and pursuant to the Company's vacation policy then in effect. 6. TERMINATION BY COMPANY (a) TERMINATION. The Company may terminate Employee for "Cause." (b) "CAUSE" shall mean: (i) The failure of Employee to render services to the Company in accordance with his employment duties, as determined by all of the independent directors of the Company's Board of Directors; (ii) The commission by Employee of an act of fraud or embezzlement against Company or an act which Employee knew to be in violation of his duties to the Company (including, but not limited to, the unauthorized disclosure of confidential information); (iii) The death or "permanent disability" of Employee. Permanent disability shall occur if, during the term of this Agreement, Employee becomes physically or mentally disabled such that he is substantially unable to perform his duties hereunder and such disability continues for six (6) continuous months or for ten (10) months over a two (2) fiscal year period. In the event Employee and the Company are unable to agree as to whether Employee is permanently disabled within the meaning of this Paragraph 6(b)(iii), Employee and Company shall each appoint a licensed doctor of medicine. The two named doctors shall then appoint a third licensed doctor of medicine and the three shall act as a committee to determine by majority vote whether such disability exists. In the event such a committee is appointed under this Paragraph 6(b)(iii), Employee and Company hereby agree to bound by the determination of the majority of the committee as to the characterization of Employee's disability; or (iv) Good cause as determined by all of the independent directors of the Company's Board of Directors to be a material breach justifying termination of Employee. -3- (c) NOTICE OF TERMINATION. Any termination of Employee by the Company shall be communicated by a written Notice of Termination to Employee. For purposes of this Agreement, a Notice of Termination shall specify the termination provision of this Agreement relied upon to effect such termination and shall set forth in reasonable detail the specific facts and circumstances claimed to provide a basis for termination of Employee. 7. TERMINATION BY EMPLOYEE (a) TERMINATION. Upon written notice delivered to the Company in accordance with Section 6(c), Employee may terminate his employment hereunder for: (i) "Good Reason" as is herein defined; or (ii) health reasons, if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health or his life, provided that Employee shall have furnished the Company with a written statement from a qualified doctor of medicine to such effect and provided, further, that, at the Company's request, Employee shall submit to an examination by a doctor of medicine selected by the Company and such doctor of medicine shall have concurred in the conclusion of the Employee's doctor. In the event that Employee elects to terminate his employment for health reasons in accordance with this Paragraph 7(a)(ii), the Company shall pay as severance compensation to Employee sixty percent (60%) of his yearly salary for the remainder of the term of this Agreement. (b) "GOOD REASON" means; (i) the occurrence of a "Change in Control" of the Company (as defined herein); (ii) a failure by the Company to comply with any material provision of this Agreement that has not been cured within thirty (30) days after notice of such noncompliance has been given by Employee to the Company; or (iii) any purported termination of Employee's employment which is not effected pursuant to a Notice of Termination as set forth in Paragraph 6(c). (c) "CHANGE IN CONTROL" occurs if (i) substantially all the assets of the Company are sold to, or the Company is merged with, any "person," as that term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, other than a then existing shareholder or group of shareholders of the Company (or affiliate thereof) owning fifty percent (50%) or more of the combined voting power of the Company's then -4- outstanding securities, or (ii) any person or group becomes or is discovered to be a beneficial owner (as defined in Rule 13d-3 under the Exchange Act as in effect on the date hereof) directly of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of Company's then outstanding securities (unless such person or group owns at least twenty-five percent (25%) of such voting power on the effective date of this Agreement), and in connection with such change in ownership the individuals who constitute the Board of Directors of Company immediately prior to such change cease to constitute at least a majority of the Board of Directors thereafter. 8. PAYMENT UPON TERMINATION (a) DATE. The "Termination Date" shall be the effective date specified in the Notice of Termination unless the party receiving such notice disputes the Notice of Termination as contrary to the terms and conditions of this Agreement. In that case, the Termination Date shall be the date such dispute is finally resolved either by mutual written agreement of the parties, by a binding and final arbitration award, or by a final judgment, order, or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected). (b) TERMINATION BY COMPANY. In the event the Company terminates Employee pursuant to Paragraphs 6(b)(i), 6(b)(ii), or 6(b)(iv), the Company shall pay to Employee his full salary through the Termination Date after which the Company shall have no further obligation to Employee under this Agreement. (c) DEATH. The Company shall maintain a life insurance policy owned by Employee which provides for payment to Employee's estate or designated beneficiary, a death benefit of $1,000,000. (d) PERMANENT DISABILITY. In the event the Company terminates Employee due to permanent disability pursuant to Paragraph 6(b)(iii), the Company shall pay to Employee eighty percent (80%) of Employee's yearly salary for a period of five (5) years following termination. Such payments shall begin no later than thirty (30) days following the Termination Date or, in the event such termination is contested pursuant to Paragraph 6(b)(iii), thirty (30) days following the decision of the commission. (e) WRONGFUL TERMINATION or TERMINATION BY EMPLOYEE FOR GOOD REASON. If, in breach of this Agreement, the Company terminates Employee's employment other than pursuant to Section 6 (it being understood that a termination purported to be pursuant to Section 6 hereof which is disputed by Employee and finally determined not to have been proper shall be a termination by the Company in breach of this Agreement) or if Employee terminates his employment for Good Reason, then: -5- (i) The Company shall pay Employee his full salary through the Termination Date at the rate in effect at the time the Notice of Termination is given; and (ii) In lieu of any further compensation payments to Employee for periods subsequent to the Termination Date, the Company shall pay as severance pay to Employee an amount equal to one dollar less than three (3) times Employee's average total compensation for the five (5) full taxable years preceding the Change in Control, as determined in accordance with the "parachute payments" provisions of the Internal Revenue Code in effect on the date of this Agreement. If resulting from a termination based on a Change in Control of the Company, such payments shall be made in a lump sum on or before the thirtieth (30th) day following the Termination Date. If resulting from any other cause, such payments shall be made in substantially equal semimonthly installments on the fifteenth and last days of each month commencing with the month in which the Termination Date occurs and continuing for twenty-four (24) consecutive semimonthly payment dates (including the first such date as aforesaid); and (iii) If termination of Employee's employment arises out of a breach by the Company of this Agreement, the Company shall pay all other damages to which Employee may be entitled as a result of such breach, including damages for any and all loss of benefits to Employee under the Company's employee benefit plans that Employee would have received if the Company had not breached this Agreement and had Employee's employment continued for the full term as set forth in Section 2 and including all legal fees and expenses incurred by Employee as a result of such termination including, but not limited to, all such fees expended in enforcement of this Agreement. If Employee resigns for Good Reason and the Company contests its obligations, as hereunder, Employee shall be entitled to recover as damages the amount of his legal fees and expenses, including costs of investigation, related to his enforcement of the Agreement. (f) CONTINUANCE OF BENEFITS. Unless the Company terminates Employee for Cause or death, the Company shall maintain in full force and effect, for the continued benefit of Employee for the greater number of years (including partial years) remaining in the term of the employment hereunder or the number three (3), all employee benefit plans and programs in which Employee was entitled to participate immediately prior to the Termination Date provided that Employee's continued participation is possible under the general terms and provisions of such plans and programs. In the event that Employee's participation in any such plan or program is barred, the Company shall arrange to provide Employee with benefits substantially similar to those which Employee would otherwise have been entitled to receive under such plans and programs from which his continued participation is barred. -6- (g) NO DUTY TO MITIGATE. Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise. 9. SEVERABILITY The provisions of this Agreement are severable. If a court of competent jurisdiction determines that any one or more provisions of this Agreement is invalid, void, or unenforceable, in whole or in part, it will be severed therefrom. The remaining provisions of this Agreement shall then continue in full force without being impaired or invalidated in any way. 10. ASSIGNMENT; BINDING EFFECT (a) ASSIGNABILITY. Subject to the restrictions in this Section 10, the Company may assign this Agreement. (b) COMPANY'S OBLIGATION UPON ASSIGNMENT OR SUCCESSION. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company or assignee of this Agreement, by agreement in form and substance satisfactory to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle Employee to compensation from the Company in the same amount and on the same terms as he would be entitled to hereunder if he terminated his employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Termination Date. As used in this Agreement, "Company" shall mean the Company as herein before defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 10, or which otherwise becomes bound by all the terms and provisions of this Agreement by operations of law. (c) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding on the parties and their respective successors and assigns. If Employee should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided for herein, shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to Employee's estate. -7- 11. CONFIDENTIAL INFORMATION Employee agrees that he shall not, during the term of this Agreement, and for a period of five (5) years following its termination, absent the Company's consent, disclose to any person, or otherwise use or exploit any non- public proprietary or confidential information of material significance to the Company and/or its affiliates, including without limitation trade secrets, customer lists, records of research, memoranda, proposals, reports, methods, processes, techniques, non-public financial information, contracts, negotiations, business plans and strategies, marketing data or other non-public information regarding the Company and/or any of its affiliates, their business, properties or affairs ("CONFIDENTIAL INFORMATION") obtained by him at any time prior to or subsequent to the execution of this Agreement, except to the extent required by his performance of his assigned duties for the Company (including its affiliates). Upon termination of employment, Employee shall surrender all Confidential Information and all other property belonging to the Company and its subsidiaries, it being understood by Employee that such documents are the sole property of the Company and that Employee shall not make any copies thereof. Additionally, the terms and conditions of this Agreement shall constitute Confidential Information and shall not be disclosed by Employee except in accordance with this Section 11. 12. CONFLICTING INVESTMENTS During the term of this Agreement and for one (1) year after termination of this Agreement, Employee shall not make or cause to be made on his behalf, or maintain an investment in any business which is engaged, either in whole or in part, in any business which is competitive with or detrimental to any businesses of the Company, or its subsidiaries, except that Employee may make or maintain an investment of no more than five percent (5%) of any outstanding class of capital stock of any publicly traded company, provided such class of capital stock is regularly traded by the public, without prior written permission of the Company. Notwithstanding this Section 12, nothing in this Agreement shall preclude: (i) Employee from investing in commercial property at which a dentist, a dental or a prepaid health plan is a tenant or from pursuing activities not conflicting or interfering with his duties to Company; or (ii) Employee from owning in whole or in part dental practices at any time that Employee may acquire in the future. 13. ENTIRE AGREEMENT This Agreement constitutes the entire understanding between the parties concerning the subject matter hereof. This Agreement supersedes all negotiations, prior discussions, and preliminary agreements. This Agreement may not be amended except in a writing executed by the Employee and the Company. -8- 14. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of California, regardless of the application of conflicts of laws principles. 15. NOTICES All notices, requests, demands and other communication required or contemplated under this Agreement, shall be in writing and shall be deemed to have been duly given when delivered personally or when enclosed in a properly sealed and addressed envelope, registered or certified, return receipt requested, and deposited (postage prepaid) in a post office or branch post office regularly maintained by the United States Government. Any notice given to the Company under the terms of this Agreement shall be addressed to the Company at the following address: Safeguard Health Enterprises, Inc. Attention: Secretary 505 North Euclid Street P.O. Box 3210 Anaheim, California 92803-3210 Any notice to be given to Employee shall be addressed to him at his home address last shown on the Company's records, or at such other address as either party may hereafter designate in writing to the other. 16. WAIVER No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver. 17. COUNTERPARTS This Agreement may be executed in counterparts, and such counterparts may be transmitted by facsimile, and all counterparts, taken together, will constitute one and the same document. -9- 18. ARBITRATION Any dispute regarding any aspect of this Agreement or any act that allegedly has or would violate any provision of this Agreement must be submitted to arbitration in Orange County, California, in accordance with the rules of the Judicial Arbitration and Mediations Service ("JAMS") as the exclusive remedy for such claim or dispute. Either party may invoke this clause by serving on the other, in writing, a request to arbitrate. Within thirty (30) days thereafter, either party may institute proceedings in superior court to enforce this clause by way of reference pursuant to Section 638 of the California Code of Civil Procedure. If the parties cannot mutually select a judge from the JAMS panel, the superior court shall make the selection. The decision of JAMS will be final and binding. If Employee alleges in good faith that he has resigned for Good Reason, then the Company is required to advance to him any amounts necessary for legal fees and expenses, including costs of investigation, related to the dispute, subject to the Company's receipt of his undertaking to repay such amounts if it is ultimately determined by JAMS that he is not entitled to keep such amounts as damages under Section 8(e)(iii). IN WITNESS WHEREOF, the parties have duly executed this Agreement effective May 25, 1995. EMPLOYEE SAFEGUARD HEALTH ENTERPRISES, INC. /s/ Steven J. Baileys /s/ Steven J. Baileys - --------------------------- By: ------------------------------- STEVEN J. BAILEYS, D.D.S. STEVEN J. BAILEYS, D.D.S., President /s/ Ronald I. Brendzel By: ------------------------------- RONALD I. BRENDZEL, Secretary EX-10.61 3 EMPLOYMENT AGREEMENT (BRENDZEL AND THE CO.) AMENDMENT TO EMPLOYMENT AGREEMENT This Amendment to Employment Agreement is entered into as of November 10, 1995, by and between Safeguard Health Enterprises, Inc., a Delaware corporation ("Company") and RONALD I. BRENDZEL, ("Employee") and hereby specifically amends Paragraph 3(a) of the Employment Agreement between the parties dated May 25, 1995, as follows: 3. COMPENSATION TERMS (a) BASE SALARY. Effective January 1, 1996, and for the remainder of the term of employment, Employee shall receive a base salary of $185,000 per year. In all other respects, the terms and conditions of the Employment Agreement entered into by and between the parties dated May 25, 1995, shall remain the same. IN WITNESS WHEREOF, the parties have affixed their signatures to this Amendment to Employment Agreement as of the date set forth above. EMPLOYEE SAFEGUARD HEALTH ENTERPRISES, INC. /s/ Ronald I. Brendzel By /s/ Steven J. Baileys - ---------------------------- ------------------------------- RONALD I. BRENDZEL STEVEN J. BAILEYS, D.D.S., President By /s/ Ronald I. Brendzel ------------------------------- RONALD I. BRENDZEL, Secretary EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into as of May 25, 1995, by and between Safeguard Health Enterprises, Inc., a Delaware Corporation ("Company") and Ronald I. Brendzel ("Employee"). The Company desires to have the benefits of Employee's knowledge and experience as a full-time employee and considers such employment a vital element to protecting and enhancing the best interests of the Company, and Employee desires to be employed full time by the Company. The Company and Employee desire to enter into an agreement reflecting the terms under which the Company will employ Employee as its Senior Vice President, Treasurer and Secretary ("SVP") until May 31, 2000. Therefore, the Company and Employee agree to the following terms and conditions under which Employee will serve as SVP of the Company: 1. EMPLOYMENT SERVICES AND DUTIES The Company agrees to employ and retain the services of Employee as SVP and Employee hereby agrees to continue employment with the Company as its SVP for the term of this Agreement. During the term of this Agreement, Employee agrees to perform his duties as SVP faithfully, to the best of his ability and in the best interests of the Company, to perform both his regular duties and other projects as requested by the Board of Directors of the Company, and assume such other additional reasonable duties or capacities as the Board of Directors of the Company may provide. 2. TERM OF EMPLOYMENT The Company agrees to employ Employee, and Employee agrees to serve, as SVP for the period commencing the date of the execution of this Agreement until the earlier of May 31, 2000, the date of Employee's death, or the date of termination pursuant to Sections 6 and 7 of this Agreement. 3. COMPENSATION TERMS The Company agrees to compensate Employee for his services rendered as SVP under this Agreement as follows: (a) BASE SALARY. Effective May 25, 1995, and for the remainder of the term of employment, Employee shall receive a base salary of $152,004 per year. -1- (b) BONUSES. Employee shall receive such bonuses, if any, as determined by the Board of Directors of the Company in its sole and absolute discretion. (c) BENEFITS. Subject to satisfaction of all eligibility requirements, Employee and his dependents shall be entitled to and shall receive any and all benefits generally available to executive employees of the Company, including participation in health, dental, vision and life insurance programs and retirement plans. (d) INDEMNIFICATION. The Company shall indemnify Employee in accordance with the terms and conditions of its then current indemnification agreements with directors and/or officers of the Company. (e) NON-PERMANENT DISABILITY. In the event that Employee becomes disabled but not permanently disabled as set forth in Section 6(b)(iii) of this Agreement and is unable temporarily to perform his duties as SVP, he shall continue to receive as disability income the amount of his base salary under Section 3(a), but the Board of Directors may in its best judgment under the circumstances, elect another person to serve as interim SVP during the period of Employee's disability. 4. EXPENSES (a) BUSINESS EXPENSES. The Company authorizes Employee to incur the reasonable and necessary expenses for promoting the business of the Company and its subsidiaries according to the policies of the Company with respect thereto and as may be determined from time to time by the Board of Directors of the Company. The Company agrees to reimburse Employee for any such reasonable and necessary expenses paid out of Employee's own funds. (b) TRANSPORTATION. During the term of this Agreement, the Company shall furnish to Employee an automobile (including all expenses such as insurance, gasoline and maintenance) suitable for business transportation. Such automobile shall be selected at the discretion of the Company's Chief Executive Officer. Every third year thereafter during the term of this Agreement, Employee, at his election, may replace the automobile with a new automobile selected at the discretion of the Company's Chief Executive Officer. -2- 5. VACATION Unless otherwise agreed to orally or by written agreement between Employee and the Company, Employee shall be entitled to four weeks of paid vacation during any fiscal year. Such vacation may be taken at such times as are mutually agreed upon by Employee and the Company, and pursuant to the Company's vacation policy then in effect. 6. TERMINATION BY COMPANY (a) TERMINATION. The Company may terminate Employee for "Cause." (b) "CAUSE" shall mean: (i) The failure of Employee to render services to the Company in accordance with his employment duties, as determined by all of the independent directors of the Company's Board of Directors; (ii) The commission by Employee of an act of fraud or embezzlement against Company or an act which Employee knew to be in violation of his duties to the Company (including, but not limited to, the unauthorized disclosure of confidential information); (iii) The death or "permanent disability" of Employee. Permanent disability shall occur if, during the term of this Agreement, Employee becomes physically or mentally disabled such that he is substantially unable to perform his duties hereunder and such disability continues for six (6) continuous months or for ten (10) months over a two (2) fiscal year period. In the event Employee and the Company are unable to agree as to whether Employee is permanently disabled within the meaning of this Paragraph 6(b)(iii), Employee and Company shall each appoint a licensed doctor of medicine. The two named doctors shall then appoint a third licensed doctor of medicine and the three shall act as a committee to determine by majority vote whether such disability exists. In the event such a committee is appointed under this Paragraph 6(b)(iii), Employee and Company hereby agree to bound by the determination of the majority of the committee as to the characterization of Employee's disability; or (iv) Good cause as determined by all of the independent directors of the Company's Board of Directors to be a material breach justifying termination of Employee. -3- (c) NOTICE OF TERMINATION. Any termination of Employee by the Company shall be communicated by a written Notice of Termination to Employee. For purposes of this Agreement, a Notice of Termination shall specify the termination provision of this Agreement relied upon to effect such termination and shall set forth in reasonable detail the specific facts and circumstances claimed to provide a basis for termination of Employee. 7. TERMINATION BY EMPLOYEE (a) TERMINATION. Upon written notice delivered to the Company in accordance with Section 6(c), Employee may terminate his employment hereunder for: (i) "Good Reason" as is herein defined; or (ii) health reasons, if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health or his life, provided that Employee shall have furnished the Company with a written statement from a qualified doctor of medicine to such effect and provided, further, that, at the Company's request, Employee shall submit to an examination by a doctor of medicine selected by the Company and such doctor of medicine shall have concurred in the conclusion of the Employee's doctor. In the event that Employee elects to terminate his employment for health reasons in accordance with this Paragraph 7(a)(ii), the Company shall pay as severance compensation to Employee sixty percent (60%) of his yearly salary for the remainder of the term of this Agreement. (b) "GOOD REASON" means; (i) the occurrence of a "Change in Control" of the Company (as defined herein); (ii) a failure by the Company to comply with any material provision of this Agreement that has not been cured within thirty (30) days after notice of such noncompliance has been given by Employee to the Company; or (iii) any purported termination of Employee's employment which is not effected pursuant to a Notice of Termination as set forth in Paragraph 6(c). (c) "CHANGE IN CONTROL" occurs if (i) substantially all the assets of the Company are sold to, or the Company is merged with, any "person," as that term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, other than a then existing shareholder or group of shareholders of the Company (or affiliate thereof) owning fifty percent (50%) or more of the combined voting power of the Company's then -4- outstanding securities, or (ii) any person or group becomes or is discovered to be a beneficial owner (as defined in Rule 13d-3 under the Exchange Act as in effect on the date hereof) directly of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of Company's then outstanding securities (unless such person or group owns at least twenty-five percent (25%) of such voting power on the effective date of this Agreement), and in connection with such change in ownership the individuals who constitute the Board of Directors of Company immediately prior to such change cease to constitute at least a majority of the Board of Directors thereafter. 8. PAYMENT UPON TERMINATION (a) DATE. The "Termination Date" shall be the effective date specified in the Notice of Termination unless the party receiving such notice disputes the Notice of Termination as contrary to the terms and conditions of this Agreement. In that case, the Termination Date shall be the date such dispute is finally resolved either by mutual written agreement of the parties, by a binding and final arbitration award, or by a final judgment, order, or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected). (b) TERMINATION BY COMPANY. In the event the Company terminates Employee pursuant to Paragraphs 6(b)(i), 6(b)(ii), or 6(b)(iv), the Company shall pay to Employee his full salary through the Termination Date after which the Company shall have no further obligation to Employee under this Agreement. (c) DEATH. The Company shall maintain a life insurance policy owned by Employee which provides for payment to Employee's estate or designated beneficiary, a death benefit of $500,000. (d) PERMANENT DISABILITY. In the event the Company terminates Employee due to permanent disability pursuant to Paragraph 6(b)(iii), the Company shall pay to Employee eighty percent (80%) of Employee's yearly salary for a period of five (5) years following termination. Such payments shall begin no later than thirty (30) days following the Termination Date or, in the event such termination is contested pursuant to Paragraph 6(b)(iii), thirty (30) days following the decision of the commission. (e) WRONGFUL TERMINATION or TERMINATION BY EMPLOYEE FOR GOOD REASON. If, in breach of this Agreement, the Company terminates Employee's employment other than pursuant to Section 6 (it being understood that a termination purported to be pursuant to Section 6 hereof which is disputed by Employee and finally determined not to have been proper, shall be a termination by the Company in breach of this Agreement) or if Employee terminates his employment for Good Reason, then: -5- (i) The Company shall pay Employee his full salary through the Termination Date at the rate in effect at the time the Notice of Termination is given; and (ii) In lieu of any further compensation payments to Employee for periods subsequent to the Termination Date, the Company shall pay as severance pay to Employee an amount equal to one dollar less than three (3) times Employee's average total compensation for the five (5) full taxable years preceding the Change in Control, as determined in accordance with the "parachute payments" provisions of the Internal Revenue Code in effect on the date of this Agreement. If resulting from a termination based on a Change in Control of the Company, such payments shall be made in a lump sum on or before the thirtieth (30th) day following the Termination Date. If resulting from any other cause, such payments shall be made in substantially equal semimonthly installments on the fifteenth and last days of each month commencing with the month in which the Termination Date occurs and continuing for twenty-four (24) consecutive semimonthly payment dates (including the first such date as aforesaid); and (iii) If termination of Employee's employment arises out of a breach by the Company of this Agreement, the Company shall pay all other damages to which Employee may be entitled as a result of such breach, including damages for any and all loss of benefits to Employee under the Company's employee benefit plans that Employee would have received if the Company had not breached this Agreement and had Employee's employment continued for the full term as set forth in Section 2 and including all legal fees and expenses incurred by Employee as a result of such termination including, but not limited to, all such fees expended in enforcement of this Agreement. If Employee resigns for Good Reason and the Company contests its obligations, as hereunder, Employee shall be entitled to recover as damages the amount of his legal fees and expenses, including costs of investigation, related to his enforcement of the Agreement. (f) CONTINUANCE OF BENEFITS. Unless the Company terminates Employee for Cause or death, the Company shall maintain in full force and effect, for the continued benefit of Employee for the greater number of years (including partial years) remaining in the term of the employment hereunder or the number three (3), all employee benefit plans and programs in which Employee was entitled to participate immediately prior to the Termination Date provided that Employee's continued participation is possible under the general terms and provisions of such plans and programs. In the event that Employee's participation in any such plan or program is barred, the Company shall arrange to provide Employee with benefits substantially similar to those which Employee would otherwise have been entitled to receive under such plans and programs from which his continued participation is barred. -6- (g) NO DUTY TO MITIGATE. Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise. 9. SEVERABILITY The provisions of this Agreement are severable. If a court of competent jurisdiction determines that any one or more provisions of this Agreement is invalid, void, or unenforceable, in whole or in part, it will be severed therefrom. The remaining provisions of this Agreement shall then continue in full force without being impaired or invalidated in any way. 10. ASSIGNMENT; BINDING EFFECT (a) ASSIGNABILITY. Subject to the restrictions in this Section 10, the Company may assign this Agreement. (b) COMPANY'S OBLIGATION UPON ASSIGNMENT OR SUCCESSION. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company or assignee of this Agreement, by agreement in form and substance satisfactory to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle Employee to compensation from the Company in the same amount and on the same terms as he would be entitled to hereunder if he terminated his employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Termination Date. As used in this Agreement, "Company" shall mean the Company as herein before defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 10, or which otherwise becomes bound by all the terms and provisions of this Agreement by operations of law. (c) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding on the parties and their respective successors and assigns. If Employee should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided for herein, shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to Employee's estate. -7- 11. CONFIDENTIAL INFORMATION Employee agrees that he shall not, during the term of this Agreement, and for a period of five (5) years following its termination, absent the Company's consent, disclose to any person, or otherwise use or exploit any non-public proprietary or confidential information of material significance to the Company and/or its affiliates, including without limitation trade secrets, customer lists, records of research, memoranda, proposals, reports, methods, processes, techniques, non-public financial information, contracts, negotiations, business plans and strategies, marketing data or other non-public information regarding the Company and/or any of its affiliates, their business, properties or affairs ("CONFIDENTIAL INFORMATION") obtained by him at any time prior to or subsequent to the execution of this Agreement, except to the extent required by his performance of his assigned duties for the Company (including its affiliates). Upon termination of employment, Employee shall surrender all Confidential Information and all other property belonging to the Company and its subsidiaries, it being understood by Employee that such documents are the sole property of the Company and that Employee shall not make any copies thereof. Additionally, the terms and conditions of this Agreement shall constitute Confidential Information and shall not be disclosed by Employee except in accordance with this Section 11. 12. CONFLICTING INVESTMENTS During the term of this Agreement and for one (1) year after termination of this Agreement, Employee shall not make or cause to be made on his behalf, or maintain an investment in any business which is engaged, either in whole or in part, in any business which is competitive with or detrimental to any businesses of the Company, or its subsidiaries, except that Employee may make or maintain an investment of no more than five percent (5%) of any outstanding class of capital stock of any publicly traded company, provided such class of capital stock is regularly traded by the public, without prior written permission of the Company. 13. ENTIRE AGREEMENT This Agreement constitutes the entire understanding between the parties concerning the subject matter hereof. This Agreement supersedes all negotiations, prior discussions, and preliminary agreements. This Agreement may not be amended except in a writing executed by the Employee and the Company. -8- 14. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of California, regardless of the application of conflicts of laws principles. 15. NOTICES All notices, requests, demands and other communication required or contemplated under this Agreement, shall be in writing and shall be deemed to have been duly given when delivered personally or when enclosed in a properly sealed and addressed envelope, registered or certified, return receipt requested, and deposited (postage prepaid) in a post office or branch post office regularly maintained by the United States Government. Any notice given to the Company under the terms of this Agreement shall be addressed to the Company at the following address: Safeguard Health Enterprises, Inc. Attention: Secretary 505 North Euclid Street P.O. Box 3210 Anaheim, California 92803-3210 Any notice to be given to Employee shall be addressed to him at his home address last shown on the Company's records, or at such other address as either party may hereafter designate in writing to the other. 16. WAIVER No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver. 17. COUNTERPARTS This Agreement may be executed in counterparts, and such counterparts may be transmitted by facsimile, and all counterparts, taken together, will constitute one and the same document. -9- 18. ARBITRATION Any dispute regarding any aspect of this Agreement or any act that allegedly has or would violate any provision of this Agreement must be submitted to arbitration in Orange County, California, in accordance with the rules of the Judicial Arbitration and Mediations Service ("JAMS") as the exclusive remedy for such claim or dispute. Either party may invoke this clause by serving on the other, in writing, a request to arbitrate. Within thirty (30) days thereafter, either party may institute proceedings in superior court to enforce this clause by way of reference pursuant to Section 638 of the California Code of Civil Procedure. If the parties cannot mutually select a judge from the JAMS panel, the superior court shall make the selection. The decision of JAMS will be final and binding. If Employee alleges in good faith that he has resigned for Good Reason, then the Company is required to advance to him any amounts necessary for legal fees and expenses, including costs of investigation, related to the dispute, subject to the Company's receipt of his undertaking to repay such amounts if it is ultimately determined by JAMS that he is not entitled to keep such amounts as damages under Section 8(e)(iii). IN WITNESS WHEREOF, the parties have duly executed this Agreement effective May 25, 1995. EMPLOYEE SAFEGUARD HEALTH ENTERPRISES, INC. /s/ Ronald I. Brendzel By: /s/ Steven J. Baileys - ------------------------------- ---------------------------------- RONALD I. BRENDZEL STEVEN J. BAILEYS, D.D.S., President By: /s/ Ronald I. Brendzel --------------------------------- RONALD I. BRENDZEL, Secretary -10- EX-10.62 4 EMPLOYMENT AGREEMENT (COX AND THE CO.) EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into as of May 25, 1995, by and between Safeguard Health Enterprises, Inc., a Delaware Corporation ("Company") and John E. Cox ("Employee"). The Company desires to have the benefits of Employee's knowledge and experience as a full-time employee and considers such employment a vital element to protecting and enhancing the best interests of the Company, and Employee desires to be employed full time by the Company. The Company and Employee desire to enter into an agreement reflecting the terms under which the Company will employ Employee as its Executive Vice President and Chief Operating Officer ("EVP") until May 31, 2000. Therefore, the Company and Employee agree to the following terms and conditions under which Employee will serve as EVP of the Company: 1. EMPLOYMENT SERVICES AND DUTIES The Company agrees to employ and retain the services of Employee as EVP and Employee hereby agrees to continue employment with the Company as its EVP for the term of this Agreement. During the term of this Agreement, Employee agrees to perform his duties as EVP faithfully, to the best of his ability and in the best interests of the Company, to perform both his regular duties and other projects as requested by the Board of Directors of the Company, and assume such other additional reasonable duties or capacities as the Board of Directors of the Company may provide. 2. TERM OF EMPLOYMENT The Company agrees to employ Employee, and Employee agrees to serve, as EVP for the period commencing the date of the execution of this Agreement until the earlier of May 31, 2000, the date of Employee's death, or the date of termination pursuant to Sections 6 and 7 of this Agreement. 3. COMPENSATION TERMS The Company agrees to compensate Employee for his services rendered as EVP under this Agreement as follows: (a) BASE SALARY. Effective May 25, 1995, and for the remainder of the term of employment, Employee shall receive a base salary of $200,000 per year. -1- (b) BONUSES. Employee shall receive such bonuses, if any, as determined by the Board of Directors of the Company in its sole and absolute discretion. (c) BENEFITS. Subject to satisfaction of all eligibility requirements, Employee and his dependents shall be entitled to and shall receive any and all benefits generally available to executive employees of the Company, including participation in health, dental, vision and life insurance programs and retirement plans. (d) INDEMNIFICATION. The Company shall indemnify Employee in accordance with the terms and conditions of its then current indemnification agreements with directors and/or officers of the Company. (e) NON-PERMANENT DISABILITY. In the event that Employee becomes disabled but not permanently disabled as set forth in Section 6(b)(iii) of this Agreement and is unable temporarily to perform his duties as EVP, he shall continue to receive as disability income the amount of his base salary under Section 3(a), but the Board of Directors may in its best judgment under the circumstances, elect another person to serve as interim EVP during the period of Employee's disability. 4. EXPENSES (a) BUSINESS EXPENSES. The Company authorizes Employee to incur the reasonable and necessary expenses for promoting the business of the Company and its subsidiaries according to the policies of the Company with respect thereto and as may be determined from time to time by the Board of Directors of the Company. The Company agrees to reimburse Employee for any such reasonable and necessary expenses paid out of Employee's own funds. (b) TRANSPORTATION. During the term of this Agreement, the Company shall furnish to Employee an automobile (including all expenses such as insurance, gasoline and maintenance) suitable for business transportation. Such automobile shall be selected at the discretion of the Company's Chief Executive Officer. Every third year thereafter during the term of this Agreement, Employee, at his election, may replace the automobile with a new automobile selected at the discretion of the Company's Chief Executive Officer. -2- 5. VACATION Unless otherwise agreed to orally or by written agreement between Employee and the Company, Employee shall be entitled to four weeks of paid vacation following completion of one year of employment. Such vacation may be taken at such times as are mutually agreed upon by Employee and the Company, and pursuant to the Company's vacation policy then in effect. 6. TERMINATION BY COMPANY (a) TERMINATION. The Company may terminate Employee for "Cause." (b) "CAUSE" shall mean: (i) The failure of Employee to render services to the Company in accordance with his employment duties, as determined by all of the independent directors of the Company's Board of Directors; (ii) The commission by Employee of an act of fraud or embezzlement against Company or an act which Employee knew to be in violation of his duties to the Company (including, but not limited to, the unauthorized disclosure of confidential information); (iii) The death or "permanent disability" of Employee. Permanent disability shall occur if, during the term of this Agreement, Employee becomes physically or mentally disabled such that he is substantially unable to perform his duties hereunder and such disability continues for six (6) continuous months or for ten (10) months over a two (2) fiscal year period. In the event Employee and the Company are unable to agree as to whether Employee is permanently disabled within the meaning of this Paragraph 6(b)(iii), Employee and Company shall each appoint a licensed doctor of medicine. The two named doctors shall then appoint a third licensed doctor of medicine and the three shall act as a committee to determine by majority vote whether such disability exists. In the event such a committee is appointed under this Paragraph 6(b)(iii), Employee and Company hereby agree to bound by the determination of the majority of the committee as to the characterization of Employee's disability; or (iv) Good cause as determined by all of the independent directors of the Company's Board of Directors to be a material breach justifying termination of Employee. -3- (c) NOTICE OF TERMINATION. Any termination of Employee by the Company shall be communicated by a written Notice of Termination to Employee. For purposes of this Agreement, a Notice of Termination shall specify the termination provision of this Agreement relied upon to effect such termination and shall set forth in reasonable detail the specific facts and circumstances claimed to provide a basis for termination of Employee. 7. TERMINATION BY EMPLOYEE (a) TERMINATION. Upon written notice delivered to the Company in accordance with Section 6(c), Employee may terminate his employment hereunder for: (i) "Good Reason" as is herein defined; or (ii) health reasons, if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health or his life, provided that Employee shall have furnished the Company with a written statement from a qualified doctor of medicine to such effect and provided, further, that, at the Company's request, Employee shall submit to an examination by a doctor of medicine selected by the Company and such doctor of medicine shall have concurred in the conclusion of the Employee's doctor. In the event that Employee elects to terminate his employment for health reasons in accordance with this Paragraph 7(a)(ii), the Company shall pay as severance compensation to Employee sixty percent (60%) of his yearly salary for the remainder of the term of this Agreement. (b) "GOOD REASON" means; (i) the occurrence of a "Change in Control" of the Company (as defined herein); (ii) a failure by the Company to comply with any material provision of this Agreement that has not been cured within thirty (30) days after notice of such noncompliance has been given by Employee to the Company; or (iii) any purported termination of Employee's employment which is not effected pursuant to a Notice of Termination as set forth in Paragraph 6(c). (c) "CHANGE IN CONTROL" occurs if (i) substantially all the assets of the Company are sold to, or the Company is merged with, any "person," as that term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, other than a then existing shareholder or group of shareholders of the Company (or affiliate thereof) owning fifty percent (50%) or more of the combined voting power of the Company's then -4- outstanding securities, or (ii) any person or group becomes or is discovered to be a beneficial owner (as defined in Rule 13d-3 under the Exchange Act as in effect on the date hereof) directly of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of Company's then outstanding securities (unless such person or group owns at least twenty-five percent (25%) of such voting power on the effective date of this Agreement), and in connection with such change in ownership the individuals who constitute the Board of Directors of Company immediately prior to such change cease to constitute at least a majority of the Board of Directors thereafter. 8. PAYMENT UPON TERMINATION (a) DATE. The "Termination Date" shall be the effective date specified in the Notice of Termination unless the party receiving such notice disputes the Notice of Termination as contrary to the terms and conditions of this Agreement. In that case, the Termination Date shall be the date such dispute is finally resolved either by mutual written agreement of the parties, by a binding and final arbitration award, or by a final judgment, order, or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected). (b) TERMINATION BY COMPANY. In the event the Company terminates Employee pursuant to Paragraphs 6(b)(i), 6(b)(ii), or 6(b)(iv), the Company shall pay to Employee his full salary through the Termination Date after which the Company shall have no further obligation to Employee under this Agreement. (c) DEATH. The Company shall maintain a life insurance policy owned by Employee which provides for payment to Employee's estate or designated beneficiary, a death benefit of $500,000. (d) PERMANENT DISABILITY. In the event the Company terminates Employee due to permanent disability pursuant to Paragraph 6(b)(iii), the Company shall pay to Employee eighty percent (80%) of Employee's yearly salary for a period of five (5) years following termination. Such payments shall begin no later than thirty (30) days following the Termination Date or, in the event such termination is contested pursuant to Paragraph 6(b)(iii), thirty (30) days following the decision of the commission. (e) WRONGFUL TERMINATION or TERMINATION BY EMPLOYEE FOR GOOD REASON. If, in breach of this Agreement, the Company terminates Employee's employment other than pursuant to Section 6 (it being understood that a termination purported to be pursuant to Section 6 hereof which is disputed by Employee and finally determined not to have been proper, shall be a termination by the Company in breach of this Agreement) or if Employee terminates his employment for Good Reason, then: -5- (i) The Company shall pay Employee his full salary through the Termination Date at the rate in effect at the time the Notice of Termination is given; and (ii) In lieu of any further compensation payments to Employee for periods subsequent to the Termination Date, the Company shall pay as severance pay to Employee an amount equal to one dollar less than three (3) times Employee's average total compensation for the five (5) full taxable years preceding the Change in Control, as determined in accordance with the "parachute payments" provisions of the Internal Revenue Code in effect on the date of this Agreement. If resulting from a termination based on a Change in Control of the Company, such payments shall be made in a lump sum on or before the thirtieth (30th) day following the Termination Date. If resulting from any other cause, such payments shall be made in substantially equal semimonthly installments on the fifteenth and last days of each month commencing with the month in which the Termination Date occurs and continuing for twenty-four (24) consecutive semimonthly payment dates (including the first such date as aforesaid); and (iii) If termination of Employee's employment arises out of a breach by the Company of this Agreement, the Company shall pay all other damages to which Employee may be entitled as a result of such breach, including damages for any and all loss of benefits to Employee under the Company's employee benefit plans that Employee would have received if the Company had not breached this Agreement and had Employee's employment continued for the full term as set forth in Section 2 and including all legal fees and expenses incurred by Employee as a result of such termination including, but not limited to, all such fees expended in enforcement of this Agreement. If Employee resigns for Good Reason and the Company contests its obligations, as hereunder, Employee shall be entitled to recover as damages the amount of his legal fees and expenses, including costs of investigation, related to his enforcement of the Agreement. (f) CONTINUANCE OF BENEFITS. Unless the Company terminates Employee for Cause or death, the Company shall maintain in full force and effect, for the continued benefit of Employee for the greater number of years (including partial years) remaining in the term of the employment hereunder or the number three (3), all employee benefit plans and programs in which Employee was entitled to participate immediately prior to the Termination Date provided that Employee's continued participation is possible under the general terms and provisions of such plans and programs. In the event that Employee's participation in any such plan or program is barred, the Company shall arrange to provide Employee with benefits substantially similar to those which Employee would otherwise have been entitled to receive under such plans and programs from which his continued participation is barred. -6- (g) NO DUTY TO MITIGATE. Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise. 9. SEVERABILITY The provisions of this Agreement are severable. If a court of competent jurisdiction determines that any one or more provisions of this Agreement is invalid, void, or unenforceable, in whole or in part, it will be severed therefrom. The remaining provisions of this Agreement shall then continue in full force without being impaired or invalidated in any way. 10. ASSIGNMENT; BINDING EFFECT (a) ASSIGNABILITY. Subject to the restrictions in this Section 10, the Company may assign this Agreement. (b) COMPANY'S OBLIGATION UPON ASSIGNMENT OR SUCCESSION. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company or assignee of this Agreement, by agreement in form and substance satisfactory to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle Employee to compensation from the Company in the same amount and on the same terms as he would be entitled to hereunder if he terminated his employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Termination Date. As used in this Agreement, "Company" shall mean the Company as herein before defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 10, or which otherwise becomes bound by all the terms and provisions of this Agreement by operations of law. (c) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding on the parties and their respective successors and assigns. If Employee should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided for herein, shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to Employee's estate. -7- 11. CONFIDENTIAL INFORMATION Employee agrees that he shall not, during the term of this Agreement, and for a period of five (5) years following its termination, absent the Company's consent, disclose to any person, or otherwise use or exploit any non-public proprietary or confidential information of material significance to the Company and/or its affiliates, including without limitation trade secrets, customer lists, records of research, memoranda, proposals, reports, methods, processes, techniques, non-public financial information, contracts, negotiations, business plans and strategies, marketing data or other non-public information regarding the Company and/or any of its affiliates, their business, properties or affairs ("CONFIDENTIAL INFORMATION") obtained by him at any time prior to or subsequent to the execution of this Agreement, except to the extent required by his performance of his assigned duties for the Company (including its affiliates). Upon termination of employment, Employee shall surrender all Confidential Information and all other property belonging to the Company and its subsidiaries, it being understood by Employee that such documents are the sole property of the Company and that Employee shall not make any copies thereof. Additionally, the terms and conditions of this Agreement shall constitute Confidential Information and shall not be disclosed by Employee except in accordance with this Section 11. 12. CONFLICTING INVESTMENTS During the term of this Agreement and for one (1) year after termination of this Agreement, Employee shall not make or cause to be made on his behalf, or maintain an investment in any business which is engaged, either in whole or in part, in any business which is competitive with or detrimental to any businesses of the Company, or its subsidiaries, except that Employee may make or maintain an investment of no more than five percent (5%) of any outstanding class of capital stock of any publicly traded company, provided such class of capital stock is regularly traded by the public, without prior written permission of the Company. 13. ENTIRE AGREEMENT This Agreement constitutes the entire understanding between the parties concerning the subject matter hereof. This Agreement supersedes all negotiations, prior discussions, and preliminary agreements. This Agreement may not be amended except in a writing executed by the Employee and the Company. 14. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of California, regardless of the application of conflicts of laws principles. -8- 15. NOTICES All notices, requests, demands and other communication required or contemplated under this Agreement, shall be in writing and shall be deemed to have been duly given when delivered personally or when enclosed in a properly sealed and addressed envelope, registered or certified, return receipt requested, and deposited (postage prepaid) in a post office or branch post office regularly maintained by the United States Government. Any notice given to the Company under the terms of this Agreement shall be addressed to the Company at the following address: Safeguard Health Enterprises, Inc. Attention: Secretary 505 North Euclid Street P.O. Box 3210 Anaheim, California 92803-3210 Any notice to be given to Employee shall be addressed to him at his home address last shown on the Company's records, or at such other address as either party may hereafter designate in writing to the other. 16. WAIVER No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver. 17. COUNTERPARTS This Agreement may be executed in counterparts, and such counterparts may be transmitted by facsimile, and all counterparts, taken together, will constitute one and the same document. -9- 18. ARBITRATION Any dispute regarding any aspect of this Agreement or any act that allegedly has or would violate any provision of this Agreement must be submitted to arbitration in Orange County, California, in accordance with the rules of the Judicial Arbitration and Mediations Service ("JAMS") as the exclusive remedy for such claim or dispute. Either party may invoke this clause by serving on the other, in writing, a request to arbitrate. Within thirty (30) days thereafter, either party may institute proceedings in superior court to enforce this clause by way of reference pursuant to Section 638 of the California Code of Civil Procedure. If the parties cannot mutually select a judge from the JAMS panel, the superior court shall make the selection. The decision of JAMS will be final and binding. If Employee alleges in good faith that he has resigned for Good Reason, then the Company is required to advance to him any amounts necessary for legal fees and expenses, including costs of investigation, related to the dispute, subject to the Company's receipt of his undertaking to repay such amounts if it is ultimately determined by JAMS that he is not entitled to keep such amounts as damages under Section 8(e)(iii). IN WITNESS WHEREOF, the parties have duly executed this Agreement effective May 25, 1995. EMPLOYEE SAFEGUARD HEALTH ENTERPRISES, INC. /s/ John E. Cox By: /s/ Steven J. Baileys - ------------------------------- ---------------------------------- JOHN E. COX STEVEN J. BAILEYS, D.D.S., President By: /s/ Ronald I. Brendzel --------------------------------- RONALD I. BRENDZEL, Secretary -10- EX-10.63 5 EMPLOYMENT AGREEMENT (BUTTS AND THE CO.) EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into as of May 25, 1995, by and between Safeguard Health Enterprises, Inc., a Delaware Corporation ("Company") and Wayne K. Butts ("Employee"). The Company desires to have the benefits of Employee's knowledge and experience as a full-time employee and considers such employment a vital element to protecting and enhancing the best interests of the Company, and Employee desires to be employed full time by the Company. The Company and Employee desire to enter into an agreement reflecting the terms under which the Company will employ Employee as its Senior Vice President ("SVP") until May 31, 2000. Therefore, the Company and Employee agree to the following terms and conditions under which Employee will serve as SVP of the Company: 1. EMPLOYMENT SERVICES AND DUTIES The Company agrees to employ and retain the services of Employee as SVP and Employee hereby agrees to continue employment with the Company as its SVP for the term of this Agreement. During the term of this Agreement, Employee agrees to perform his duties as SVP faithfully, to the best of his ability and in the best interests of the Company, to perform both his regular duties and other projects as requested by the Board of Directors of the Company, and assume such other additional reasonable duties or capacities as the Board of Directors of the Company may provide. 2. TERM OF EMPLOYMENT The Company agrees to employ Employee, and Employee agrees to serve, as SVP for the period commencing the date of the execution of this Agreement until the earlier of May 31, 2000, the date of Employee's death, or the date of termination pursuant to Sections 6 and 7 of this Agreement. 3. COMPENSATION TERMS The Company agrees to compensate Employee for his services rendered as SVP under this Agreement as follows: (a) BASE SALARY. Effective May 25, 1995, and for the remainder of the term of employment, Employee shall receive a base salary of $125,000 per year. -1- (b) BONUSES. Employee shall receive such bonuses, if any, as determined by the Board of Directors of the Company in its sole and absolute discretion. (c) BENEFITS. Subject to satisfaction of all eligibility requirements, Employee and his dependents shall be entitled to and shall receive any and all benefits generally available to executive employees of the Company, including participation in health, dental, vision and life insurance programs and retirement plans. (d) INDEMNIFICATION. The Company shall indemnify Employee in accordance with the terms and conditions of its then current indemnification agreements with directors and/or officers of the Company. 4. EXPENSES (a) BUSINESS EXPENSES. The Company authorizes Employee to incur the reasonable and necessary expenses for promoting the business of the Company and its subsidiaries according to the policies of the Company with respect thereto and as may be determined from time to time by the Board of Directors of the Company. The Company agrees to reimburse Employee for any such reasonable and necessary expenses paid out of Employee's own fund. (b) TRANSPORTATION. During the term of this Agreement, the Company shall furnish to Employee an automobile expense allowance as may be determined by the Company's Chief Executive Officer. 5. VACATION Unless otherwise agreed to orally or by written agreement between Employee and the Company, Employee shall be entitled to four weeks of paid vacation during any fiscal year. Such vacation may be taken at such times as are mutually agreed upon by Employee and the Company, and pursuant to the Company's vacation policy then in effect. 6. TERMINATION BY COMPANY (a) TERMINATION. The Company may terminate Employee for "Cause." (b) "CAUSE" shall mean: (i) The failure of Employee to render services to the Company in accordance with his employment duties, as determined by all of the independent directors of the Company's Board of Directors; -2- (ii) The commission by Employee of an act of fraud or embezzlement against Company or an act which Employee knew to be in violation of his duties to the Company (including, but not limited to, the unauthorized disclosure of confidential information); (iii) The death or "permanent disability" of Employee. Permanent disability shall occur if, during the term of this Agreement, Employee becomes physically or mentally disabled such that he is substantially unable to perform his duties hereunder and such disability continues for six (6) continuous months; or (iv) Good cause as determined by all of the independent directors of the Company's Board of Directors to be a material breach justifying termination of Employee. (c) NOTICE OF TERMINATION. Any termination of Employee by the Company shall be communicated by a written Notice of Termination to Employee. For purposes of this Agreement, a Notice of Termination shall specify the termination provision of this Agreement relied upon to effect such termination and shall set forth in reasonable detail the specific facts and circumstances claimed to provide a basis for termination of Employee. 7. TERMINATION BY EMPLOYEE (a) TERMINATION. Upon thirty (30) days advance written notice delivered to the Company, Employee may terminate his employment with the Company; or upon written notice delivered to the Company in accordance with Section 6(c), Employee may terminate his employment hereunder for "Good Reason" as is herein defined. (b) "GOOD REASON" means; (i) the occurrence of a "Change in Control" of the Company (as defined herein); (ii) a failure by the Company to comply with any material provision of this Agreement that has not been cured within thirty (30) days after notice of such noncompliance has been given by Employee to the Company; or (iii) any purported termination of Employee's employment which is not effected pursuant to a Notice of Termination as set forth in Paragraph 6(c). -3- (c) "CHANGE IN CONTROL" occurs if (i) substantially all the assets of the Company are sold to, or the Company is merged with, any "person," as that term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, other than a then existing shareholder or group of shareholders of the Company (or affiliate thereof) owning fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities, or (ii) any person or group becomes or is discovered to be a beneficial owner (as defined in Rule 13d-3 under the Exchange Act as in effect on the date hereof) directly of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of Company's then outstanding securities (unless such person or group owns at least twenty-five percent (25%) of such voting power on the effective date of this Agreement), and in connection with such change in ownership the individuals who constitute the Board of Directors of Company immediately prior to such change cease to constitute at least a majority of the Board of Directors thereafter. 8. PAYMENT UPON TERMINATION (a) DATE. The "Termination Date" shall be the effective date specified in the Notice of Termination as provided for in Paragraphs 6(c) or 7(a). (b) TERMINATION BY COMPANY. In the event the Company terminates Employee pursuant to Paragraphs 6(b)(i), 6(b)(ii), or 6(b)(iv), the Company shall pay to Employee his full salary through the Termination Date after which the Company shall have no further obligation to Employee under this Agreement. (c) DEATH. The Company shall maintain a life insurance policy owned by the Employee which provides for payment to Employee's estate or designated beneficiary, a death benefit of $100,000. (d) PERMANENT DISABILITY. In the event the Company terminates Employee due to permanent disability pursuant to Paragraph 6(b)(iii), the Company shall pay to Employee fifty percent (50%) of Employee's annual salary then in effect, payable in equal amounts over a period of six (6) months following termination. Such payments shall begin no later than thirty (30) days following the Termination Date. (e) WRONGFUL TERMINATION or TERMINATION BY EMPLOYEE FOR GOOD REASON. If, in breach of this Agreement, the Company terminates Employee's employment other than pursuant to Section 6 (it being understood that a termination purported to be pursuant to Section 6 hereof which is disputed by Employee and finally determined not to have been proper, shall be a termination by the Company in breach of this Agreement) or if Employee terminates his employment for Good Reason, then; -4- (i) The Company shall pay Employee his full salary through the Termination Date at the rate in effect at the time the Notice of Termination is given; and (ii) In lieu of any further compensation payments to Employee for periods subsequent to the Termination Date, the Company shall pay as severance pay to Employee an amount equal to one (1) times Employee's average total compensation for the five (5) full taxable years preceding the Change in Control, as determined in accordance with the "parachute payments" provisions of the Internal Revenue Code in effect on the date of this Agreement. If resulting from a termination based on a Change in Control of the Company, such payments shall be made in a lump sum on or before the thirtieth (30th) day following the Termination Date. If resulting from any other cause, such payments shall be made in substantially equal semimonthly installments on the fifteenth and last days of each month commencing with the month in which the Termination Date occurs and continuing for twenty-four (24) consecutive semimonthly payment dates (including the first such date as aforesaid); and (iii) If termination of Employee's employment arises out of a breach by the Company of this Agreement, the Company shall pay all other damages to which Employee may be entitled as a result of such breach, including damages for any and all loss of benefits to Employee under the Company's employee benefit plans that Employee would have received if the Company had not breached this Agreement and had Employee's employment continued for the full term as set forth in Section 2 and including all legal fees and expenses incurred by Employee as a result of such termination including, but not limited to, all such fees expended in enforcement of this Agreement. If Employee resigns for Good Reason and the Company contests its obligations, as hereunder, Employee shall be entitled to recover as damages the amount of his legal fees and expenses, including costs of investigation, related to his enforcement of the Agreement. (f) NO DUTY TO MITIGATE. Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise. 9. SEVERABILITY The provisions of this Agreement are severable. If a court of competent jurisdiction determines that any one or more provisions of this Agreement is invalid, void, or unenforceable, in whole or in part, it will be severed therefrom. The remaining provisions of this Agreement shall then continue in full force without being impaired or invalidated in any way. -5- 10. ASSIGNMENT; BINDING EFFECT (a) ASSIGNABILITY. This Agreement may be assigned by the Company to any successor to all or substantially all of the business and/or assets of the Company. (b) COMPANY'S OBLIGATION UPON ASSIGNMENT OR SUCCESSION. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company or assignee of this Agreement, by agreement in form and substance satisfactory to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtains such agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle Employee to compensation from the Company in the same amount and on the same terms as he would be entitled to hereunder if he terminated his employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Termination Date. As used in this Agreement, "Company" shall mean the Company as herein before defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 10, or which otherwise becomes bound by all the terms and provision of this Agreement by operations of law. (c) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding on the parties and their respective successors and assigns. If Employee should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided for herein, shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to Employee's estate. 11. CONFIDENTIAL INFORMATION Employee agrees that he shall not, during the term of this Agreement, and for a period of five (5) years following its termination, absent the Company's consent, disclose to any person, or otherwise use or exploit any non- public proprietary or confidential information of material significance to the Company and/or its affiliates, including without limitation trade secrets, customer lists, records of research, memoranda, proposals, reports, methods, processes, techniques, non-public financial information, contracts, negotiations, business plans and strategies, marketing data or other non-public information regarding the Company and/or any of its affiliates, their business, properties or affairs ("CONFIDENTIAL INFORMATION") obtained by him at any time prior to or subsequent to the execution of this Agreement, except to the extent required by his performance of his assigned duties for the -6- Company (including its affiliates). Upon termination of employment, Employee shall surrender all Confidential Information and all other property belonging to the Company and its subsidiaries, it being understood by Employee that such documents are the sole property of the Company and that Employee shall not make any copies thereof. Additionally, the terms and conditions of this Agreement shall constitute Confidential Information and shall not be disclosed by Employee except in accordance with this Section 11. 12. CONFLICTING INVESTMENTS During the term of this Agreement and for one (1) year after termination of this Agreement, Employee shall not make or cause to be made on his behalf, or maintain an investment in any business which is engaged, either in whole or in part, in any business which is competitive with or detrimental to any businesses of the Company, or its subsidiaries, except that Employee may make or maintain an investment of no more than five percent (5%) of any outstanding class of capital stock of any publicly traded company, provided such class of capital stock is regularly traded by the public, without prior written permission of the Company. 13. ENTIRE AGREEMENT This Agreement constitutes the entire understanding between the parties concerning the subject matter hereof. This Agreement supersedes all negotiations, prior discussions, and preliminary agreements. This Agreement may not be amended except in a writing executed by the Employee and the Company. 14. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of California, regardless of the application of conflicts of laws principles. 15. NOTICES All notices, requests, demands and other communication required or contemplated under this Agreement, shall be in writing and shall be deemed to have been duly given when delivered personally or when enclosed in a properly sealed and addressed envelope, registered or certified, return receipt requested, and deposited (postage prepaid) in a post office or branch post office regularly maintained by the United States Government. Any notice given to the Company under the terms of this Agreement shall be addressed to the Company at the following address: -7- Safeguard Health Enterprises, Inc. Attention: Secretary 505 North Euclid Street P.O. Box 3210 Anaheim, California 92803-3210 Any notice to be given to Employee shall be addressed to him at his home address last shown on the Company's records, or at such other address as either party may hereafter designate in writing to the other. 16. WAIVER No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver. 17. COUNTERPARTS This Agreement may be executed in counterparts, and such counterparts may be transmitted by facsimile, and all counterparts, taken together, will constitute one and the same document. 18. ARBITRATION Any dispute regarding any aspect of this Agreement or any act that allegedly has or would violate any provision of this Agreement must be submitted to arbitration in Orange County, California, in accordance with the rules of the Judicial Arbitration and Mediations Service ("JAMS") as the exclusive remedy for such claim or dispute. Either party may invoke this clause by serving on the other, in writing, a request to arbitrate. Within thirty (30) days thereafter, either party may institute proceedings in superior court to enforce this clause by way of reference pursuant to Section 638 of the California Code of Civil Procedure. If the parties cannot mutually select a judge from the JAMS panel, the superior court shall make the selection. The decision of JAMS will be final and binding. If Employee alleges in good faith that he has resigned for Good Reason, then the Company is required to advance to him any amounts necessary for legal fees and expenses, including costs of investigation, related to the dispute, subject to the Company's receipt of his undertaking to repay such amounts if it is ultimately determined by JAMS that he is not entitled to keep such amounts as damages under Section 8(e)(iii). -8- IN WITNESS WHEREOF, the parties have duly executed this Agreement effective May 25, 1995. EMPLOYEE SAFEGUARD HEALTH ENTERPRISES, INC. /s/ Wayne K. Butts By: /s/ Steven J. Baileys - -------------------------- ------------------------------ WAYNE K. BUTTS STEVEN J. BAILEYS, D.D.S., President By: /s/ Ronald I. Brendzel ------------------------------ RONALD I. BRENDZEL, Secretary -9- EX-10.64 6 FORM OF RIGHTS AGREEMENT SAFEGUARD HEALTH ENTERPRISES, INC. AND AMERICAN STOCK TRANSFER & TRUST COMPANY AS RIGHTS AGENT ______________ RIGHTS AGREEMENT DATED AS OF MARCH 22, 1996 TABLE OF CONTENTS
1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Appointment of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . 5 3. Issue of Rights Certificates. . . . . . . . . . . . . . . . . . . . . . . 5 4. Form of Rights Certificates . . . . . . . . . . . . . . . . . . . . . . . 6 5. Countersignature and Registration . . . . . . . . . . . . . . . . . . . . 7 6. Transfer, Split-Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed, Lost & Stolen Rights Certificates. . . . . . . 8 7. Exercise of Rights; Purchase Price; Expiration Date of Rights . . . . . . 8 8. Cancellation and Destruction of Rights Certificates . . . . . . . . . . . 10 9. Reservation and Availability of Capital Stock . . . . . . . . . . . . . . 10 10. Preferred Stock Record Date . . . . . . . . . . . . . . . . . . . . . . . 12 11. Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 12. Certificate of Adjusted Purchase Price or Number of Shares. . . . . . . . 19 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power. . . 19 14. Fractional Rights and Fractional Shares . . . . . . . . . . . . . . . . . 22 15. Rights of Action. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 16. Agreement of Rights Holders . . . . . . . . . . . . . . . . . . . . . . . 24 17. Rights Certificate Holder Not Deemed a Shareholder. . . . . . . . . . . . 24 18. Concerning the Rights Agent . . . . . . . . . . . . . . . . . . . . . . . 25 19. Merger or Consolidation or Change of Name of Rights Agent . . . . . . . . 25 20. Duties of Rights Agent. . . . . . . . . . . . . . . . . . . . . . . . . . 25 21. Change of Rights Agents . . . . . . . . . . . . . . . . . . . . . . . . . 27 22. Issuance of New Rights Certificates . . . . . . . . . . . . . . . . . . . 28 23. Redemption and Termination. . . . . . . . . . . . . . . . . . . . . . . . 28 24. Exchange. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 25. Notice of Certain Events. . . . . . . . . . . . . . . . . . . . . . . . . 31 26. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 27. Supplements and Amendments. . . . . . . . . . . . . . . . . . . . . . . . 32 28. Successors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 29. Determination and Actions by the Board of Directors, etc. . . . . . . . . 33 30. Benefits of this Agreement. . . . . . . . . . . . . . . . . . . . . . . . 33 31. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 32. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 33. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 34. Descriptive Headings; References. . . . . . . . . . . . . . . . . . . . . 34
RIGHTS AGREEMENT RIGHTS AGREEMENT, dated as of March 22, 1996 ("AGREEMENT"), between Safeguard Health Enterprises, Inc., a Delaware corporation ("COMPANY") and American Stock Transfer & Trust Company ("RIGHTS AGENT"). WHEREAS, on March 22, 1996 ("RIGHTS DIVIDEND DECLARATION DATE"), the Board of Directors of the Company authorized and declared a dividend distribution of one Right for each share of Common Stock (as hereinafter defined) of the Company outstanding at the close of business on April 12, 1996 ("RECORD DATE"), and has authorized the issuance of one Right (as such number may hereinafter be adjusted pursuant to the provisions of SECTION 11(P) hereof) for each share of Common Stock of the Company issued from the Record Date (whether originally issued or delivered from the Company's treasury) until the earliest of the Distribution Date or a Section 13 Event or the Expiration Date (each as hereinafter defined), each Right initially representing the right to purchase one one-thousandth of a share of Series A Junior Participating Preferred Stock of the Company having the rights, preferences, privileges and restrictions set forth in the form of Certificate of Designation, Preferences and Rights attached hereto as EXHIBIT A, upon the terms and subject to the conditions hereinafter set forth ("RIGHTS"); NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the following terms have the meanings indicated: (a) "ACQUIRING PERSON" shall mean any Person who or which, together with all Affiliates and Associates of such Person, without the prior approval of the Board of Directors of the Company, shall become, after the date hereof, the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding, but shall not include an Exempt Person or any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such plan, or a Person who or which, together with its Affiliates and Associates, shall become the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding solely as a result of a reduction in the number of shares of Common Stock outstanding due to a repurchase of Common Stock by the Company, unless such Person shall thereafter purchase or otherwise become the Beneficial Owner of additional shares of Common Stock. Notwithstanding the foregoing, if the Board of Directors of the Company determines in good faith that a Person who would otherwise be an "Acquiring Person," as defined pursuant to the foregoing provisions of this paragraph (a), has become such inadvertently, and such Person divests as promptly as practicable a sufficient number of shares of Common Stock so that such Person would no longer be an "Acquiring Person," as defined pursuant to the foregoing provisions of this paragraph (a), then such Person shall not be deemed to be an "Acquiring Person" for any purposes of this Agreement. (b) "ACT" shall mean the Securities Act of 1933. (c) "AFFILIATE" and "ASSOCIATE" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. (d) A Person shall be deemed the "BENEFICIAL OWNER" of, and shall be deemed to "BENEFICIALLY OWN," any securities: (i) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing) or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; PROVIDED, HOWEVER, that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own," (A) securities tendered pursuant to a tender or exchange offer made by such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange, or (B) securities issuable upon exercise of Rights at any time prior to the occurrence of a Triggering Event, or (C) securities issuable upon exercise of Rights from and after the occurrence of a Triggering Event which Rights were acquired by such Person or any of such Person's Affiliates or Associates prior to the Distribution Date or pursuant to SECTION 3(A) or SECTION 22 (the "ORIGINAL RIGHTS") or pursuant to SECTION 11(I) in connection with an adjustment made with respect to any Original Rights; (ii) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to vote or dispose of or has "beneficial ownership" of (as determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange Act), including pursuant to any agreement, arrangement or understanding, whether or not in writing; PROVIDED, HOWEVER, that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own," any security under this subparagraph (ii) as a result of an agreement, arrangement or understanding to vote such security if such agreement arrangement or understanding: (A) arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable provisions of the General Rules and Regulations under the Exchange Act, and (B) is not also then reportable by such Person on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person (or any of such Person's Affiliates or Associates) has any agreement, arrangement or understanding (whether or not in writing), for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in the proviso to subparagraph (ii) of this paragraph (d)) or disposing of any voting securities of the Company; PROVIDED, HOWEVER, that nothing in this paragraph (d) shall cause a person engaged in business as an underwriter of securities to be the "Beneficial Owner" of, or to "beneficially own," any securities acquired through such person's participation in good faith in a firm commitment underwriting until the expiration of forty days after the date of such acquisition. (e) "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or a day on which banking institutions in the State of California are authorized or obligated by law or executive order to close. (f) "CLOSE OF BUSINESS" on any given date shall mean 5:00 P.M., California time on such date; PROVIDED, HOWEVER, that if such date is not a Business Day it shall mean 5:00 P.M., California time on the next succeeding Business Day. (g) "COMMON STOCK" shall mean the common stock, $0.01 par value, of the Company, except that "Common Stock" when used with reference to any Person other 2 than the Company shall mean the capital stock (or units of beneficial interest which represent the right to participate in profits, losses, deductions and credits) of such Person with the greatest voting power, or the equity securities or other equity interest having power to control or direct the management, of such Person. (h) "COMMON STOCK EQUIVALENTS" shall have the meaning set forth in SECTION 11(A)(III). (i) "CONTINUING DIRECTOR" shall mean (i) any member of the Board of Directors of the Company, while a member of the Board, who is not an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, or a representative of an Acquiring Person or of any such Affiliate or Associate, and who was a member of the Board prior to the date of this Agreement, or (ii) any Person who subsequently becomes a member of the Board, while a member of the Board, who is not an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, or a representative of an Acquiring Person or of any such Affiliate or Associate, if such Person's nomination for election or election to the Board is recommended or approved by a majority of the Continuing Directors. (j) "CURRENT MARKET PRICE" shall have the meaning set forth in SECTION 11(D)(I). (k) "CURRENT VALUE" shall have the meaning set forth in SECTION 11(A)(III). (l) "DISTRIBUTION DATE" shall have the meaning set forth in SECTION 3(A). (m) "EQUIVALENT PREFERRED STOCK" shall have the meaning set forth in SECTION 11(B). (n) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended and in effect on the date of this Agreement. (o) "EXEMPT PERSON" shall mean the Company, any Subsidiary of the Company, any employee benefit plan or employee stock plan of the Company or any Subsidiary of the Company, or any person or entity organized, appointed, or established by the Company or any Subsidiary of the Company, for or pursuant to the terms of any such plan. (p) "EXPIRATION DATE" shall mean the earliest of (i) the Final Expiration Date, (ii) the time at which the Rights are redeemed as provided in SECTION 23, (iii) the time at which the Board of Directors orders the exchange of Rights as provided in SECTION 24, or (iv) the consummation of a transaction contemplated by SECTION 13(D). (q) "FINAL EXPIRATION DATE" shall mean the close of business on March 21, 2006. (r) "PERSON" shall mean any individual, firm, corporation, partnership, limited liability company or partnership or other entity. (s) "PREFERRED STOCK" shall mean shares of Series A Junior Participating Preferred Stock, $.01 par value, of the Company and, to the extent that there is not a sufficient number of shares of Series A Junior Participating Preferred Stock authorized to 3 permit the full exercise of the Rights, any other series of Preferred Stock, $.01 par value, of the Company designated for such purpose containing terms substantially similar to the terms of the Series A Junior Participating Preferred Stock. (t) "PRINCIPAL PARTY" shall have the meaning set forth in SECTION 13(B). (u) "PURCHASE PRICE" shall have the meaning set forth in SECTION 4(A). (v) "RECORD DATE" shall have the meaning set forth in the WHEREAS clause at the beginning of this Agreement. (w) "REDEMPTION PRICE" shall have the meaning set forth in SECTION 23(A). (x) "RIGHTS" shall have the meaning set forth in the WHEREAS clause at the beginning of this Agreement. (y) "RIGHTS CERTIFICATES" shall have the meaning set forth in SECTION 3(A). (z) "RIGHTS DIVIDEND DECLARATION DATE" shall-have the meaning set forth in the WHEREAS clause at the beginning of this Agreement. (aa) "SECTION 11(A)(II) EVENT" shall mean any event described in SECTION 11(A)(II). (bb) "SECTION 11(A)(II) TRIGGER DATE" shall have the meaning set forth in SECTION 11(A)(III). (cc) "SECTION 13 EVENT" shall mean any event described in clause (x), (y) or (z) of SECTION 13(A). (dd) "SPECIAL VOTE:" An action of the Company's Board of Directors by "Special Vote" means an action that is taken (and can only be taken) at a time when there are two or more Continuing Directors, and that is approved by both (i) a majority of the Continuing Directors, and (ii) a majority of the entire Board of Directors, including the Continuing Directors. (ee) "SPREAD" shall have the meaning set forth in SECTION 11(A)(III). (ff) "STOCK ACQUISITION DATE" shall mean the first date of public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) under the Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has become such or such earlier date as a majority of the directors shall become aware of the existence of an Acquiring Person; PROVIDED THAT, if such person is thereafter determined not to have become an Acquiring Person within the meaning of SECTION 1(A), then no Stock Acquisition Date shall be deemed to have occurred. (gg) "SUBSIDIARY" shall mean, with reference to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power sufficient to elect at least a majority of the directors of such corporation (or 4 other persons performing similar functions) is beneficially owned, directly or indirectly, by such Person, or otherwise controlled by such Person. (hh) "SUBSTITUTION PERIOD" shall have the meaning set forth in SECTION 11(A)(III). (ii) "TRADING DAY" shall have the meaning set forth in SECTION 11(D)(I). (jj) "TRIGGERING EVENT" shall mean any Section 11(a)(ii) Event or any Section 13 Event. Any determination required by the definitions contained in this SECTION 1 shall be made by the Board of Directors of the Company in its good faith judgment, which determination shall be binding on the Rights Agent and the holders of the Rights. 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the Rights Agent to act as agent for the Company and the holders of the Rights (who, in accordance with SECTION 3, shall prior to the Distribution Date also be the holders of the Common Stock) in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such Co- Rights Agents as it may deem necessary or desirable. 3. ISSUE OF RIGHTS CERTIFICATES. (a) Until the earlier of (i) the close of business on the tenth day after the Stock Acquisition Date (or, if the tenth day after the Stock Acquisition Date occurs before the Record Date, the close of business on the Record Date), or (ii) the close of business on the tenth day after the date that a tender or exchange offer by any Person (other than an Exempt Person) is first published or sent or given within the meaning of Rule 14d-2(a) of the General Rules and Regulations under the Exchange Act, if upon consummation thereof, such Person together with its Affiliates and Associates, would be the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding (irrespective of whether any shares are actually purchased pursuant to any such offer) (each of the time periods in (i) and (ii) being subject to extension as provided in SECTION 27 and the earliest of (i) and (ii) being herein referred to as the "DISTRIBUTION DATE"), (x) the Rights will be evidenced (subject to the provisions of paragraph (b) of this SECTION 3) by the certificates for the Common Stock registered in the names of the holders of the Common Stock (which certificates for Common Stock shall be deemed also to be certificates for Rights) and not by separate certificates, and (y) each Right will be transferable only in connection with the transfer of the underlying share of Common Stock (including a transfer to the Company). As soon as practicable after the Distribution Date, the Rights Agent will send to each record holder of the Common Stock as of the close of business on the Distribution Date, at the address of such holder shown on the records of the Company, one or more rights certificates, in substantially the form of EXHIBIT B hereto (the "RIGHTS CERTIFICATES"), evidencing one Right for each share of Common Stock so held, subject to adjustment as provided herein. In the event that an adjustment in the number of Rights per share of Common Stock has been made pursuant to SECTION 11(P), at the time of distribution of the Rights Certificates, the Company shall make the necessary and appropriate rounding adjustments (in accordance with SECTION 14(A)) so that Rights Certificates representing only whole numbers of Rights are distributed and cash is paid in lieu of any fractional Rights. As of and after the Distribution Date, the Rights will be evidenced solely by such Rights Certificates. (b) As promptly as practicable following the Record Date, the Company will send a copy of a Summary of Rights to purchase Preferred Stock, containing substantially the information set forth in the form attached hereto as EXHIBIT C, to each record holder of the Common Stock as of the close of business on the Record Date, at the address of such holder shown on the records of the Company. With respect to certificates for the Common Stock outstanding as of the Record Date, until the Distribution Date, the Rights will be evidenced by such certificates for the Common Stock and the registered holders of the Common Stock shall also be the registered holders of the associated Rights. Until the earlier of the Distribution Date or the Expiration Date, the transfer of any certificates representing shares of Common Stock in respect of which Rights have been issued shall also constitute the transfer of the Rights associated with such shares of Common Stock. (c) Rights shall be issued in respect of all shares of Common Stock which are issued after the Record Date but prior to the earliest of the Stock Acquisition Date, a Section 13 Event or the Expiration Date. Certificates representing such shares of Common Stock (including, without limitation, certificates issued upon transfer or exchange of Common Stock) shall also be deemed to be certificates for Rights, and shall bear the following legend: "This certificate also represents Rights that entitle the holder hereof to certain rights as set forth in a Rights Agreement between the Corporation and American Stock Transfer & Trust Company, as Rights Agent, dated as of March 22, 1996 ("Rights Agreement"), the terms, conditions and limitations of which are hereby incorporated herein by reference and a copy of which is on file at the principal offices of the Corporation. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. The Corporation will mail to the holder of this certificate a copy of the Rights Agreement, as in effect on the date of mailing, without charge promptly after receipt of a written request therefor. Under certain circumstances set forth in the Rights Agreement, Rights issued to, or beneficially owned by, any Person who is, was or becomes an Acquiring Person or any Affiliate or Associate thereof (as such terms are defined in the Rights Agreement), whether currently held by or on behalf of such Person or by any subsequent holder, may become null and void." With respect to such certificates containing the foregoing legend, the Rights associated with the Common Stock represented by such certificates shall, until the Distribution Date, be evidenced by such certificates alone and registered holders of Common Stock shall also be the registered holders of the associated Rights, and the transfer of any of such certificates shall also constitute the transfer of the Rights associated with the Common Stock represented by such certificates. 4. FORM OF RIGHTS CERTIFICATES. (a) The Rights Certificates (and the forms of an election to purchase and of assignment and of certificates to be printed on the reverse thereof) when, as and if issued, shall each be substantially in the form set forth in EXHIBIT B hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the 6 provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Rights may from time to time be listed, or to conform to usage. Subject to the provisions of SECTION 11 and SECTION 22, the Rights Certificates, whenever distributed, shall be dated as of the Record Date and on their face shall entitle the holders thereof to purchase such number of one one-thousandths of a share of Preferred Stock as shall be set forth therein at the price set forth therein (such exercise price per one one-thousandth of a share, the "PURCHASE PRICE"), but the amount and type of securities purchasable upon the exercise of each Right and the Purchase Price thereof shall be subject to adjustment as provided herein. (b) Notwithstanding any other provision of this Agreement, any Rights Certificate issued pursuant to SECTION 3(A) or SECTION 22 that represents Rights beneficially owned by any Person known to be: (i) an Acquiring Person or any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom such Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which the Board of Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect avoidance of SECTION 7(E), and any Rights Certificate issued pursuant to SECTION 6 or SECTION 11 upon transfer, exchange, replacement or adjustment of any other Rights Certificate referred to in this sentence, shall contain (to the extent feasible) the following legend, modified as applicable to apply to such Person: "The Rights represented by this Rights Certificate are or were beneficially owned by a Person who was or became an Acquiring Person or an Affiliate or Associate of an Acquiring Person (as such terms are defined in the Rights Agreement). Accordingly, this Rights Certificate and the Rights represented hereby may become null and void in the circumstances specified in Section 7(e) of such Agreement." 5. COUNTERSIGNATURE AND REGISTRATION. (a) The Rights Certificates shall be executed on behalf of the Company by its Chairman of the Board, its President or any other officer of the Company designated by the Chairman or President, either manually or by facsimile signature, and shall have affixed thereto the Company's seal or a facsimile thereof which shall be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. The Rights Certificates shall be manually countersigned by the Rights Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Rights Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Rights Certificates, nevertheless, may be countersigned by the Rights Agent and issued and delivered by the Company with the same force and effect as though the person who signed such Rights Certificates had not ceased to be such officer of the Company; and any Rights Certificates may be signed on behalf of the Company by any person who, at the actual date of the execution of such Rights Certificate shall be a proper officer of the Company to sign such Rights Certificate, although at the date of the execution of this Rights Agreement any such person was not such an officer. 7 (b) Following the Distribution Date, the Rights Agent will keep or cause to be kept, at its office or offices designated as the appropriate place for surrender of Rights Certificates upon exercise or transfer, books for registration and transfer of the Rights Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Rights Certificates, the number of Rights evidenced on its face by each of the Rights Certificates and the certificate number and the date of each of the Rights Certificates. 6. TRANSFER, SPLIT-UP, COMBINATION AND EXCHANGE OF RIGHTS CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHTS CERTIFICATES. (a) Subject to the provisions of SECTION 4(B), SECTION 7(E) and SECTION 14, at any time after the close of business on the Distribution Date, and at or prior to the close of business on the Expiration Date, any Rights Certificate or Certificates may be transferred, split up, combined or exchanged for another Rights Certificate or Certificates, entitling the registered holder to purchase a like number of one-thousandths of a share of Preferred Stock (or, following a Triggering Event, Common Stock, other securities, cash or other assets, as the case may be) as the Rights Certificate or Certificates surrendered then entitled such holder (or former holder in the case of a transfer) to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Rights Certificate or Certificates shall make such request in writing delivered to the Rights Agent, and shall surrender the Rights Certificate or Certificates to be transferred, split up, combined or exchanged at the office or offices of the Rights Agent designated for such purpose. Neither the Rights Agent nor the Company shall be obligated to take any action whatsoever with respect to the transfer of any such surrendered Rights Certificate until the registered holder shall have completed and signed the certificate contained in the form of assignment on the reverse side of such Rights Certificate and shall have provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Thereupon the Rights Agent shall, subject to SECTION 4(B), SECTION 7(E) and SECTION 14, countersign and deliver to the Person entitled thereto a Rights Certificate or Rights Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Rights Certificate. (b) Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Rights Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Rights Certificate if mutilated, the Company will execute and deliver a new Rights Certificate of like tenor to the Rights Agent for countersignature and delivery to the registered owner in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated. 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF RIGHTS. (a) Subject to SECTION 7(E), 23(B) and 24(B), the registered holder of any Rights Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein including, without limitation, the restrictions on exercisability set forth in SECTION 9(C), SECTION 11(A)(III) and SECTION 23(A)), in whole or in part at any time after the Distribution Date upon surrender of the Rights Certificate, with the form of election to 8 purchase and the certificate on the reverse side thereof duly executed, to the Rights Agent at the office or offices of the Rights Agent designated for such purpose, together with payment of the aggregate Purchase Price with respect to the total number of one one-thousandths of a share of Preferred Stock (or other securities, cash or other assets, as the case may be) as to which such surrendered Rights are then exercisable, at or prior to the Expiration Date. (b) The Purchase Price for each one one-thousandth of a share of Preferred Stock pursuant to the exercise of a Right shall initially be $75.00, and shall be subject to adjustment from time to time as provided in SECTIONS 11 and 13(A) and shall be payable in accordance with paragraph (c) below. (c) Upon receipt of a Rights Certificate representing exercisable Rights, with the form of election to purchase and the certificate duly executed, accompanied by payment, with respect to each Right so exercised, of the Purchase Price per one one-thousandth of a share of Preferred Stock (or other shares, securities, cash or other assets, as the case may be) to be purchased as set forth below and an amount equal to any applicable transfer tax, the Rights Agent shall, subject to SECTION 20(K), thereupon promptly (i) (A) requisition from any transfer agent of the shares of Preferred Stock (or make available, if the Rights Agent is the transfer agent for such shares) certificates for the total number of one one-thousandths of a share of Preferred Stock to be purchased and the Company hereby authorizes its transfer agent to comply with all such requests, or (B) if the Company shall have elected to deposit the total number of shares of Preferred Stock issuable upon exercise of the Rights hereunder with a depository agent, requisition from the depository agent depository receipts representing such number of one one- thousandths of a share of Preferred Stock as are to be purchased (in which case certificates for the shares of Preferred Stock represented by such receipts shall be deposited by the transfer agent with the depository agent) and the Company will direct the depository agent to comply with such request, (ii) requisition from the Company an amount of cash, if any, to be paid in lieu of fractional shares in accordance with SECTION 14, (iii) after receipt of such certificates or depository receipts, cause the same to be delivered to or upon the order of the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder, and (iv) after receipt thereof, deliver such cash, if any, to or upon the order of the registered holder of such Rights Certificate. The payment of the Purchase Price (as such amount may be reduced pursuant to SECTION 11(A)(III)) may be made by bank draft, certified bank check or money order payable to the order of the Company. In the event that the Company is obligated to issue other securities (including Common Stock) of the Company, pay cash and/or distribute other property pursuant to SECTION 11(A), the Company will make all arrangements necessary so that such other securities, cash and/or other property are available for distribution by the Rights Agent, if and when appropriate. (d) In case the registered holder of any Rights Certificate shall exercise less than all the Rights evidenced thereby, a new Rights Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent and delivered to, or upon the order of, the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder, subject to the provisions of SECTION 14. (e) Notwithstanding anything in this Agreement to the contrary, from and after the occurrence of a Section 11(a)(ii) Event, any Rights beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring Person, (ii) a 9 transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person (or of any such Associate of Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) by or for the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom the Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which the Board of Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect the avoidance of this SECTION 7(E), shall become null and void without any further action and no holder of such Rights shall have any rights whatsoever with respect to such Rights, whether under any provision of this Agreement or otherwise. The Company shall use all reasonable efforts to insure that the provisions of this SECTION 7(E) and SECTION 4(B) are complied with, but shall have no liability to any holder of Rights Certificates or other Person as a result of its failure to make any determinations with respect to an Acquiring Person or any of their respective Affiliates, Associates or transferees hereunder. (f) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder upon the occurrence of any purported exercise as set forth in this SECTION 7 unless such registered holder shall have (i) completed and signed the certificate contained in the form of election to purchase set forth on the reverse side of the Rights Certificate surrendered for such exercise, and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. 8. CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES. All Rights Certificates surrendered for the purpose of exercises, transfer, split up, combination or exchange shall, if surrendered to the Company or any of its agents, be delivered to the Rights Agent for cancellation or in cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Rights Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all cancelled Rights Certificates to the Company, or shall, at the written request of the Company, destroy such cancelled Rights Certificates, and in such case shall deliver a certificate of destruction thereof to the Company. 9. RESERVATION AND AVAILABILITY OF CAPITAL STOCK. (a) The Company covenants and agrees that it will cause to be reserved and kept available out of its authorized and unissued shares of Preferred Stock (and, following the occurrence of a Triggering Event, out of its authorized and unissued shares of Common Stock and/or other securities or out of its authorized and issued shares held in its treasury), the number of shares of Preferred Stock (and, following the occurrence of a Triggering Event, Common Stock and, or other securities) that, as provided in this Agreement including SECTION 11(A)(III), will be sufficient to permit the exercise in full of all outstanding Rights, PROVIDED, HOWEVER, that the Company shall not be required to reserve and keep available shares of Preferred Stock, Common Stock or other securities sufficient to permit the exercise in full of all outstanding Rights pursuant to the adjustments 10 set forth in SECTION 11(A)(II), SECTION 11(A)(III) or SECTION 13 unless, and only to the extent that, the Rights become exercisable pursuant to such adjustments. (b) So long as the shares of Preferred Stock (and, following the occurrence of a Triggering Event, Common Stock and/or other securities) issuable and deliverable upon the exercise of Rights may be listed on any national securities exchange, the Company shall use its best efforts to cause, from and after such time as the Rights become exercisable, all shares reserved for such issuance to be listed on such exchange upon official notice of issuance upon such exercise. (c) If necessary to permit the offer and issuance of Preferred Stock (and, following the occurrence of a Triggering Event, Common Stock and/or other securities) issuable and deliverable upon the exercise of Rights, the Company shall use its best efforts to (i) file, as soon as practicable following the earliest date after the occurrence of a Section 11(a)(ii) Event on which the consideration to be delivered by the Company upon exercise of the Rights has been determined in accordance with SECTION 11(A)(III), or as soon as is required by law following the Distribution Date, as the case may be, a registration statement under the Act, with respect to the securities purchasable upon exercise of the Rights on an appropriate form, (ii) cause such registration statement to become effective as soon as practicable after such filing, and (iii) cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Act) until the earlier of (A) the date as of which the Rights are no longer exercisable for such securities, and (B) the date of the expiration of the Rights. The Company will also take such action as may be appropriate under, or to ensure compliance with, the securities or "blue sky" laws of the various states in connection with the exercisability of the Rights. The Company may temporarily suspend, for a period of time not to exceed ninety (90) days after the date set forth in clause (i) of the first sentence of this SECTION 9(C), the exercisability of the Rights in order to prepare and file such registration statement and permit it to become effective. Upon any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer in effect. Notwithstanding any provision of this Agreement to the contrary, the Rights shall not be exercisable in any jurisdiction, unless the requisite qualification in such jurisdiction shall have been obtained and until a registration statement (if required) has been declared effective. (d) The Company covenants and agrees that it will take all such action as may be necessary to ensure that all one one-thousandths of a share of Preferred Stock (and, following the occurrence of a Triggering Event, Common Stock and/or other securities) delivered upon exercise of Rights shall, at the time of delivery of the certificates for such shares (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and nonassessable. (e) The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges which may be payable in respect of the issuance or delivery of the Rights Certificates and of any certificates for a number of one one-thousandths of a share of Preferred Stock (or Common Stock and/or other securities, as the case may be) upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Rights Certificates to a Person other than, or the issuance or delivery of a number of one one-thousandths of a share of Preferred Stock (or Common Stock and/or other securities, as the case may be) in respect of a name other than that of, 11 the registered holder of the Rights Certificates evidencing Rights surrendered for exercise or to issue or deliver any certificates for a number of one one-thousandths of a share of Preferred Stock (or Common Stock and/or other securities, as the case may be) in a name other than that of the registered holder upon the exercise of any Rights until such tax shall have been paid (any such tax being payable by the holder of such Rights Certificate at the time of surrender) or until it has been established to the Company's satisfaction that no such tax is due. 10. PREFERRED STOCK RECORD DATE. Each person in whose name any certificate for a number of one one-thousandths of a share of Preferred Stock (or Common Stock and/or other securities, as the case may be) is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of such fractional shares of Preferred Stock (or Common Stock and/or other securities, as the case may be) represented thereby and such certificate shall be dated as of the date upon which the Rights Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and all applicable transfer taxes) was made; provided, however, that if the date of such surrender and payment is a date upon which the Preferred Stock (or Common Stock and/or other securities, as the case may be) transfer books of the Company are closed, such Person shall be deemed to have become the record holder of such shares (fractional or otherwise) on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred Stock (or Common Stock and/or other securities, as the case may be) transfer books of the Company are open. Prior to the exercise of the Rights evidenced thereby, the holder of a Rights Certificate, as such, shall not be entitled to any rights of a stockholder of the Company with respect to shares for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein. 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER AND KIND OF SHARES OR NUMBER OF RIGHTS. The Purchase Price, the number and kind of shares covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this SECTION 11. (a) (i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Stock payable in shares of Preferred Stock, (B) subdivide the outstanding Preferred Stock, (C) combine the outstanding Preferred Stock into a smaller number of shares, or (D) issue any shares of its capital stock in a reclassification of the Preferred Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this SECTION 11(A) and SECTION 7(E), the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of Preferred Stock or capital stock, as the case may be, issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive, upon payment of the Purchase Price then in effect, the aggregate number and kind of shares of Preferred Stock or capital stock, as the case may be, which, if such Right had been exercised immediately prior to such date and at a time when the Preferred Stock transfer books of the Company were open, he would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. If an event occurs which would require an adjustment 12 under both this SECTION 11(A)(I) and SECTION 11(A)(II), the adjustment provided for in this SECTION 11(A)(I) shall be in addition to, and shall be made prior to, any adjustment required pursuant to SECTION 11(A)(II). (ii) Subject to SECTION 23(A) and SECTION 24, in the event any Person (other than an Exempt Person), alone or together with its Affiliates and Associates, shall, at any time after the Rights Dividend Declaration Date, become the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding, unless the event causing the 15% threshold to be crossed is an acquisition of shares of Common Stock pursuant to a tender offer or an exchange offer for all outstanding shares of Common Stock at a price and on terms determined by the Board of Directors of the Company acting by Special Vote and by at least a majority of the Continuing Directors who are not officers of the Company, after receiving advice from one or more investment banking firms, to be (a) at a price which is fair to shareholders of the Company (taking into account all factors which such members of the Board deem relevant including, without limitation, prices which could reasonably be achieved if the Company or its assets were sold on an orderly basis designed to realize maximum value) and (b) otherwise in the best interests of the Company and its shareholders, then, proper provision shall be made so that each holder of a Right (except as provided below and in SECTION 7(E)) shall thereafter have the right to receive, upon exercise thereof at the then current Purchase Price in accordance with the terms of this Agreement, in lieu of a number of one one-thousandths of a share of Preferred Stock, such number of shares of Common Stock of the Company as shall equal the result obtained by (x) multiplying the then current Purchase Price by the then number of one one-thousandths of a share of Preferred Stock for which a Right was exercisable immediately prior to the occurrence of a Section 11(a)(ii) Event, and (y) dividing that product (which, following such occurrence, shall thereafter be referred to as the "PURCHASE PRICE" for each Right and for all purposes of this Agreement) by 50% of the Current Market Price (determined pursuant to SECTION 11(D)) per share of Common Stock on the date of such occurrence (such number of shares is herein called the "ADJUSTMENT SHARES"); provided that the Purchase Price and the number of Adjustment Shares shall be further adjusted as provided in this Agreement to reflect any events occurring after the date of such occurrence. (iii) In the event that the number of shares of Common Stock which are authorized by the Company's Certificate of Incorporation but not outstanding or reserved for issuance for purposes other than upon exercise of the Rights is not sufficient to permit the exercise in full of the Rights in accordance with the foregoing subparagraph (ii) of this SECTION 11(A) and the Rights shall become so exercisable, to the extent permitted by applicable law and any agreements in effect on the date hereof to which the Company is a party, the Company shall: (A) determine the excess of (1) the value of the Adjustment Shares issuable upon the exercise of a Right (the "CURRENT VALUE") over (2) the Purchase Price (such excess, the "SPREAD"), and (B) with respect to each Right, make adequate provision to substitute for the Adjustment Shares, upon payment of the applicable Purchase Price, (1) cash, (2) a reduction in the Purchase Price, (3) Common Stock or other equity securities of the Company (including, without limitation, shares, or units of shares, of preferred stock which the Board of Directors of the Company has deemed to have the same value as shares of Common Stock (such shares of preferred stock, "COMMON STOCK EQUIVALENTS")), (4) debt securities of the Company, (5) other assets, or (6) any combination of the foregoing, having an aggregate value equal to the Current Value, where such aggregate value has been determined by the Board of Directors of the Company based upon the advice of a nationally recognized investment banking firm selected by the Board of Directors of the Company; PROVIDED, HOWEVER, if the Company shall not have made 13 adequate provision to deliver value pursuant to clause (B) above within thirty (30) days following the later of (x) the occurrence of a Section 11(a)(ii) Event and (y) the date on which the Company's right of redemption pursuant to SECTION 23(A) expires (the later of (x) and (y) being referred to herein as the "SECTION 11(A)(II) TRIGGER DATE"), then the Company shall be obligated to deliver, upon the surrender for exercise of a Right and without requiring payment of the Purchase Price, shares of Common Stock (to the extent available) and then, if necessary, cash, which shares and/or cash have an aggregate value equal to the Spread. If the Board of Directors of the Company shall determine in good faith that it is likely that sufficient additional shares of Common Stock could be authorized for issuance upon exercise in full of the Rights, the thirty (30) day period set forth above may be extended to the extent necessary, but not more than ninety (90) days after the Section 11(a)(ii) Trigger Date, in order that the Company may seek stockholder approval for the authorization of such additional shares (such period, as it may be extended, the "SUBSTITUTION PERIOD"). To the extent that the Company determines that some action need be taken pursuant to the first and/or second sentences of this Section 11(a)(iii), the Company (x) shall provide, subject to SECTION 7(E), that such action shall apply uniformly to all outstanding Rights, and (y) may suspend the exercisability of the Rights until the expiration of the Substitution Period in order to seek any authorization of additional shares and/or to decide the appropriate form of distribution to be made pursuant to such first sentence and to determine the value thereof. In the event of any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer in effect. For purposes of this SECTION 11(A)(III), the value of the Common Stock shall be the Current Market Price (as determined pursuant to SECTION 11(D)) per share of the Common Stock on the Section 11(a)(ii) Trigger Date and the value of any "COMMON STOCK EQUIVALENT" shall be deemed to have the same value as the Common Stock on such date. The Board of Directors may, but shall not be required to, establish procedures to allocate the right to receive Common Stock upon the exercise of Rights pursuant to this SECTION 11(A)(III). (b) In case the Company shall fix a record date for the issuance of rights (other than the Rights), options or warrants to all holders of Preferred Stock entitling them to subscribe for or purchase (for a period expiring within forty-five (45) calendar days after such record date) Preferred Stock (or shares having the same rights, privileges and preferences as the shares of Preferred Stock ("EQUIVALENT PREFERRED STOCK")) or securities convertible into Preferred Stock or Equivalent Preferred Stock at a price per share of Preferred Stock or per share of Equivalent Preferred Stock (or having a conversion price per share, if a security convertible into Preferred Stock or Equivalent Preferred Stock) less than the Current Market Price (as determined pursuant to SECTION 11(D)) per share of Preferred Stock on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of shares of Preferred Stock outstanding on such record date, plus the number of shares of Preferred Stock which the aggregate offering price of the total number of shares of Preferred Stock (and/or Equivalent Preferred Stock so to be offered and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such Current Market Price, and the denominator of which shall be the number of shares of Preferred Stock outstanding on such record date, plus the number of additional shares of Preferred Stock and/or Equivalent Preferred Stock to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible). In case such subscription price may be paid by delivery of consideration part or all of which may be in a form other than cash, the value of such consideration shall be as determined in good faith 14 by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights. Shares of Preferred Stock owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed, and in the event that such rights or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (c) In case the Company shall fix a record date for a distribution to all holders of Preferred Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) of evidences of indebtedness, cash (other than a regular quarterly cash dividend out of the earnings or retained earnings of the Company), assets (other than a dividend payable in Preferred Stock, but including any dividend payable in stock other then Preferred Stock) or subscription rights or warrants (excluding those referred to in SECTION 11(B)), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the Current Market Price (as determined pursuant to SECTION 11(D)) per share of Preferred Stock on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent) of the portion of the cash, assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to a share of Preferred Stock and the denominator of which shall be such Current Market Price (as determined pursuant to SECTION 11(D)) per share of Preferred Stock. Such adjustments shall be made successively whenever such a record dated is fixed, and in the event that such distribution is not so made, the Purchase Price shall be adjusted to be the Purchase Price which would have been in effect if such record date had not been fixed. (d) (i) For the purpose of any computation hereunder, other than computations made pursuant to SECTION 11(A)(III), the "CURRENT MARKET PRICE" per share of Common Stock on any date shall be deemed to be the average of the daily closing prices per share of such Common Stock for the thirty (30) consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date and for purposes of computations made pursuant to SECTION 11(A)(III), the "Current Market Price" per share of Common Stock on any date shall be deemed to be the average of the daily closing prices per share of such Common Stock for the then ten (10) consecutive Trading Days immediately following such date; provided, however, that in the event that the Current Market Price per share of the Common Stock is determined during a period following the announcement by the issuer of such Common Stock of (A) a dividend or distribution on such Common Stock payable in shares of such Common Stock or securities convertible into shares of such Common Stock (other than the Rights), or (B) any subdivision, combination or reclassification of such Common Stock, and prior to the expiration of the requisite thirty (30) Trading Day or ten (10) Trading Day period, as set forth above, after the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the Current Market Price shall be properly adjusted to take into account ex-dividend trading. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the shares of Common Stock are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with 15 respect to securities listed on the principal national securities exchange on which the shares of Common Stock are listed or admitted to trading or, if the shares of Common Stock are not listed or admitted to trading on any national securities exchange the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or such other system then in use, or, if on any such date the shares of Common Stock are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Stock selected by the Board of Directors of the Company. If on any such date no market maker is making a market in the Common Stock, the fair value of such shares on such date as determined in good faith by the Board of Directors of the Company shall be used. The term "TRADING DAY" shall mean a day on which the principal national securities exchange on which the shares of Common Stock are listed or admitted to trading is open for the transaction of business or, if the shares of Common Stock are not listed or admitted to trading on any national securities exchange, a Business Day. If the Common Stock is not publicly held or not so listed or traded, "Current Market Price" per share shall mean the fair value per share as determined in good faith by the board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes. (ii) For the purpose of any computation hereunder, the Current Market Price per share of Preferred Stock shall be determined in the same manner as set forth above for the Common Stock in clause (i) of this SECTION 11(D) (other than the last sentence thereof). If the Current Market Price per share of Preferred Stock cannot be determined in the manner provided above or if the Preferred Stock is not publicly held or listed or traded in a manner described in clause (i) of this SECTION 11(D), the Current Market Price per share of Preferred Stock shall be conclusively deemed to be an amount equal to 1,000 (as such number may be appropriately adjusted for such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock occurring after the date of this Agreement) multiplied by the Current Market Price per share of the Common Stock. If neither the Common Stock nor the Preferred Stock is publicly held or so listed or traded, "Current Market Price" per share of the Preferred Stock shall mean the fair value per share as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes. For all purposes of this Agreement, the Current Market Price of one one-thousandth of a share of Preferred Stock shall be equal to the Current Market Price of one share of Preferred Stock divided by 1,000. (e) Anything herein to the contrary notwithstanding, no adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in the Purchase Price; PROVIDED, HOWEVER, that any adjustments which by reason of this SECTION 11(E) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this SECTION 11 shall be made to the nearest cent or to the nearest ten-thousandth of a share of Common Stock or other share or one-millionth of a share of Preferred Stock, as the case may be. Notwithstanding the first sentence of this SECTION 11(E), an adjustment required by this SECTION 11 shall be made no later than the earlier of (i) three (3) years from the date of the transaction which mandates such adjustments, or (ii) the Expiration Date. (f) If as a result of an adjustment made pursuant to SECTION 11(A)(II) or SECTION 13(A), the holder of any Right thereafter exercised shall become entitled to receive 16 any shares of capital stock other than Preferred Stock, thereafter the number of such other shares so receivable upon exercise of any Right and the Purchase Price thereof shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Stock contained in SECTION 11, and the provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the Preferred Stock shall apply on like terms to any such other shares. (g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of one one-thousandths of a share of Preferred Stock purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. (h) Unless the Company shall have exercised its election as provided in SECTION 11(I), upon each adjustment of the Purchase Price as a result of the calculations made in SECTIONS 11(B) and (C), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of one one-thousandths of a share of Preferred Stock (calculated to the nearest one ten-thousandths) obtained by (i) multiplying (x) the number of one one-thousandths of a share covered by a Right immediately prior to this adjustment, by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price, and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price. (i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in lieu of any adjustment in the number of one one-thousandths of a share of Preferred Stock purchasable upon the exercise of a Right. Each of the Rights outstanding after the adjustment in the number of Rights shall be exercisable for the number of one one-thousandths of a share of Preferred Stock for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest one-ten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Rights Certificates have been issued, shall be at least ten (10) days later than the date of the public announcement. If Rights Certificates have been issued, upon each adjustment of the number of Rights pursuant to this SECTION 11(I), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Rights Certificates on such record date Rights Certificates evidencing, subject to SECTION 14, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Rights Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Rights Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Rights Certificates so to be distributed shall be issued executed and countersigned in the manner provided for herein (and may bear, at the option of the Company, the adjusted Purchase Price) and shall be registered in the names of the holders of record of Rights Certificates on the record date specified in the public announcement. 17 (j) Irrespective of any adjustment or change in the Purchase Price or the number of one one-thousandths of a share of Preferred Stock issuable upon the exercise of the Rights, the Rights Certificates theretofore and thereafter issued may continue to express the Purchase Price per one one- thousandths of a share and the number of one one-thousandths of a share which were expressed in the initial Rights Certificates issued hereunder. (k) Before taking any action that would cause adjustment reducing the Purchase Price below the then stated value, if any, of the number of one one-thousandths of a share of Preferred Stock issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable such number of one one-thousandths of a share of Preferred Stock at such adjusted Purchase Price. (l) In any case in which this SECTION 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuance to the holder of any Right exercised after such record date the number of one one-thousandths of a share of Preferred Stock and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the number of one one-thousandths of a share of Preferred Stock and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; PROVIDED, HOWEVER, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares (fractional or otherwise) or securities upon the occurrence of the event requiring such adjustment. (m) Anything in this SECTION 11 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this SECTION 11, as and to the extent that in their good faith judgment the Board of Directors of the Company shall determine to be advisable in order that any (i) consolidation or subdivision of the Preferred Stock, (ii) issuance wholly for cash of any shares of Preferred Stock at less than the Current Market Price, (iii) issuance wholly for cash of shares of Preferred Stock or securities which by their terms are convertible into or exchangeable for shares of Preferred Stock, (iv) stock dividends or (v) issuance of rights, options or warrants referred to in this SECTION 11, hereafter made by the Company to holders of its Preferred Stock shall not be taxable to such stockholders. (n) The Company covenants and agrees that it shall not, at any time after the Distribution Date, (i) consolidate with any other Person (other than a Subsidiary of the Company in a transaction which complies with SECTION 11(O)), (ii) merge with or into any other Person (other than a Subsidiary of the Company in a transaction which complies with SECTION 11(O)), or (iii) sell or transfer (or permit any Subsidiary to sell or transfer), in one transaction, or a series of related transactions, assets or earning power aggregating more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company and/or any of its Subsidiaries in one or more transactions each of which complies with SECTION 11(O)), if (x) at the time of or immediately after such consolidation, merger, sale or transfer there are any rights, warrants or other instruments or securities outstanding or agreements in effect which would substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights or (y) prior to, simultaneously with or immediately after such consolidation, merger, sale or transfer there are any rights, warrants or other instruments or securities outstanding or agreements in effect which would substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights or (y) prior to, simultaneously with or immediately after such 18 consolidation, merger, sale or transfer, the shareholders of the Person who constitutes, or would constitute, the "Principal Party" for purposes of SECTION 13(a) shall have received a distribution of Rights previously owned by such Person or any of its Affiliates and Associates. (o) The Company covenants and agrees that, after the Distribution Date, it will not, except as permitted by SECTION 23, 24 or 27, take (or permit any Subsidiary to take) any action if at the time such action is taken it is reasonably foreseeable that such action will diminish substantially or otherwise eliminate the benefits intended to be afforded by the Rights. (p) Anything in this Agreement to the contrary notwithstanding, in the event that the Company shall at any time after the Rights Dividend Declaration Date and prior to the Distribution Date (i) declare a dividend on the outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, the number of Rights associated with each share of Common Stock then outstanding, or issued or delivered thereafter but prior to the Distribution date, shall be proportionately adjusted so that the number of Rights thereafter associated with each share of Common Stock following any such event shall equal the result obtained by multiplying the number of Rights associated with each share of Common Stock immediately prior to such event by a fraction the numerator which shall be the total number of shares of Common Stock outstanding immediately prior to the occurrence of the event and the denominator of which shall be the total number of shares of Common Stock outstanding immediately following the occurrence of such event. 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES. Whenever an adjustment is made as provided in SECTION 11 and SECTION 13, the Company shall (a) promptly prepare a certificate setting forth such adjustment and a brief statement of the facts accounting for such adjustment, (b) promptly file with the Rights Agent, and with each transfer agent for the Preferred Stock and the Common Stock, a copy of such certificate, and (c) mail a brief summary thereof to each holder of a Rights Certificate (or, if prior to the Distribution Date, to each holder of a certificate representing shares of Common Stock) in accordance with SECTION 25. Notwithstanding the foregoing sentence, the failure of the Company to give such notice shall not affect the validity of or the force or effect of or the requirement for such adjustment. The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment therein contained. Any adjustment to be made pursuant to SECTIONS 11 and 13 shall be effective as of the date of the event giving rise to such adjustment. 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR EARNING POWER. (a) In the event that, following the Stock Acquisition Date, directly or indirectly, (x) the Company shall consolidate with, or merge with and into, any other Person (other than a Subsidiary of the Company in a transaction which complies with SECTION 11(o)), and the Company shall not be the continuing or surviving corporation of such consolidation or merger, (y) any Person (other than a Subsidiary of the Company in a transaction which complies with SECTION 11(o)) shall consolidate with, or merge with or into, the Company, and the Company shall be the continuing or surviving corporation of such consolidation or merger, and, in connection with such consolidation or merger, all or 19 part of the outstanding shares of Common Stock shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property, or (z) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer), in one transaction or a series of related transactions, assets or earning power aggregating more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any Person or Persons (other than the Company or any Subsidiary of the Company in one or more transactions each of which complies with SECTION 11(o)), then, and in each such case, proper provisions shall be made so that: (i) each holder of a Right, except as provided in SECTION 7(e), shall thereafter have the right to receive, upon the exercise thereof at the then current Purchase Price in accordance with the terms of this Agreement, such number of validly authorized and issued, fully paid, non-assessable and freely tradable shares of Common Stock of the Principal Party (as such term is hereinafter defined), not subject to any liens, encumbrances, rights of first refusal or other adverse claims, as shall be equal to the result obtained by (1) multiplying the then current Purchase Price by the number of one one-thousandths of a share of Preferred Stock for which a Right was exercisable immediately prior to the occurrence of a Section 11(a)(ii) Event by the Purchase Price in effect immediately prior to such Section 11(a)(ii) Event, and (2) dividing that product (which, following the first occurrence of a Section 13 Event, shall be referred to as the "PURCHASE PRICE" for each Right and for all purposes of this Agreement) by 50% of the Current Market Price (determined pursuant to SECTION 11(d)(i)) per share of the Common Stock of such Principal Party on the date of consummation of such Section 13 Event (or the fair market value on such date of other securities or property of the Principal Party, as provided for herein); PROVIDED that the Purchase Price and the number of shares of Common Stock of such Principal Party issuable upon exercise of each Right shall be further adjusted as provided in this Agreement to reflect any events occurring after the date of the first occurrence of a Section 13 event; (ii) such Principal Party shall thereafter be liable for, and shall assume, by virtue of such Section 13 Event, all the obligations and duties of the Company pursuant to this Agreement; (iii) the term "Company" shall thereafter be deemed to refer to such Principal Party, it being specifically intended that the provisions of SECTION 11 shall apply only to such Principal Party following the first occurrence of a Section 13 Event; (iv) such Principal Party shall take such steps (including, but not limited to, the reservation of a sufficient number of shares of its Common Stock) in connection with the consummation of any such transaction as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to its shares of Common Stock thereafter deliverable upon the exercise of the Rights; PROVIDED, HOWEVER, that upon the subsequent occurrence of any merger, consolidation, sale of all or substantially all assets, recapitalization, reclassification of shares, reorganization or other extraordinary transaction in respect of such Principal Party, each holder of a Right shall thereupon be entitled to receive, upon exercise of a Right and payment of the Purchase Price, such cash, shares, rights, warrants and other property which such holder would have been entitled to receive had such Rights Holder, at the time of such transaction, owned the shares of Common Stock of the Principal Party purchasable upon the exercise of a Right, and such Principal Party shall take such steps (including, but not limited to, reservation of shares of stock) as may be necessary to permit the subsequent exercise of the Rights in accordance with the terms hereof for such cash, shares, rights, warrants and other property; and (v) the provisions of SECTION 11(a)(ii) shall be of no effect following the first occurrence of any Section 13 Event. (b) "PRINCIPAL PARTY" shall mean: 20 (i) in the case of any transaction described in clause (x) or (y) of the first sentence of SECTION 13(a): (A) the Person that is the issuer of any securities into which shares of Common Stock of the Company are converted in such merger or consolidation, or, if there is more than one such issuer, the issuer whose issued and outstanding Common Stock has the greatest aggregate market value or (B) if no securities are so issued, (x) the Person that is the other party to such merger or consolidation and survives said merger or consolidation, or, if there is more than one such Person, the Person whose issued and outstanding Common Stock has the greatest aggregate market value or (y) if the Person that is the other party to the merger or consolidation does not survive the merger or consolidation, the Person that does survive the merger or consolidation (including the Company if it survives); and (ii) in the case of any transaction described in clause (z) of the first sentence of SECTION 13(a), the Person that is the party receiving the greatest portion of the assets or earning power transferred pursuant to such transaction or transactions, or, if each Person that is a party to such transaction or transactions receives the same portion of the assets or earning power so transferred or if the Person receiving the greatest portion of the assets or earning power cannot be determined, whichever of such Persons as is the issuer of Common Stock having the greatest market value of shares outstanding; PROVIDED, HOWEVER, that in any such case, (l) if the Common Stock of such Person is not at such time and has not been continuously over the preceding twelve (12) month period registered under Section 12 of the Exchange Act, and such Person is a direct or indirect Subsidiary of another Person the Common Stock of which is and has been so registered, "Principal Party" shall refer to such other Person; and (2) if such Person is a Subsidiary, directly or indirectly, of more than one Person, the Common Stocks of two or more of which are and have been so registered, "Principal Party" shall refer to whichever of such persons is the issuer of the issued and outstanding Common Stock having the greatest aggregate market value. (c) The Company shall not consummate any such consolidation, merger, sale or transfer unless the Principal Party shall have a sufficient number of authorized shares of its Common Stock which have not been issued or reserved for issuance to permit the exercise in full of the Rights in accordance with this SECTION 13 and unless prior thereto the Company and such Principal Party shall have executed and delivered to the Rights Agent a supplemental agreement providing for the terms set forth in paragraphs (a) and (b) of this SECTION 13 and further providing that, as soon as practicable after the date of any consolidation, merger, sale or transfer mentioned in paragraph (a) of this SECTION 13, the Principal Party will: (i) prepare and file a registration statement under the Act, with respect to the Rights and the securities purchasable upon exercise of the Rights on an appropriate form, and will use its best efforts to cause such registration statement to (A) become effective as soon as practicable after such filing and (B) remain effective (with a prospectus at all times meeting the requirements of the Act) until the Expiration Date and similarly comply with applicable state securities laws; (ii) will deliver to holders of the Rights historical financial statements of the Principal Party and each of its Affiliates which comply in all respects 21 with the requirements for registration on Form 10 (or any successor form) under the Exchange Act; (iii) use its best efforts, if the Common Stock of the Principal Party shall become listed on a national securities exchange, to list (or continue the listing of) the Rights and the securities purchasable upon exercise of the Rights on such securities exchange and, if the Common Stock of the Principal Party shall not be listed on a national securities exchange, to cause the Rights and the securities purchasable upon exercise of the Rights to be reported by NASDAQ or such other system then in use; and (iv) obtain waivers of any rights of first refusal or preemptive rights in respect of the shares of Common Stock of the Principal Party subject to purchase upon exercise of outstanding Rights. The provisions of this SECTION 13 shall similarly apply to successive mergers or consolidations or sales or transfers. In the event that a Section 13 Event shall occur at any time after the occurrence of a Section 11(a)(ii) Event, the Rights which have not theretofore been exercised shall thereafter become exercisable in the manner described in SECTION 13(a). (d) Notwithstanding anything in this Agreement to the contrary, SECTION 13 shall not be applicable to a transaction described in subparagraphs (x) and (y) of SECTION 13(a) if (i) such transaction is consummated with a Person or Persons who acquired shares of Common Stock pursuant to a tender offer or exchange offer for all outstanding shares of Common Stock which complies with the provisions of SECTION 11(a)(ii) hereof (or a wholly owned Subsidiary of any such Person or Persons), (ii) the price per share of Common Stock offered in such transaction is not less than the price per share of Common Stock paid to all holders of shares of Common Stock whose shares were purchased pursuant to such tender offer or exchange offer, and (iii) the form of consideration being offered to the remaining holders of shares of Common Stock pursuant to such transaction is the same as the form of consideration paid pursuant to such tender offer or exchange offer. Upon consummation of any such transaction contemplated by this SECTION 13(d), all Rights hereunder shall expire. 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES. (a) The Company shall not be required to issue fractions of Rights, except prior to the Distribution date as provided in SECTION 11(p), or to distribute Rights Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Rights Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the Current Market Value of a whole Right. For purposes of this SECTION 14(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price of the Rights for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Rights are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading, or if the Rights 22 are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Company. If on any such date no such market maker is making a market in the Rights the fair value of the Rights on such date as determined in good faith by the Board of Directors of the Company shall be used. (b) The Company shall not be required to issue fractions of shares of Preferred Stock (other than fractions which are integral multiples of one one-thousandth of a share of Preferred Stock) upon exercise of the Rights or to distribute certificates which evidence fractional shares of Preferred Stock (other than fractions which are integral multiples of one one-thousandth of a share of Preferred Stock). In lieu of fractional shares of Preferred Stock that are not integral multiples of one one-thousandth of a share of Preferred Stock, the Company may pay to the registered holders of Rights Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the Current Market Value of one one-thousandth of a share of Preferred Stock. For purposes of this SECTION 14(b), the Current Market Value of one one-thousandth of a share of Preferred Stock shall be one one-thousandth of the closing price of a share of Preferred Stock (as determined pursuant to SECTION 11(d)(ii)) for the Trading Day immediately prior to the date of such exercise. (c) Following the occurrence of a Triggering Event, the Company shall not be required to issue fractions of shares of Common Stock upon exercise of the Rights or to distribute certificates which evidence fractional shares of Common Stock. In lieu of fractional shares of Common Stock, the Company may pay to the registered holders of Rights Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the Current Market Value of one (1) share of Common Stock. For purposes of this SECTION 14(c), the Current Market Value of one share of Common Stock shall be the closing price of one share of Common Stock (as determined pursuant to SECTION 11(d)(i)) for the Trading Day immediately prior to the date of such exercise. (d) The holder of a Right by the acceptance of the Rights expressly waives his right to receive any fractional Rights or any fractional shares upon exercise of a Right, except as permitted by this SECTION 14. 15. RIGHTS OF ACTION. All rights of action in respect of this Agreement, other than rights of action vested in the Rights Agent pursuant to SECTION 18, are vested in the respective registered holders of the Rights Certificates (and, prior to the Distribution Date, the registered holders of the Common Stock); and any registered holder of any Rights Certificate (or, prior to the Distribution Date, of the Common Stock), without the consent of the Rights Agent or of the holder of any other Rights Certificate (or, prior to the Distribution Date, of the Common Stock), may, in his own behalf and for his own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, his right to exercise the Rights evidenced by such Rights Certificate in the manner provided in such Rights Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and shall be 23 entitled to specific performance of the obligations hereunder and injunctive relief against actual or threatened violations of the obligations hereunder of any Person subject to this Agreement. 16. AGREEMENT OF RIGHTS HOLDERS. Every holder of a Right by accepting the same consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of Common Stock; (b) after the Distribution Date, the Rights Certificates are transferable only on the registry books of the Rights Agent if surrendered at the office or offices of the Rights Agent designated for such purposes, duly endorsed or accompanied by a proper instrument of transfer and with the appropriate forms and certificates fully executed; (c) subject to SECTION 6(a) and SECTION 7(f), the Company and the Rights Agent may deem and treat the person in whose name a Rights Certificate (or, prior to the Distribution Date, the associated Common Stock certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Rights Certificates or the associated Common Stock certificate made by anyone other than the Company or the Rights Agents) for all purposes whatsoever, and neither the Company nor the Rights Agent, subject to the last sentence of SECTION 7(e), shall be required to be affected by any notice to the contrary; and (d) notwithstanding anything in this Agreement to the contrary, neither the Company nor the Rights Agent shall have any liability to any holder of a Right or other Person as a result of its inability to perform any of its obligations under this Agreement by reason of any preliminary or permanent injunction or other order decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission, or any statute, rule, regulation or executive order promulgated or enacted by any governmental authority, prohibiting or otherwise restraining performance of such obligation; PROVIDED, HOWEVER, the Company must use its best efforts to have any such order, decree or ruling lifted or otherwise overturned as soon as possible. 17. RIGHTS CERTIFICATE HOLDER NOT DEEMED A SHAREHOLDER. No holder, as such, of any Rights Certificate shall be entitled to vote, receive dividends or be deemed for any purposes the holder of the number of one one-thousandths of a share of Preferred Stock or any other securities of the Company which may at any time be issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Rights Certificate be construed to confer upon the holder of any Rights Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting shareholders (except as provided in SECTION 25), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Rights Certificate shall have been exercised in accordance with the provisions hereof. 24 18. CONCERNING THE RIGHTS AGENT. (a) The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder as set forth in a separately executed written fee agreement. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability, or expense, incurred without gross negligence or willful misconduct on the part of the Rights Agent, for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability in the premises. (b) The Rights Agent shall be protected and shall incur no liability for or in respect of any action taken, suffered or omitted by it in connection with its administration of this Agreement in reliance upon any Rights Certificate or certificate for Common Stock or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper Person or Persons. 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT. (a) Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the corporate trust or stock transfer business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto; PROVIDED, HOWEVER, that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of SECTION 21. In case at the time such successor Rights Agent shall succeed to the agency created by this Agreement, any of the Rights Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of a predecessor Rights Agent and deliver such Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, any successor Rights Agent may countersign such Rights Certificates either in the name of the predecessor or in the name of the successor Rights Agent; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. (b) In case at any time the name of the Rights Agent shall be changed and at such time any of the Rights Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, the Rights Agent may countersign such Rights Certificates either in its prior name or in its changed name; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of 25 which the Company and the holders of Rights Certificates, by their acceptance thereof, shall be bound: (a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter (including, without limitation, the identity of any Acquiring Person and the determination of "Current Market Price") be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by the Chairman of the Board, Chief Executive Officer, President, any Vice President, Chief Financial Officer, Treasurer, any Assistant Treasurer, Secretary or any Assistant Secretary of the Company and delivered to the Rights Agent; and such certificate shall be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder only for its own gross negligence or willful misconduct. (d) The Rights Agent shall not be liable for or by reason of the statements of fact or recitals contained in this Agreement or in the Rights Certificates or be required to verify the same (except as to its countersignature on such Rights Certificates), but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Rights Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Rights Certificate (except its countersignature thereof); nor shall it be responsible for any adjustment required under the provisions of SECTION 11 or SECTION 13 or responsible for the manner, method or amount of any such adjustment or the ascertaining of the existence of facts that would require any such adjustment (except with respect to the exercise of Rights evidenced by Rights Certificates after receipt of the certificate described in SECTION 12 setting forth any such adjustment); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock or Preferred Stock to be issued pursuant to this Agreement or any Rights Certificates or as to whether any shares of Common Stock or Preferred Stock will, when so issued, be validly authorized and issued, fully paid and nonassessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from the Chairman of the Board or the President of the Company or any other officer of the Company designated 26 to the Rights Agent in writing by the Chairman of the Board or President of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions of any such officer. (h) The Rights Agent and any shareholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, default, neglect or misconduct or any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct; PROVIDED, HOWEVER, reasonable care was exercised in the selection and continued employment thereof. (j) No provision of this Agreement shall require the Rights Agents to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if there shall be reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. (k) If, with respect to any Rights Certificate surrendered to the Rights Agent for exercise or transfer, the certificate attached to the form of assignment or form of election to purchase as the case may be, has either not been completed or indicates an affirmative response to clause 1 and/or 2 thereof, the Rights Agent shall not take any further action with respect to such requested exercise of transfer without first consulting with the Company. 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon thirty (30) days' notice in writing mailed to the Company, and to each transfer agent of the Common Stock and Preferred Stock by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent (with or without cause) upon thirty (30) days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Stock and Preferred Stock, by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of thirty (30) days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Rights Certificate (who shall, with such notice, submit his Rights Certificate for inspection by the Company), then the incumbent Rights Agent or any registered holder of any Rights Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the 27 Company or by such a court, shall be (a) a corporation organized and doing business under the laws of the United States or of any other state of the United States in good standing, which is authorized under such laws to exercise corporate trust or stock transfer powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus deemed by the Company's Board of Directors to be reasonable under the circumstances. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment, the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Stock and the Preferred Stock, and mail a notice thereof in writing to the registered holders of the Rights Certificates. Failure to give any notice provided for in this SECTION 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agents as the case may be. 22. ISSUANCE OF NEW RIGHTS CERTIFICATES. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Rights Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Rights Certificates made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of shares of Common Stock following the Distribution Date and prior to the redemption or expiration of the Rights, the Company (a) shall, with respect to shares of Common Stock so issued or sold pursuant to the exercise of stock options or under any employee plan or arrangement, or upon the exercise, conversion or exchange of securities hereinafter issued by the Company, and (b) may, in any other case, if deemed necessary or appropriate by the Board of Directors of the Company, issue Rights Certificates representing the appropriate number of Rights in connection with such issuance or sale; provided, however, that (i) no such Rights Certificate shall be issued if, and to the extent that, the Company shall be advised by counsel that such issuance would create a significant risk of material adverse tax consequences to the Company or the Person to whom such Rights Certificate would be issued, and (ii) no such Rights Certificate shall be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof. 23. REDEMPTION AND TERMINATION. (a) The Board of Directors of the Company may, at its option, at any time prior to the earlier of (i) the close of business on the tenth day following the Stock Acquisition Date (or, if the Stock Acquisition Date shall have occurred prior to the Record Date, the close of business on the tenth day following the Record Date), subject to extension as provided in SECTION 27 or (ii) the close of business on the Final Expiration Date, redeem all but not less than all the then outstanding Rights at a redemption price of $0.01 per Right, as such amount may be appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price 28 being hereinafter referred to as the "REDEMPTION PRICE"). Notwithstanding anything contained in this Agreement to the contrary, the Rights shall not be exercisable after the occurrence of an event described in SECTION 11(a)(ii) until such time as the Company's right of redemption hereunder has expired. The Company may, at its option, pay the Redemption Price in cash, shares of Common Stock (based on the "Current Market Price," as defined in SECTION 11(d)(i), of the Common Stock at the time of redemption) or any other form of consideration deemed appropriate by the Board of Directors. Such redemption of the Rights by the Company may be made effective at such time, on such basis and with such conditions as the Board of Directors in its sole discretion may establish; PROVIDED, HOWEVER, that any redemption of Rights occurring as of or after the time a Person becomes an Acquiring Person may be effected, and the method of payment of the redemption price and conditions to redemption may be determined, only by the Company's Board of Directors acting by Special Vote. (b) Immediately upon the action of the Board of Directors of the Company ordering the redemption of the Rights, and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price for each Right so held, without any interest thereon. Promptly after the action of the Board of Directors ordering the redemption of the Rights, the Company shall give notice of such redemption to the Rights Agent and the holders of the then outstanding Rights by mailing such notice to all such holders at each holder's last address as it appears upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the Transfer Agent for the Common Stock. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. The failure to give notice required by this SECTION 23(b) or any defect therein shall not affect the legality or validity of the action taken by the Company. 24. EXCHANGE. (a) Subject to applicable laws, rules and regulations, and subject to subsection (c) below, at any time after the occurrence of a Triggering Event, the Board of Directors of the Company, acting by Special Vote, may cause the Company to exchange all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become void pursuant to the provisions of SECTION 7(e)) for Common Stock at an exchange ratio of one share of Common Stock per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such exchange ratio being hereinafter referred to as the "RATIO OF EXCHANGE"). Notwithstanding the foregoing, the Board of Directors shall not be empowered to effect such exchange at any time after any Person (other than an Exempt Person), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or more of the Common Stock then outstanding. (b) Immediately upon the action of the Board of Directors ordering the exchange of any Rights pursuant to subsection (a) of this SECTION 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of shares of Common Stock equal to the number of such Rights held by such holder multiplied by the Ratio of Exchange. The Company shall give public notice of any such exchange; PROVIDED, HOWEVER, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company shall mail a notice of any such exchange to 29 all of the holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the Common Stock for Rights will be effected and, in the event of any partial exchange, the number of Rights that will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights (other than Rights which have become void pursuant to the provisions of SECTION 7(e)) held by each holder of Rights. (c) In the event that there shall not be sufficient Common Stock authorized but unissued to permit any exchange of Rights as contemplated in accordance with SECTION 24(a), the Company shall either take such action as may be necessary to authorize additional shares of Common Stock for issuance upon exchange of the Rights or alternatively, at the option of the Board of Directors acting by Special Vote, with respect to each Right (i) pay cash in an amount equal to the Current Value (as hereinafter defined), in lieu of issuing Common Stock in exchange therefor, or (ii) issue debt or equity securities or a combination thereof, having a value equal to the Current Value, in lieu of issuing Common Stock in exchange for each such Right, where the value of such securities shall be determined by a nationally recognized investment banking firm selected by the Board of Directors acting by Special Vote, or (iii) deliver any combination of cash, property, Common Stock and/or other securities having a value equal to the Current Value in exchange for each Right. For purposes of this SECTION 24(c) only, the "CURRENT VALUE" shall mean the product of the current per share market price of Common Stock (determined pursuant to SECTION 11(d) on the date of the occurrence of the event described above in subparagraph (a)) multiplied by the number of shares of Common Stock for which the Right otherwise would be exchangeable if there were sufficient shares available. To the extent that the Company determines that some action need be taken pursuant to clauses (i), (ii), or (iii) of this SECTION 24(c), the Board of Directors acting by Special Vote may temporarily suspend the exercisability of the Rights for a period of up to sixty (60) days following the date on which the event described in SECTION 24(a) shall have occurred, in order to seek any authorization of additional Common Stock and/or to determine the appropriate form of distribution to be made pursuant to the above provision and to determine the value thereof. In the event of any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended. (d) The Company shall not be required to issue fractions of Common Stock or to distribute certificates that evidence fractional Common Stock. In lieu of such fractional Common Stock, there shall be paid to the registered holders of the Rights Certificates with regard to which such fractional Common Stock would otherwise be issuable, an amount in cash equal to the same fraction of the current per share market value of a whole Common Stock (as determined pursuant to the second sentence of SECTION 11(d)). (e) The Company may, at the option of the Board of Directors acting by Special Vote, at any time before any Person has become an Acquiring Person, exchange all or part of the then outstanding Rights for rights of substantially equivalent value, as determined reasonably and with good faith by the Board of Directors acting by Special Vote, based upon the advice of one or more nationally recognized investment banking firms. 30 (f) Immediately upon the action of the Board of Directors acting by Special Vote ordering the exchange of any Rights pursuant to subsection (e) of this SECTION 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of rights in exchange therefore as has been determined by the Board of Directors in accordance with subsection (e) above. The Company shall give public notice of any such exchange; PROVIDED, HOWEVER, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the transfer agent for the Common Stock of the Company. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the Rights will be effected. 25. NOTICE OF CERTAIN EVENTS. (a) In case the Company shall propose, at any time after the Distribution Date, (i) to pay any dividend payable in stock of any class to the holders of Preferred Stock or to make any other distribution to the holders of Preferred Stock (other than a regular quarterly cash dividend out of earnings or retained earnings of the Company), or (ii) to offer to the holders of Preferred Stock rights or warrants to subscribe for or to purchase any additional shares of Preferred Stock or shares of stock of any class or any other securities, rights or options, or (iii) to effect any reclassification of its Preferred Stock (other than a reclassification involving only the subdivision of outstanding shares of Preferred Stock), or (iv) to effect any consolidation or merger into or with any other Person (other than a Subsidiary of the Company in a transaction which complies with SECTION 11(o)), or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one transaction or a series of related transactions, of more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company and/or any of its Subsidiaries in one or more transactions each of which complies with SECTION 11(o)), or (v) to effect the liquidation, dissolution or winding up of the Company, then, in each such case, the Company shall give to each holder of a Rights Certificate, to the extent feasible and in accordance with SECTION 26, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, distribution of rights or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of the shares of Preferred Stock, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (ii) above at least ten (10) days prior to the record date for determining holders of the shares of Preferred Stock for purposes of such action, and in the case of any such other action, at least ten (10) days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the shares of Preferred Stock whichever shall be the earlier. The failure to give notice required by this SECTION 25 or any defect therein shall not affect the legality or validity of the action taken by the Company or the vote upon any such action. (b) In case any of the events set forth in SECTION 11(a)(II) shall occur, then, in any such case, (i) the Company shall as soon as practicable thereafter give to each holder of a Rights Certificate, to the extent feasible and in accordance with SECTION 26, a notice of the occurrence of such event, which shall specify the event and the consequences of the event to holders of Rights under SECTION 11(a)(ii), and (ii) all references in the 31 preceding paragraph to Preferred Stock shall be deemed thereafter to refer to Common Stock and/or, if appropriate, other securities. 26. NOTICES. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Rights Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: Safeguard Health Enterprises, Inc. 505 North Euclid Street P.O. Box 3210 Anaheim, California 92803-3210 Attention: President Subject to the provisions of SECTION 21, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Rights Certificate to or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Company) as follows: American Stock Transfer & Trust Company 40 Wall Street, 46th Floor New York, New York 10005 Attention: Reorganization Department Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Rights Certificate (or, if prior to the Distribution Date, to the holder of certificates representing shares of Common Stock) shall be sufficiently given or made if sent by first- class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Transfer Agent. 27. SUPPLEMENTS AND AMENDMENTS. Prior to the Distribution Date and subject to the penultimate sentence of this SECTION 27, the Board of Directors of the Company may, in its sole and absolute discretion and the Rights Agent shall, if the Board of Directors so directs, supplement or amend any provision of this Agreement without the approval of any holders of certificates representing shares of Common Stock, whether or not such supplement or amendment is adverse to any holders of Rights. From and after the Distribution Date, and subject to the penultimate sentence of this SECTION 27, the Board of Directors acting by Special Vote may, and the Rights Agent shall, if the Board of Directors acting by Special Vote so directs, supplement or amend this Agreement without the approval of any holders of Rights Certificates in order to (i) cure any ambiguity, (ii) correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions hereunder, (iii) shorten or lengthen any time period hereunder, or (iv) otherwise change or supplement the provisions hereunder in any manner which the Board of Directors acting by Special Vote may deem necessary or desirable and which shall not materially and adversely affect the interests of the holders of Rights Certificates (other than an Acquiring Person or an Affiliate or Associate of any such Person); provided, this Agreement may not be supplemented or amended after the Distribution Date to (A) make the Rights again redeemable after the Rights have ceased to be redeemable, or (B) change any other time period 32 unless such change is for the purpose of protecting, enhancing or clarifying the rights of, and/or the benefits to the holders of Rights (other than any Acquiring Person and its Associates or Affiliates). Upon the delivery of a certificate from an appropriate officer of the Company which states that the proposed supplement or amendment is in compliance with the terms of this SECTION 27, the Rights Agent shall execute such supplement or amendment. Notwithstanding anything contained in this Agreement to the contrary, no supplement or amendment shall be made which changes the Redemption Price or the Final Expiration Date. Prior to the Distribution Date, the interests of the holders of Rights shall be deemed coincident with the interests of the holders of Common Stock. 28. SUCCESSORS. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. 29. DETERMINATION AND ACTIONS BY THE BOARD OF DIRECTORS, ETC. For all purposes of this Agreement, any calculation of the number of shares of Common Stock outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding shares of Common Stock of which any Person is the Beneficial Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act. The Board of Directors of the Company (acting by Special Vote where specifically provided for herein) shall have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board of Directors of the Company or to the Company, or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (i) interpret the provisions of this Agreement, and (ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including, but not limited to, a determination to redeem or not redeem the Rights, or to amend this Agreement). All such actions, calculations, interpretations and determinations (including, for purposes of clause (y) below, all omissions with respect to the foregoing) which are done or made by the Board of Directors of the Company in good faith, shall (x) be final, conclusive and binding on the Company, the Rights Agent, the holders of the Rights and all other parties, and (y) not subject any member of the Board of Directors to any liability to the holders of the Rights or to any other Person. 30. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be construed to give to any Person other than the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, registered holders of the Common Stock) any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, registered holders of the Common Stock). 31. SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated; provided, however, that notwithstanding anything in this Agreement to the contrary, if any such term, 33 provision, covenant or restriction is held by such court or authority to be invalid, void or unenforceable and the Board of Directors of the Company (acting by Special Vote) determines in its good faith judgment that severing the invalid language from this Agreement would adversely affect the purpose or effect of this Agreement, the right of redemption set forth in SECTION 23, if lapsed, shall be reinstated and shall not expire until the close of business on the tenth Business Day following the date of such determination by the Board of Directors of the Company. 32. GOVERNING LAW. This Agreement, each Right and each Rights Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts made and to be performed entirely within such State. 33. COUNTERPARTS. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. 34. DESCRIPTIVE HEADINGS; REFERENCES. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. References herein to Sections and Exhibits shall, unless otherwise specified, be to the referenced section or exhibit hereof or hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. SAFEGUARD HEALTH ENTERPRISES, INC. By: /s/ Steven J.Baileys --------------------------------------- Steven J.Baileys, D.D.S. Chairman, President and Chief Executive Officer By: /s/ Ronald I. Brendzel --------------------------------------- Ronald I. Brendzel Senior Vice President, Chief Financial Officer and Secretary AMERICAN STOCK TRANSFER & TRUST COMPANY By: --------------------------------------- Herbert J. Lemmer Senior Vice President and General Counsel 34 EXHIBIT A [FORM OF CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS] CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK OF SAFEGUARD HEALTH ENTERPRISES, INC. Pursuant to Section 151 of the General Corporation Law of the State of Delaware: We, Steven J. Baileys, Chairman, President, and Chief Executive Officer, and Ronald I. Brendzel, Senior Vice President, Chief Financial Officer and Secretary, of Safeguard Health Enterprises, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware, in accordance with the provisions of Section 103 thereof, do hereby certify: That pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation of the Corporation, said Board of Directors on March 22, 1996 adopted the following resolution creating a series of 30,000 shares of Preferred Stock designated as Series A Participating Preferred Stock: "RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation by the Certificate of Incorporation, the Board of Directors does hereby provide for the issue of a series of Preferred Stock, $.01 par value, of the Corporation, to be designated "Series A Junior Participating Preferred Stock" (hereinafter referred to as the "Series A Preferred Stock"), initially consisting of 30,000 shares, and to the extent that the designations, powers, preferences and relative and other special rights and qualifications, limitations and restrictions of the Series A Preferred Stock are not stated and expressed in the Certificate of Incorporation, does hereby fix and herein state and express such designations, powers, preferences, and relative and other special rights and qualifications, limitations and restrictions thereof as follows (all terms used herein which are defined in the Certificate of Incorporation shall be deemed to have the meanings provided therein): Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" and the number of shares constituting such series shall be 30,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A Junior Participating Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Junior Participating Preferred Stock. SECTION 2. DIVIDENDS AND DISTRIBUTIONS. (A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the 15th day of February, May, August and November in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to, subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, par value $.01 per share, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time after March 22, 1996 ("Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) above concurrently with any declaration of a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock). (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. 2 Section 3. VOTING RIGHTS. The holders of shares of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) Except as set forth herein, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. CERTAIN RESTRICTIONS. (A) The Corporation shall not declare any dividend on, make any distribution on, or redeem or purchase or otherwise acquire for consideration any shares of Common Stock after the first issuance of a share or fraction of a share of Series A Participating Preferred Stock unless concurrently therewith it shall declare a dividend on the Series A Participating Preferred Stock as required by Section 2 hereof. (B) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 have been declared but not paid, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not (i) declare or pay dividends on, make any other distribution on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; 3 (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; (iv) purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (C) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under the foregoing provisions of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. REACQUIRED SHARES. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. SECTION 6. LIQUIDATION, DISSOLUTION OR WINDING UP. (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $1,000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment ("Series A Liquidation Preference"). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share ("Common Adjustment") equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 1,000 (as appropriately adjusted as set forth in subparagraph 6(C) below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the "Adjustment Number"). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Preferred Stock and Common Stock, respectively, holders of Series A Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of remaining assets to be distributed in the ratio of the Adjustment Number to one (1) with respect to such Preferred Stock and Common Stock, on a per share basis, respectively. 4 (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, which rank on a parity with the Series A Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (C) In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. NO REDEMPTION. The shares of Series A Preferred Stock shall not be redeemable. Section 9. RANKING. The Series A Preferred Stock shall rank junior to all other series of the Corporation's preferred stock, if any, as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. Section 10. AMENDMENT. The Certificate of Incorporation of the Corporation shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series A Preferred Stock, voting separately as a class. Section 11. FRACTIONAL SHARES. Series A Preferred Stock may be issued in fractions of a share, which shall entitle the holder, in proportion to such holder's fractional 5 shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Preferred Stock. IN WITNESS WHEREOF, we have executed and subscribed this Certificate as of the 22nd day of March, 1996. _________________________ Steven J. Baileys, D.D.S. Chairman, President and Chief Executive Officer ________________________ Ronald I. Brendzel Senior Vice President, Chief Financial Officer and Secretary 6 EXHIBIT B [FORM OF RIGHTS CERTIFICATE] CERTIFICATE NO. R______________ ________________RIGHTS NOT EXERCISABLE AFTER MARCH 21, 2006 OR EARLIER IF REDEEMED BY THE COMPANY. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $0.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF SUCH AGREEMENT.*] RIGHTS CERTIFICATE SAFEGUARD HEALTH ENTERPRISES, INC. This certifies that ________________________, or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement, dated as of March 22, 1996 ("Rights Agreement"), between Safeguard Health Enterprises, Inc., a Delaware corporation ("Company"), and American Stock Transfer & Trust Company, a New York corporation ("Rights Agent"), to purchase from the Company at any time prior to 5:00 P.M. (California time) on March 21, 2006 at the office or offices of the Rights Agent designated for such purpose, or its successors as Rights Agent, one one-thousandth of a fully paid, non-assessable share of Series A Junior Participating Preferred Stock ("Preferred Stock") of the Company, at a purchase price of $75.00 per one one-thousandth of a share ("Purchase Price"), upon presentation and surrender of this Rights Certificate with the Form of Election to Purchase and related Certificate duly executed. The Purchase Price may be paid by bank draft, certified bank check or money order payable to the order of the Company. The number of Rights evidenced by this Rights Certificate (and the number of shares which may be purchased upon exercise thereof) set forth above, and the Purchase Price per share set forth above, are the number and Purchase Price as of ______________, based on the Preferred Stock as constituted at such date. - ------------------------------- * The portion of the legend in brackets shall be inserted only if applicable, shall be modified to apply to an Acquiring Person, and shall replace the preceding sentence. Upon the occurrence of a Section 11(a)(ii) Event (as such term is defined in the Rights Agreement), if the Rights evidenced by this Rights Certificate are beneficially owned by (i) an Acquiring Person or an Affiliate or Associate an Acquiring of Person (as such terms are defined in the Rights Agreement), (ii) a transferee of an Acquiring Person, (or of any such Associate or Affiliate), or (iii) under certain circumstances specified in the Rights Agreement, a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such, such Rights shall become null and void and no holder hereof shall have any right with respect to such Rights from and after the occurrence of such Section 11(a)(ii) Event. As provided in the Rights Agreement, the Purchase Price and the number and kind of shares of Preferred Stock or other securities which may be purchased upon the exercise of the Rights evidenced by this Rights Certificate are subject to modification and adjustment upon the happening of certain events, including Triggering Events (as such term is defined in the Rights Agreement). The Rights Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the Rights, limitations of Rights, and obligations, duties and immunities of the Rights Agent, the Company and the holders of the Rights Certificates, which limitations of Rights include the temporary suspension of the exercisability of such Rights under the specific circumstances set forth in the Rights Agreement. Copies of the Rights Agreement are on file at the office of the Rights Agent and are also available upon written request to the Company. This Rights Certificate, with or without other Rights Certificates, upon surrender at the office or offices of the Rights Agent designated for such purpose, may be exchanged for another Rights Certificate or Rights Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate amount of securities as the Rights evidenced by the Rights Certificate or Rights Certificates surrendered shall have entitled such holder to purchase. If this Rights Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Rights Certificate or Rights Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate may be (i) redeemed by the Company at its option at a redemption price of $0.01 per Right or (ii) exchanged by the Company in whole or part for Common Shares, substantially equivalent rights, or other consideration as determined by the Company. No fractional shares of Preferred Stock will be issued upon the exercise of any Right or Rights evidenced hereby (other than fractions which are integral multiples of one one-thousandth of a share of Preferred Stock, which may, at the election of the Company, be evidenced by depository receipts), but in lieu thereof a cash payment will be made, as provided in the Rights Agreement. No holder of this Rights Certificate, as such, shall be entitled to vote or receive dividends or be deemed for any purpose the holder of shares of Preferred Stock or of any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or, to receive notice of meeting or other actions affecting stockholders (except as provided in the Rights Agreement), or to receive 2 dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Rights Certificate shall have been exercised as provided in the Rights Agreement. The Rights Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent. WITNESS the facsimile signature of the proper officers of the Company and its corporate seal. Dated as of _____________________, __ (Seal) SAFEGUARD HEALTH ENTERPRISES, INC. By: ======================== (Printed Name & Title) ATTEST: ______________________________ ______________________________ (Printed Name & Title) Countersigned: American Stock Transfer & Trust Company, as Rights Agent By: _________________________ _________________________ (Printed Name & Title) 3 [FORM OF REVERSE SIDE OF RIGHTS CERTIFICATE] FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Rights Certificate.) FOR VALUE RECEIVED ________________________________ hereby sells, assigns and transfers unto ______________________________________________ _______________________________________________________________ (Please print name and address of transferee) this Rights Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint __________________________ Attorney, to transfer the within Rights Certificate on the books of the within-named Company with full power of substitution. Dated: ___________________, ______________________________ (Signature) ______________________________ (Printed Name) Signature Guaranteed: ______________________________ CERTIFICATE The undersigned hereby certifies by checking the appropriate boxes that: (1) this Rights Certificate [ ] is [ ] is not being sold, assigned and transferred by or on behalf of a Person who is or was an Acquiring Person or an Affiliate or Associate of any such Person (as such terms are defined pursuant to the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, the undersigned [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from any Person who is, was or subsequently became an Acquiring Person or an Affiliate or Associate of any such Person. Dated: ___________________, ______________________________ (Signature) ______________________________ (Printed Name) Signature Guaranteed: ______________________________ NOTICE The signature to the foregoing Assignment and Certificate must correspond to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever. [FORM OF ELECTION TO PURCHASE] (TO BE EXECUTED IF HOLDER DESIRES TO EXERCISE RIGHTS REPRESENTED BY THE RIGHTS CERTIFICATE) To: SAFEGUARD HEALTH ENTERPRISES, INC. The undersigned hereby irrevocably elects to exercise ______________ Rights represented by this Rights Certificate to purchase the number of one one-thousandths of a share of Preferred Stock issuable upon the exercise of the Rights (or such other securities of the Company or of any other Person which may be issuable upon the exercise of the Rights) and requests that certificates for such shares be issued in the name of and delivered to: Please insert social security or other identifying number____________ (Please print name and address) _____________________________________ _____________________________________________________________________ If such number of Rights shall not be all the Rights evidenced by this Rights Certificate, a new Rights Certificate for the balance of such Rights shall be registered in the name of and delivered to: Please insert social security or other identifying number____________ (Please print name and address) _____________________________________ _____________________________________________________________________ Dated: ___________________, ______________________________ (Signature) ______________________________ (Printed Name) Signature Guaranteed: ______________________________ CERTIFICATE The undersigned hereby certifies by checking the appropriate boxes that: (l) the Rights evidenced by this Rights Certificate [ ] are [ ] are not being exercised by or on behalf of a Person who is or was an Acquiring Person or an Affiliate or Associate of any such Person (as such terms are defined pursuant to the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, the undersigned [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from any Person who is, was or became an Acquiring Person or an Affiliate or Associate of any such Person. Dated: ___________________, ______________________________ (Signature) ______________________________ (Printed Name) Signature Guaranteed: ______________________________ NOTICE The signature to the foregoing Election to Purchase and Certificate must correspond to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever. EXHIBIT C SAFEGUARD HEALTH ENTERPRISES, INC. SUMMARY OF RIGHTS TO PURCHASE PREFERRED STOCK On March 22, 1996 ("Rights Dividend Declaration Date") the Board of Directors of Safeguard Health Enterprises, Inc., a Delaware corporation ("Company") declared a dividend of one Right (a "Right") for each outstanding share of Company Common Stock to be distributed to stockholders of record at the close of business on April 12, 1996. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share (a "Unit") of Series A Junior Participating Preferred Stock, par value $.01 per share ("Preferred Stock") at a "Purchase Price" of $75.00, subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement dated as of March 22, 1996 ("Rights Agreement") between the Company and American Stock Transfer & Trust Company, as Rights Agent. Initially, the Rights will be attached to all Common Stock certificates representing shares then outstanding, and no separate Rights Certificates will be distributed. Until the Distribution Date (as described below), (i) the Rights will be evidenced by the Common Stock certificates and will be transferred with and only with such Common Stock certificates, (ii) new Common Stock certificates issued after April 12, 1996 will contain a notation incorporating the Rights Agreement by reference and (iii) the surrender for transfer of any certificates for Common Stock outstanding will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. The Rights are not exercisable until the Distribution Date and will expire at the close of business on March 21, 2006, unless earlier redeemed by the Company as described below. The Rights will separate from the Common Stock and a Distribution Date will occur ("Distribution Date") upon the earlier of 10 days (or such longer time as may be determined by the Company's board, acting with the approval of a majority of the Continuing Directors as defined below) following (i) a public announcement (or determination by the Company's board) that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of Common Stock ("Stock Acquisition Date"), or (ii) the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 15% or more of such outstanding shares of Common Stock. As soon as practicable after the Distribution Date, Rights Certificates will be mailed to holders of record of the Common Stock as of the close of business on the Distribution Date and, thereafter, the separate Rights Certificates alone will represent the Rights. In the event that on or at any time following the Rights Dividend Declaration Date, a person becomes the beneficial owner of more than 15% of the then outstanding shares of Common Stock (except pursuant to an offer for all outstanding shares of Common Stock which the Continuing Directors determine to be fair to and otherwise in the best interests of the Company and its stockholders), then each holder of a Right will thereafter have the right to receive, upon exercise, Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the Purchase Price of the Right. Rights are exercisable following the occurrence of the foregoing only after such time as the Rights are no longer redeemable by the Company, as set forth below. Notwithstanding any of the foregoing, following the occurrence of the event set forth in this paragraph, all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person will be null and void. In the event that, at any time following the Stock Acquisition Date, (i) the Company is acquired in a merger or other business combination transaction in which the Company is not the surviving corporation or in which the Company's outstanding Common Stock is exchanged for cash, stock or other property (other than a merger which follows an offer described in the second preceding paragraph), or (ii) 50% or more of the Company's assets or earning power is sold or transferred, each holder of a Right (except Rights which previously have been voided as set forth above) shall thereafter have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the Purchase Price of the Right. The Purchase Price payable, and the number of Units of Preferred Stock or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution, as set forth in the Rights Agreement. With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments amount to at least 1% of the Purchase Price. No fractional Rights, fractions of shares of Preferred Stock (other than fractions which are integral multiples of one one-thousandth of a share), or fractional shares of Common Stock will be issued and, in lieu thereof, an adjustment in cash will be made based on the market price of the Rights, Preferred Stock, or Common Stock, respectively, on the last trading date prior to the date of exercise. In general, the Company may redeem the Rights in whole, but not in part, at a price of $0.01 per Right, at any time until ten days following the Stock Acquisition Date (or such later date as may be determined by the Company's board, acting with the approval of a majority of the Continuing Directors, as defined below). Immediately upon the action of the Board of Directors ordering redemption of the Rights, the Rights will terminate and the only right of the holders of Rights will be to receive the $0.01 redemption price. The Company may exchange Common Stock or other substantially equivalent rights or consideration for the Rights, in whole or part, from time to time as determined by the Company's board, acting with the approval of a majority of the Continuing Directors, as defined below. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. 2 Other than those provisions relating to the redemption price or the final expiration date of the Rights, any of the provisions of the Rights Agreement may be supplemented or amended by the Board of Directors prior to the Distribution Date, without approval of the Rights holders, whether or not a supplement or amendment is adverse to the Rights holders. After the Distribution Date, the provisions of the Rights Agreement (other than the provisions relating to the redemption price or the final expiration date of the Rights) may be amended by the Board of Directors, with the approval of a majority of the Continuing Directors in order to make changes which do not materially and adversely affect the interests of holders of Rights (excluding the interests of any Acquiring Person), PROVIDED, however, that the Rights Agreement may not be amended to (i) make the Rights again redeemable after the Rights have ceased to be redeemable, or (ii) change any other time period unless such change is for the benefit of the holders (excluding any Acquiring Person). "Continuing Director" means a member of the Board of Directors of the Company who is not an Acquiring Person or an affiliate or representative of an Acquiring Person. A copy of the Rights Agreement has been filed with the Securities and Exchange Commission as an Exhibit to a Registration Statement on Form 8-A dated March 28, 1996. A copy of the Rights Agreement is available free of charge from the Company. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is incorporated herein by reference. 3 EX-21.1 7 SUBSIDIARIES OF THE COMPANY EXHIBIT 21.1 SAFEGUARD HEALTH ENTERPRISES, INC. SUBSIDIARIES OF THE COMPANY The subsidiaries of Safeguard Health Enterprises, Inc., a Delaware corporation, are as follows: 1. Safeguard Health Plans, Inc., an Arizona corporation 2. Safeguard Health Plans, Inc., a California corporation 3. Safeguard Health Plans, Inc., a Colorado corporation 4. Safeguard Health Plans, Inc., an Illinois corporation 5. Safeguard Health Plans, Inc., a Kansas corporation 6. Safeguard Health Plans, Inc., a Kentucky corporation 7. Safeguard Health Plans, Inc., a Missouri corporation 8. Safeguard Health Plans, Inc., a Nevada corporation 9. Safeguard Health Plans, Inc., an Ohio corporation 10. Safeguard Health Plans, Inc., an Oklahoma corporation 11. Safeguard Health Plans, Inc., an Oregon corporation 12. Safeguard Health Plans, Inc., a Texas corporation 13. Safeguard Health Plans, Inc., a Utah corporation 14. Safeguard Health Plans, Inc., a Washington corporation 15. Guards Dental, Inc., a California corporation (A wholly owned subsidiary of Safeguard Health Plans, Inc., a California corporation) 16. SafeHealth Life Insurance Company, a California corporation EX-24.1 8 INDEPENDENT AUDITORS' REPORT EXHIBIT 24.1 INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in this Registration Statement No. 33-2226 on Form S-8 of Safeguard Health Enterprises, Inc. of our report dated March 22, 1996, incorporated by reference in the Annual Report on Form 10-K of Safeguard Health Enterprises, Inc. for the year ended December 31, 1995. DELOITTE & TOUCHE, LLP Costa Mesa, California March 28, 1996 EX-27 9 EXH. 27 FDS
5 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 506 14,240 4,604 260 0 20,578 25,430 12,375 38,343 5,941 0 0 0 21,092 10,837 38,343 81,577 81,577 65,578 65,578 13,451 0 0 3,834 1,446 2,388 0 0 0 2,388 .52 .51
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