-----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, DfQ32irwVBn5aKawAFsVHNWc5LY9Mho+Po7h6jh7zZWwTuK8bggF4GRgmRPU7+wf Fpg3InZmWSNdilsylqJENw== 0001015402-01-501063.txt : 20010515 0001015402-01-501063.hdr.sgml : 20010515 ACCESSION NUMBER: 0001015402-01-501063 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAFEGUARD HEALTH ENTERPRISES INC CENTRAL INDEX KEY: 0000727303 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 521528581 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12050 FILM NUMBER: 1631267 BUSINESS ADDRESS: STREET 1: 95 ENTERPRISE T CITY: ALISO VIEJO STATE: CA ZIP: 92656-2601 BUSINESS PHONE: 9494254110 10-Q 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 0-12050 SAFEGUARD HEALTH ENTERPRISES, INC. (Exact name of registrant as specified in its charter) DELAWARE 52-1528581 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation) 95 ENTERPRISE ALISO VIEJO, CALIFORNIA 92656 (Address of principal executive offices) (Zip Code) (949) 425-4300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of May 1, 2001, the number of shares of registrant's common stock, par value $.01 per share, outstanding was 4,737,498 shares (not including 3,284,788 shares of common stock held in treasury), and the number of shares of registrant's convertible preferred stock, par value $.01 per share, outstanding was 300,000 shares. SAFEGUARD HEALTH ENTERPRISES, INC. INDEX TO FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001 PAGE -------- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements . . . . . . . 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . .8 Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . .11 PART II. OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . .11 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . .12 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) MARCH 31, DECEMBER 31, 2001 2000 ------------ -------------- ASSETS (unaudited) Current assets: Cash and cash equivalents $ 1,129 $ 1,381 Investments available-for-sale, at fair value 16,096 15,321 Accounts receivable, net of allowances 1,969 2,778 Other current assets 1,476 1,788 ------------ -------------- Total current assets 20,670 21,268 Property and equipment, net of accumulated depreciation 2,436 2,843 Restricted investments available-for-sale, at fair value 2,692 2,700 Notes receivable, net of allowances 1,180 1,750 Intangible assets, net of accumulated amortization 4,085 4,154 Other assets 273 380 ------------ -------------- Total assets $ 31,336 $ 33,095 ============ ============== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 3,766 $ 3,986 Accrued interest, converted to equity in 2001 (Note 4) -- 4,990 Other accrued expenses 5,850 6,457 Short-term debt, converted to equity in 2001 (Note 4) -- 47,545 Other short-term debt 242 250 Claims payable and claims incurred but not reported 6,869 7,554 Deferred revenue 1,516 1,413 ------------ -------------- Total current liabilities 18,243 72,195 Long-term debt 202 250 Other long-term liabilities 985 1,079 Stockholders' equity (deficit): Convertible preferred stock 41,250 -- Common stock 21,829 21,829 Retained earnings (accumulated deficit) (33,080) (44,254) Accumulated other comprehensive income 40 119 Treasury stock, at cost (18,133) (18,123) ------------ -------------- Total stockholders' equity (deficit) 11,906 (40,429) ------------ -------------- Total liabilities and stockholders' equity (deficit) $ 31,336 $ 33,095 ============ ==============
See accompanying Notes to Consolidated Financial Statements. -1-
SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) 2001 2000 -------- -------- Premium revenue, net $21,643 $24,463 Health care services expense 15,187 17,738 Selling, general and administrative expense 6,534 8,413 -------- -------- Operating income (loss) (78) (1,688) Investment and other income 435 259 Interest expense on debt that was converted to equity in 2001 (Note 4) (402) (1,015) Other interest expense (32) (17) -------- -------- Income (loss) before income taxes and extraordinary item (77) (2,461) Income tax expense -- -- -------- -------- Income (loss) before extraordinary item (77) (2,461) Extraordinary item: Conversion of debt to convertible preferred stock (Note 4) 11,251 -- -------- -------- Net income (loss) $11,174 $(2,461) ======== ======== Basic and diluted net income (loss) per share: Income (loss) before extraordinary item $ -- $ (0.52) Extraordinary item 0.45 -- -------- -------- Net income (loss) $ 0.45 $ (0.52) ======== ======== Weighted average basic and diluted shares outstanding 24,738 4,747
See accompanying Notes to Consolidated Financial Statements. -2-
SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (IN THOUSANDS) (UNAUDITED) 2001 2000 --------- -------- Cash flows from operating activities: Net income (loss) $ 11,174 $(2,461) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Gain on conversion of debt to convertible preferred stock (11,251) -- Bad debt expense 75 -- Amortization of deferred loan costs 24 25 Depreciation and amortization 621 727 Gain on sale of investments (98) -- Changes in operating assets and liabilities: Accounts receivable 734 106 Other current assets 48 492 Accounts payable (219) (1,999) Accrued expenses (890) 367 Claims payable and claims incurred but not reported (685) 355 Deferred revenue 103 313 --------- -------- Net cash used in operating activities (364) (2,075) Cash flows from investing activities: Purchase of investments available-for-sale (7,919) (8,850) Proceeds from sale/maturity of investments available-for-sale 7,171 2,570 Purchase of property and equipment (145) -- Payments received on notes receivable 845 355 Additions to intangibles and other assets -- (354) --------- -------- Net cash used in investing activities (48) (6,279) Cash flows from financing activities: Borrowings on debt -- 8,000 Increase in accrued interest, converted to equity in 2001 321 931 Payments on debt (56) (75) Repurchase of common stock (10) -- Payments on other long-term liabilities (95) (119) --------- -------- Net cash provided by financing activities 160 8,737 --------- -------- Net (decrease) increase in cash (252) 383 Cash and cash equivalents at beginning of period 1,381 1,639 --------- -------- Cash and cash equivalents at end of period $ 1,129 $ 2,022 ========= ========
See accompanying Notes to Consolidated Financial Statements. -3- SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. GENERAL - ----------------- The accompanying unaudited consolidated financial statements of SafeGuard Health Enterprises, Inc. and subsidiaries (the "Company") for the three months ended March 31, 2001 and 2000, have been prepared in accordance with accounting principles generally accepted in the United States of America, applicable to interim periods. The accompanying financial statements reflect all normal and recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the Company's financial position and results of operations for the interim periods. The financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission, and omit certain footnote disclosures and other information necessary to present the Company's financial position and results of operations for annual periods in accordance with accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. The Company incurred significant net losses in each of the three years ended December 31, 2000. During the period since the beginning of 2000, management took certain actions to improve the Company's operating results and financial position. In March 2000, the Company obtained $8.0 million of financing, and entered into a transaction under which substantially all of the Company's debt was converted into equity, as discussed in Note 4, which has substantially reduced the Company's interest expense. During the first quarter of 2000, the Company consolidated all of its administrative activities into its National Service Center in California, which resulted in a significant reduction in the number of employees at the Company and the amount of office space used by the Company. Also during the first quarter of 2000, the Company reduced its health care services expense by eliminating non-standard payments to certain dental service providers. These actions, along with reductions in various other selling, general and administrative expenses, have had a significant positive impact on the Company's results of operations and financial position, beginning in the second quarter of 2000. Management intends to further improve the Company's results of operations by increasing revenue through improved customer service and customer retention programs, decreasing health care services expense by expanding its provider networks, and making further reductions in various selling, general and administrative expenses. The Company believes these actions and its improved financial position will provide adequate financial resources to support its operations for the foreseeable future. Basic and diluted net income (loss) per share is based on the weighted average common shares outstanding, including the common shares into which the convertible preferred stock is convertible. The weighted average common shares outstanding includes the common share equivalents of the convertible preferred stock, because the Company believes the convertible preferred stock is essentially equivalent to common stock, based on all the rights and preferences of both types of stock. During the three months ended March 31, 2001 and 2000, other potentially dilutive securities that were outstanding consisted of stock options and warrants. Due to a net loss before extraordinary item in both of these periods, the outstanding stock options and warrants would have an anti-dilutive effect on diluted loss per share in each period. Accordingly, stock options and warrants are excluded from the calculation of diluted loss per share for each of these periods. Therefore, the Company's diluted loss per share is the same as its basic loss per share for the three months ended March 31, 2001 and 2000. Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS - -------------------------------------------- In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 was amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133," in June 1999, and by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," in June 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133, as amended, requires derivatives to be reported on the balance sheet at fair value, and was adopted by the Company effective on January 1, 2001. The adoption of SFAS No. 133, as amended, had no significant effect on the Company's financial statements. -4- In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140 replaces SFAS No. 125, which has the same title, revises the accounting and reporting standards for securitizations and other transfers of assets, and expands the disclosure requirements for such transactions. Under SFAS No. 140, consistent standards are provided for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The accounting requirements of SFAS No. 140 are effective for transfers and servicing of financial assets and extinguishments of liabilities that occur after March 31, 2001, and must be applied prospectively. The Company expects that SFAS No. 140 will not have a significant effect on its financial statements. NOTE 3. SALE OF DISCONTINUED OPERATIONS - -------------------------------------------- In 1997 and 1998, the Company sold a number of general dental and orthodontic practices (the "Practices") to a single purchaser (the "Purchaser") in exchange for long-term promissory notes. The Purchaser subsequently defaulted on its obligations to the Company under those promissory notes, and in October 2000, the Company completed a transaction with the Purchaser and another third party (the "New Purchaser"), in which the Practices were sold to the New Purchaser. In this transaction, the Purchaser transferred its interest in the Practices to the New Purchaser, the New Purchaser paid $2.4 million to the Company and placed an additional $1.5 million in an escrow account for the benefit of the Company, and the Company agreed to pay certain obligations related to these practices. These obligations consisted primarily of payroll, dental office lease obligations for which the Company was the primary lessee, patient refunds, and the obligation to complete the orthodontic treatments for the Company's managed care patients who had previously paid their full share of the cost of the treatments. These obligations either had to be paid in order to complete the transaction, or were obligations for which the Company may be contingently liable in any event. The amount of the escrow account that may be realized by the Company, and the ultimate cost of the obligations assumed by the Company, are reflected on the accompanying consolidated balance sheet based on the Company's best estimates, but these amounts are subject to uncertainties. NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT - ---------------------------------------------- Short-term and long-term debt consisted of the following (in thousands): MARCH 31, DECEMBER 31, 2001 2000 ----------- -------------- Investor senior loan $ -- $ 8,000 Revolving credit facility -- 7,045 Senior notes payable -- 32,500 Other 444 500 ----------- -------------- Total debt 444 48,045 Less - short-term portion (242) (47,795) ----------- -------------- Long-term debt $ 202 $ 250 =========== ============== On March 1, 2000, the Company entered into a Recapitalization Agreement with an investor group (the "Investors"), the revolving credit facility lender (the "Bank"), and the holder of the senior notes payable (the "Senior Note Holder"). In this transaction, the Investors loaned $8.0 million to the Company in the form of an investor senior loan, due April 30, 2001, with an interest rate of 10% annually. The Investors, the Bank, and the Senior Note Holder agreed to convert the $8.0 million investor senior loan, the outstanding balance of $7.0 million under the revolving credit facility, and the $32.5 million of senior notes payable into convertible preferred stock, subject to regulatory and stockholder approval. -5- Effective as of January 31, 2001, the Company completed the conversion of the investor senior loan ($8.0 million), the outstanding balance under the revolving credit facility ($7.0 million), the senior notes payable ($32.5 million), and the accrued interest on the revolving credit facility and the senior notes payable ($5.3 million as of January 31, 2001) into 300,000 shares of convertible preferred stock. The estimated value of the convertible preferred stock was $137.50 per share as of January 31, 2001, which is based on the closing price of the Company's common stock on January 31, 2001, which was $1.375 per share, and the fact that each share of convertible preferred stock is convertible into 100 shares of common stock. Based on this estimated value, the conversion transaction resulted in a gain of $11.3 million, which is net of approximately $350,000 of transaction costs. There is no income tax effect related to this transaction, due to the Company's net operating loss carry-forwards for tax purposes, as discussed in Note 5. The convertible preferred stock does not accrue dividends of any kind. Each share of convertible preferred stock is convertible into 100 shares of common stock at the option of the holder. The convertible preferred stock entitles the holder to one vote for each share of common stock into which the preferred stock is convertible, with respect to all matters voted on by the common stockholders of the Company, except for the election of directors. The holders of the convertible preferred stock have the right to elect a total of five members of the board of directors, and the holders of the common stock have the right to elect the remaining two directors. The convertible preferred stock has a $30 million liquidation preference over the common stock. As a result of the conversion transaction, the previously existing common stockholders of the Company now own approximately 14% of the common stock interests of the Company. In March 2000, in connection with the conversion transaction, the Company agreed to place four new directors, who represent the holders of the investor senior loan, the revolving credit facility, and the senior notes payable, on its board of directors. Three of those directors were placed on the board in March 2000, and the fourth director was placed on the board as of January 31, 2001. These new directors constitute a majority of the board of directors, which currently has a total of seven members. In 1999, in connection with a restructuring of the senior notes payable, the Company issued warrants to purchase 382,000 shares of its common stock for $4.51 per share to the Senior Note Holder. These warrants were cancelled without being exercised, in connection with the conversion of the senior notes payable into convertible preferred stock effective January 31, 2001. NOTE 5. INCOME TAXES - ----------------------- The Company's net deferred tax assets have been fully reserved since September 30, 1999, due to uncertainty about whether those net assets will be realized in the future. The uncertainty is primarily due to operating losses incurred by the Company during each of the three years ended December 31, 2000, and the existence of significant net operating loss carryforwards. The Company's deferred tax assets remain fully reserved as of March 31, 2001, for the same reasons. Due to the conversion of outstanding debt into convertible preferred stock, as described in Note 4, there was a "change of control" of the Company for purposes of Internal Revenue Code Section 382, effective January 31, 2001. As a result, effective January 31, 2001, the amount of net operating loss carryforwards that can be used to offset current taxable income on the Company's federal tax return is limited to approximately $350,000 per year. As of December 31, 2000, the Company had net operating loss carryforwards of approximately $35.3 million for federal income tax purposes, and approximately $18.6 million for state income tax purposes. Therefore, the Company's taxable income during the month ended January 31, 2001, which included the $11.3 million gain on conversion of the Company's debt into convertible preferred stock, as discussed in Note 4, was completely offset by loss carryforwards, and the Company recognized no income tax expense for this period. The Company had a net loss for tax purposes for the period from February 1, 2001, to March 31, 2001, and accordingly, recorded no income tax expense for this period. -6- NOTE 6. TOTAL COMPREHENSIVE INCOME - -------------------------------------- Total comprehensive income or loss reflects the change in stockholders' equity during the period from transactions and other events and circumstances from non-stockholder sources. Total comprehensive income or loss of the Company for the three months ended March 31, 2001 and 2000, includes net income or loss, and other comprehensive income or loss, which consists of unrealized gains or losses on marketable securities, net of realized gains and losses that occurred during the period. Other comprehensive (loss) income was $(79,000) and $5,000 for the three months ended March 31, 2001 and 2000, respectively. Total comprehensive income (loss) was $11,095,000 and $(2,456,000) for the three months ended March 31, 2001 and 2000, respectively. NOTE 7. CONTINGENCIES - ----------------------- LITIGATION The Company is a defendant in various lawsuits arising in the normal course of business. In the opinion of management, the ultimate outcome of existing litigation will not have a material effect on the Company's financial position or results of operations. In December 1999, a stockholder lawsuit against the Company was filed, which alleged that the Company and certain of its officers violated certain securities laws by issuing a series of alleged false and misleading statements concerning the Company's publicly reported revenues and earnings during a specified class period. On September 12, 2000, after the plaintiffs had filed a first amended complaint, the Federal District Trial Court dismissed the lawsuit with prejudice, stating that the plaintiffs had failed to state a claim against the Company. On October 6, 2000, the plaintiffs filed an appeal of the dismissal of the lawsuit, and that appeal is currently pending. The Company has directors and officers liability insurance and intends to vigorously contest the appeal. In the opinion of management, the ultimate outcome of this matter will not have a material adverse effect on the Company's financial position or results of operations. Contingent Lease Obligations The Company sold all of its general dental practices and orthodontic practices in 1996, 1997 and 1998. The Company also re-sold certain of these practices in October 2000, after the original purchaser of a number of these practices defaulted on its obligations to the Company, as discussed in Note 3. In connection with the sale and re-sale of those practices, all the purchasers of the practices agreed to make the remaining lease payments related to the dental offices used by those practices. However, the Company remains contingently liable for the lease payments in the event the purchasers of those practices fail to make the payments. As of March 31, 2001, the aggregate contingent liability of the Company related to all of these leases was approximately $5.1 million over the terms of the various lease agreements, which expire at various dates through 2007. Management has not been notified of any defaults that would materially affect the Company's financial position. The aggregate contingent lease obligation of $5.1 million excludes $425,000 of estimated lease obligations that have been accrued as of March 31, 2001, due to possible failures by the entities to make the lease payments under the leases that were assigned by the Company. This estimated lease obligation is included in the accompanying consolidated balance sheet under the caption "Other accrued expenses." -7- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements, as long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statements. The Company desires to take advantage of these safe harbor provisions. In addition to the Risk Factors section of the Company's Annual Report on Form 10-K for the year ended December 31, 2000, filed with the Securities and Exchange Commission, the following risk factors should be considered in connection with this Quarterly Report on Form 10-Q for the period ended March 31, 2001. The statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations concerning expected growth, the outcome of business strategies, future operating results and financial position, economic and market events and trends, future premium revenue, future health care expenses, the Company's ability to control health care, selling, general and administrative expenses, and all other statements that are not historical facts, are forward-looking statements. Words such as expects, projects, anticipates, intends, plans, believes, seeks or estimates, or variations of such words and similar expressions, are also intended to identify forward-looking statements. These forward-looking statements are subject to significant risks, uncertainties and contingencies, many of which are beyond the control of the Company. Actual results may differ materially from those projected in the forward-looking statements, which statements involve risks and uncertainties. The Company's ability to expand its business is affected by competition from a large number of other entities, many of which are much larger and have greater financial resources than the Company, that offer dental plans in the markets in which the Company operates. There is a risk that the Company will not be able to increase revenues in the future as employer groups and other purchasers of dental coverage continue to resist premium rate increases, while demanding a wide choice of dental care providers and a high level of customer service. Securing cost-effective contracts with dentists may become more difficult due to increased competition among dental plans for contracts with dental providers, and a possible decrease in the number of dentists in practice in the markets in which the Company operates. There are risks associated with changes in the Company's operating and expansion strategies, and the possible inability to realize all of the proceeds from the recent resale of certain dental office assets to a third party. There is a risk that the Company will be unable to continue to improve its earnings before interest, taxes, depreciation and amortization ("EBITDA"), as any such improvement is dependent upon a multitude of factors including, but not limited to, the ability of the Company to identify additional opportunities to increase sales and reduce costs. There is a risk that the purchaser of certain resold dental office assets will not comply with its agreement to make rental payments on the related office lease agreements, for which the Company remains contingently liable, and there is a risk that other dentists who previously purchased dental practices from the Company will not make the required payments on their assigned or sublet lease agreements, for which the Company remains contingently liable. There is a risk that the Company may incur additional expenses in connection with the delivery of the dental office assets resold to the New Purchaser, and there are risks associated with additional health care expenses that may be incurred by the Company for the cost of the completion of orthodontic and dental treatment that may be required to be paid in connection with the transfer of the recently resold dental office assets. There is a risk that the dentists who purchased a number of dental practices from the Company and issued promissory notes to the Company, will not make payments on such promissory notes. All of these risks and uncertainties could have a negative impact on the estimated net proceeds from the resale of the dental office assets by the Company. The Company's profitability depends, in part, on its ability to maintain effective control over its health care costs, while providing members with quality dental care. A variety of factors, such as utilization rates of dental services, changes in the value of the Company's assets, new technologies, the cost of dental services delivered by referral specialists, the amount of claims incurred by patients insured by the Company, and numerous other external influences could affect the Company's operating results. -8- All of the risks set forth herein could negatively impact the earnings of the Company in the future. The Company's expectations for the future are based on current information and its evaluation of external influences. Changes in any one factor could materially impact the Company's expectations related to premium rates, benefits plans offered, membership enrollment, the amount of health care expenses incurred, and profitability, and therefore, affect the forward-looking statements which may be included in this report. In addition, past financial performance is not necessarily a reliable indicator of future performance. An investor should not use historical performance alone to anticipate future results or future period trends. SUMMARY OF RESULTS OF OPERATIONS The following table shows the Company's results of operations as a percentage of revenue, and is used in the period-to-period comparisons discussed below.
THREE MONTHS ENDED MARCH 31, --------------- 2001 2000 ------ ------- Premium revenue, net 100.0% 100.0% Health care services expense 70.2 72.5 Selling, general and administrative expense 30.2 34.4 ------ ------- Operating income (loss) (0.4) (6.9) Investment and other income 2.0 1.0 Interest expense on debt that was converted to equity in 2001 (1) (1.9) (4.1) Other interest expense (0.1) (0.1) ------ ------- Income (loss) before income taxes and extraordinary item (0.4) (10.1) Income tax expense -- -- ------ ------- Income (loss) before extraordinary item (0.4) (10.1) Extraordinary item 52.0 -- ------ ------- Net income (loss) 51.6% (10.1)% ====== ======= (1) Substantially all of the Company's debt was converted into convertible preferred stock effective January 31, 2001. See Note 4 to the accompanying consolidated financial statements.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 Premium revenue decreased by $2.8 million, or 11.5%, from $24.5 million in 2000 to $21.6 million in 2001. The average membership for which the Company provided dental coverage decreased by approximately 204,000 members, or 23.7%, from 859,000 members during 2000 to 655,000 during 2001. The decrease in the average number of members is due to the loss of a number of employer groups during the twelve months ended March 31, 2001. Premium revenue decreased by only 11.5% even though average membership decreased by 23.7%. This was primarily due to a shift in the product mix toward preferred provider ("PPO")/indemnity plans, which have significantly higher premium rates than managed care plans, and increases in premium rates. Health care services expense decreased by $2.5 million, or 14.4%, from $17.7 million in 2000 to $15.2 million in 2001. Health care services expense as a percentage of premium revenue (the "loss ratio") decreased from 72.5% in 2000 to 70.2% in 2001. This decrease is primarily due to a decrease in the loss ratio in the managed care business. This decrease was primarily due to a decrease in health care expenses incurred pursuant to non-standard provider payment arrangements, such as minimum capitation arrangements and fee-for-service payments for dental services that are covered by capitation arrangements in most cases. The Company renegotiated several of these non-standard arrangements, or in some cases, terminated the related provider contracts, during the first six months of 2000. -9- Selling, general and administrative ("SG&A") expenses decreased by $1.9 million, or 22.3%, from $8.4 million in 2000 to $6.5 million in 2001. SG&A expenses as a percentage of premium revenue decreased from 34.4% in 2000 to 30.2% in 2001. The decrease in SG&A expenses is due to several reasons. The most significant reason is that salaries and benefits decreased due to a reduction in the number of employees during the first quarter of 2000, in connection with a consolidation of the Company's administrative services into a single location. In addition, the Company has decreased its administrative expenses in several areas, principally telephone and data communications expenses, office rent expense, and equipment rent expense. The decrease is also partially due to a decrease in broker commissions, which is related to the decrease in premium revenue, as discussed above. Investment and other income increased by $176,000, or 68.0%, from $259,000 in 2000 to $435,000 in 2001. This increase is primarily due to realized gains on the sale of investments in 2001, but is also partially due to the $8.0 million borrowing in March 2000, which increased the amount of funds invested by the Company. Total interest expense decreased by $598,000, or 57.9%, from $1.0 million in 2000 to $434,000 in 2001. This decrease is primarily due to the conversion of substantially all of the Company's debt into convertible preferred stock effective January 31, 2001, which eliminated nearly all of the Company's interest expense. The loss before income taxes and extraordinary item decreased by $2.4 million, from $2.5 million in 2000 to $77,000 in 2001. The loss before income taxes and extraordinary item as a percentage of premium revenue decreased from 10.1% in 2000 to 0.4% in 2001. The decrease in the loss was primarily due to a $1.9 million decrease in SG&A expenses, a decrease in the loss ratio from 72.5% to 70.2%, and a $598,000 decrease in interest expense, all as discussed above. There was an extraordinary gain of $11.3 million in the first quarter of 2001, compared to zero in the same period in 2000. The extraordinary gain resulted from the conversion of substantially all of the Company's debt into convertible preferred stock. See Note 4 to the accompanying consolidated financial statements for more discussion of this transaction. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities decreased from $2.1 million in 2000 to $364,000 in 2001. This improvement was due to several reasons, the largest of which are described below. First, the net loss before extraordinary item decreased from $2.5 million in 2000 to $77,000 in 2001, as discussed above under Results of Operations. In addition, the net cash used by the change in accounts payable decreased from $2.0 million in 2000 to $219,000 in 2001. The decrease in 2000 was primarily due to the fact that the Company significantly reduced the processing time for accounts payable during the first quarter of 2000 by using the proceeds of the $8.0 borrowing on March 1, 2000, as discussed in Note 4 to the accompanying financial statements. These factors were partially offset by an $890,000 decrease in accrued expenses in 2001, compared to a $367,000 increase in 2000, and a $685,000 decrease in claims payable in 2001, compared to a $355,000 increase in 2000. The decrease in accrued expenses in 2001 was primarily due to the payment of liabilities related to the sale of certain assets of discontinued operations, as discussed in Note 3 to the accompanying financial statements, payments on equipment leases for which the future payments were previously accrued, and payment of accrued interest on the investor senior loan, which was converted to convertible preferred stock in January, as discussed in Note 4 to the accompanying financial statements. The decrease in claims payable in 2001 was primarily due to a decrease in the processing time for dental claim payments during the first quarter of 2001. Net cash used in investing activities decreased from $6.3 million in 2000 to $48,000 in 2001. The net cash used by investing activities in 2000 was primarily due to the purchase of investments with the $8.0 million proceeds from the borrowing on March 1, 2000, as discussed in Note 4 to the accompanying financial statements. The investment of those proceeds in 2000 was partially offset by the sale of investments to finance the $2.0 million decrease in accounts payable in 2000, as discussed above. Net cash provided by financing activities decreased from $8.7 million in 2000 to $160,000 in 2001. The net cash provided by financing activities in 2000 was primarily due to the $8.0 million borrowing on March 1, 2000, as discussed above. -10- The Company's net working capital improved from negative $50.9 million as of December 31, 2000, to positive $2.4 million as of March 31, 2001, primarily due to the conversion of $52.5 million of debt and accrued interest into convertible preferred stock, as discussed in Note 4 to the accompanying consolidated financial statements. Excluding the obligations that were converted to equity, the Company's net working capital increased from $1.6 million as of December 31, 2000, to $2.4 million as of March 31, 2001. This improvement is primarily due to $845,000 of payments received in exchange for the cancellation of certain notes receivable during the quarter ended March 31, 2001. The Company's total short-term and long-term debt decreased from $48.0 million at December 31, 2000, to $0.4 million at March 31, 2001, due to the conversion of substantially all of the Company's debt into convertible preferred stock effective January 31, 2001. See Note 4 to the accompanying consolidated financial statements for more discussion of this transaction. The Company believes it has adequate financial resources to continue its current operations for the foreseeable future. RECENT ACCOUNTING PRONOUNCEMENTS See Note 2 to the accompanying condensed consolidated financial statements for a discussion of recent accounting pronouncements. IMPACT OF INFLATION The Company's operations are potentially impacted by inflation, which can affect premium rates, health care services expense, and selling, general and administrative expenses. The Company expects that its earnings will be positively impacted by inflation in premium rates, because premium rates for dental benefit plans in general have been increasing due to inflation in recent years. The Company expects that its earnings will be negatively impacted by inflation in health care costs, because fees charged by dentists and other dental providers have been increasing due to inflation in recent years. The impact of inflation on the Company's health care expenses is mitigated in the short-term by the fact that approximately 40% of total health care services expense consists of capitation payments to providers. In addition, most of the Company's selling, general and administrative expenses are impacted by general inflation in the economy. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is not subject to a material amount of risk related to changes in interest rates or foreign currency exchange rates. PART II. OTHER INFORMATION ITEM 1. 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 covered by liability insurance maintained by the Company or by dentists in the Company's provider network, or will not result in a significant adverse outcome. In December 1999, a stockholder lawsuit against the Company was filed, which alleged that the Company and certain of its officers violated certain securities laws by issuing a series of alleged false and misleading statements concerning the Company's publicly reported revenues and earnings during a specified class period. On September 12, 2000, after the plaintiffs had filed a first amended complaint, the Federal District Trial Court dismissed the lawsuit with prejudice, stating that the plaintiffs had failed to state a claim against the Company. On October 6, 2000, the plaintiffs filed an appeal of the dismissal of the lawsuit, and that appeal is currently pending. The Company has directors and officers liability insurance and intends to vigorously contest the appeal. In the opinion of management, the ultimate outcome of this matter will not have a material adverse effect on the Company's financial position or results of operations. -11- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS EXHIBIT DESCRIPTION ------- ----------- 3.2 Amended and Restated Bylaws of the Company (B) REPORTS ON FORM 8-K. The Company filed a Report on Form 8-K dated as of March 5, 2001, announcing the closing of the Company's recapitalization transaction as of January 31, 2001. The Company filed a Report on Form 8-K dated as of March 19, 2001, announcing the scheduling of the Company's Annual Meeting of Stockholders set for May 23, 2001, at the executive offices of the Company. -12- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Aliso Viejo, State of California, on the 10th day of May 2001. SAFEGUARD HEALTH ENTERPRISES, INC. By: /s/ James E. Buncher ----------------------- James E. Buncher President and Chief Executive Officer (Principal Executive Officer) By: /s/ Dennis L. Gates ---------------------- Dennis L. Gates Senior Vice President and Chief Financial Officer (Chief Accounting Officer) -13- EX-3.2 2 doc2.txt - -------------------------------------------------------------------------------- AMENDED AND RESTATED BYLAWS OF SAFEGUARD HEALTH ENTERPRISES, INC. EFFECTIVE APRIL 12, 2001 - -------------------------------------------------------------------------------- AMENDED AND RESTATED BYLAWS OF SAFEGUARD HEALTH ENTERPRISES, INC. TABLE OF CONTENTS PAGE ---- Article 1 Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Registered Office and Agent . . . . . . . . . . . . . . . . 1 1.2 Other Offices.. . . . . . . . . . . . . . . . . . . . . . . 1 Article 2 Shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.1 Place and Manner of Meetings. . . . . . . . . . . . . . . . 1 2.2 Annual Meeting. . . . . . . . . . . . . . . . . . . . . . . 1 2.3 Voting List.. . . . . . . . . . . . . . . . . . . . . . . . 1 2.4 Special Meetings. . . . . . . . . . . . . . . . . . . . . . 2 2.5 Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.6 Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.7 Majority Vote; Withdrawal of Quorum.. . . . . . . . . . . . 2 2.8 Method of Voting. . . . . . . . . . . . . . . . . . . . . . 2 2.9 Presiding Officer and Conduct of Meetings.. . . . . . . . . 3 2.10 Record Date; Closing Transfer Books.. . . . . . . . . . . . 3 2.11 Action Without Meeting. . . . . . . . . . . . . . . . . . . 3 Article 3 Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.1 Management. . . . . . . . . . . . . . . . . . . . . . . . . 3 3.2 Number; Qualification; Election; Term.. . . . . . . . . . . 3 3.3 Chairman. . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.4 Change in Number. . . . . . . . . . . . . . . . . . . . . . 4 3.5 Removal.. . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.6 Vacancies.. . . . . . . . . . . . . . . . . . . . . . . . . 4 3.7 Election of Directors.. . . . . . . . . . . . . . . . . . . 4 3.8 Place and Manner of Meetings. . . . . . . . . . . . . . . . 4 3.9 First Meeting.. . . . . . . . . . . . . . . . . . . . . . . 4 i 3.10 Regular Meetings. . . . . . . . . . . . . . . . . . . . . . 5 3.11 Special Meetings. . . . . . . . . . . . . . . . . . . . . . 5 3.12 Action Without Meeting. . . . . . . . . . . . . . . . . . . 5 3.13 Quorum; Majority Vote.. . . . . . . . . . . . . . . . . . . 5 3.14 Compensation. . . . . . . . . . . . . . . . . . . . . . . . 5 3.15 Procedure.. . . . . . . . . . . . . . . . . . . . . . . . . 5 Article 4 Committees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 4.1 Designation.. . . . . . . . . . . . . . . . . . . . . . . . 5 4.2 Procedure.. . . . . . . . . . . . . . . . . . . . . . . . . 6 4.3 Removal.. . . . . . . . . . . . . . . . . . . . . . . . . . 6 Article 5 Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5.1 Method. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5.2 Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Article 6 Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 6.1 Number. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 6.2 Election. . . . . . . . . . . . . . . . . . . . . . . . . . 6 6.3 Other Officers. . . . . . . . . . . . . . . . . . . . . . . 6 6.4 Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 6.5 Removal.. . . . . . . . . . . . . . . . . . . . . . . . . . 7 6.6 Vacancies.. . . . . . . . . . . . . . . . . . . . . . . . . 7 6.7 Compensation. . . . . . . . . . . . . . . . . . . . . . . . 7 6.8 Chairman of the Board.. . . . . . . . . . . . . . . . . . . 7 6.9 Chief Executive Officer.. . . . . . . . . . . . . . . . . . 7 6.10 Vice Chairman of the Board. . . . . . . . . . . . . . . . . 7 6.11 President.. . . . . . . . . . . . . . . . . . . . . . . . . 7 6.12 Chief Operating Officer.. . . . . . . . . . . . . . . . . . 7 6.13 Vice Presidents.. . . . . . . . . . . . . . . . . . . . . . 8 6.14 Secretary.. . . . . . . . . . . . . . . . . . . . . . . . . 8 6.15 Chief Financial Officer/Treasurer.. . . . . . . . . . . . . 8 6.16 Assistant Officers. . . . . . . . . . . . . . . . . . . . . 8 6.17 When Duties of an Officer May be Delegated. . . . . . . . . 8 6.18 Officers Holding Two (2) or More Offices. . . . . . . . . . 8 6.19 Filling of Offices. . . . . . . . . . . . . . . . . . . . . 8 ii Article 7 Certificates, Shareholders and Stock Plans. . . . . . . . . . . . 8 7.1 Certificates. . . . . . . . . . . . . . . . . . . . . . . . 8 7.2 Replacement of Lost or Destroyed Certificates . . . . . . . 9 7.3 Transfer of Shares. . . . . . . . . . . . . . . . . . . . . 9 7.4 Registered Shareholders.. . . . . . . . . . . . . . . . . . 9 7.5 Stock Option Plans. . . . . . . . . . . . . . . . . . . . . 9 Article 8 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . 9 8.1 Indemnification.. . . . . . . . . . . . . . . . . . . . . . 9 Article 9 General Provisions. . . . . . . . . . . . . . . . . . . . . . . . 11 9.1 Dividends and Reserves. . . . . . . . . . . . . . . . . . . 11 9.2 Directors' Right of Inspection. . . . . . . . . . . . . . . 11 9.3 Books and Records.. . . . . . . . . . . . . . . . . . . . . 11 9.4 Checks and Notes. . . . . . . . . . . . . . . . . . . . . . 11 9.5 Securities of Other Corporations. . . . . . . . . . . . . . 11 9.6 Fiscal Year.. . . . . . . . . . . . . . . . . . . . . . . . 12 9.7 Seal. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 9.8 Resignation.. . . . . . . . . . . . . . . . . . . . . . . . 12 9.9 Amendment of Bylaws.. . . . . . . . . . . . . . . . . . . . 12 9.10 Table of Contents; Headings.. . . . . . . . . . . . . . . . 12 9.11 Construction. . . . . . . . . . . . . . . . . . . . . . . . 12 iii AMENDED AND RESTATED BYLAWS OF SAFEGUARD HEALTH ENTERPRISES, INC. ARTICLE 1 OFFICES 1.1 REGISTERED OFFICE AND AGENT. The registered office and registered ---------------------------- agent of SafeGuard Health Enterprises, Inc. (the "Corporation") shall be as designated with the Secretary of State of the State of Delaware, as it may be changed from time to time. 1.2 OTHER OFFICES. The Corporation may also have offices at such other ------------- places both within and without the State of Delaware, as the board of directors may from time to time determine, or as the business of the Corporation may require. ARTICLE 2 SHAREHOLDERS 2.1 PLACE AND MANNER OF MEETINGS. All meetings of the shareholders -------------------------------- shall be held at such time and place, within or without the State of Delaware, as determined by the Board of Directors and shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Shareholders may participate in such meetings by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting as provided herein shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. 2.2 ANNUAL MEETING. An annual meeting of the shareholders shall be --------------- held during the month of May at such time as shall be designated from time to time by the board of directors and stated in the notice of the meeting, at which time the shareholders shall elect a board of directors, and transact such other business as may properly be brought before the meeting. 2.3 VOTING LIST. At least ten (10) days before each meeting of ------------ shareholders a complete list of the shareholders entitled to vote at the meeting, arranged in alphabetical order, with the address of each and the number of voting shares held by each, shall be prepared by the officer or agent having charge of the stock transfer books. Such list, for a period of ten (10) days prior to the meeting, shall be kept on file at a place within the city where the meeting is to be held and shall be subject to inspection by any shareholder for any purpose germane to the meeting, at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting during the whole time thereof, and shall be subject to the inspection of any shareholder who may be present. 1 2.4 SPECIAL MEETINGS. Special meetings of the shareholders, for any ----------------- purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, or by these bylaws, may be called by a majority of the board of directors properly authorized, or the holders of not less than twenty percent (20%) of all the shares entitled to vote at the meetings. Business transacted at all special meetings shall be confined to the objects stated in the notice of the meeting. 2.5 NOTICE. Except as otherwise provided or permitted by statute, ------ written or printed notice stating the place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting either personally or by mail, by or at the direction of the board of directors to each shareholder of record entitled to vote at the meeting, provided that such notice may be waived as provided in Section 5.2 of these bylaws. If mailed, such notice shall be deemed to be delivered when deposited in the mail addressed to the shareholder at his address as it appears on the records of the Corporation, with postage thereon prepaid. 2.6 QUORUM. The holders of a majority of the shares issued and ------ outstanding and entitled to vote thereat, present in person or represented by proxy shall be requisite and shall constitute a quorum at all meetings of the shareholders for the transaction of business except as otherwise provided by statute, by the certificate of incorporation or by these bylaws. If a quorum is not present or represented at a meeting of the shareholders, the shareholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. 2.7 MAJORITY VOTE; WITHDRAWAL OF QUORUM. When a quorum is present at ------------------------------------- any meeting, the vote of the holders of a majority of the shares having voting power, present in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the statutes or of the certificate of incorporation, or of these bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such question. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. 2.8 METHOD OF VOTING. Each outstanding share, regardless of class, ------------------ shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders, except to the extent that the voting rights of the shares of any class or classes are limited or denied by the Corporation's Certificate of Incorporation. At any meeting of the shareholders each shareholder having the right to vote may vote either in person or by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact and being otherwise valid under Delaware law. Each proxy shall be revocable unless expressly provided therein to be irrevocable and unless otherwise made irrevocable by law. Each proxy shall be filed with the secretary of the Corporation prior to or at the time of the meeting. Voting for directors shall be in accordance with Section 3.7 of these bylaws. 2 2.9 PRESIDING OFFICER AND CONDUCT OF MEETINGS. The chairman of the --------------------------------------------- board of directors shall preside at all meetings of the shareholders and shall automatically serve as chairman of such meetings. In the absence of the chairman of the board of directors, then the president, chief executive officer, or vice chairman, if any, of the Corporation shall preside at the meetings of the shareholders and shall automatically be the chairman of such meeting, unless and until a different person is elected by a majority of the shares entitled to vote at such meeting. The secretary, or in the absence of the secretary, a person designated by the chairman of the board, shall act as secretary of the meeting. 2.10 RECORD DATE; CLOSING TRANSFER BOOKS. The board of directors may ------------------------------------- fix in advance a record date for the purpose of determining shareholders entitled to notice of or to vote at a meeting of the shareholders, the record date to be not less than ten (10) nor more than sixty (60) days prior to said meeting (but in any event not prior to the date upon which the resolution fixing the record date is adopted by the board of directors); or the board of directors may close the stock transfer books for such purpose for a period of not less than ten (10) nor more than sixty (60) days prior to such meeting. In the absence of any action by the board of directors, the record date for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which the notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. The board of directors may also fix, as provided or permitted by statute, a record date for purposes of determining shareholders entitled to consent to an action in writing without a meeting. If no record date has been fixed by the board of directors, the record date for determining shareholders entitled to consent to an action in writing without a meeting shall be determined as provided by statute. 2.11 ACTION WITHOUT MEETING. No action shall be taken by the ------------------------ shareholders except at an annual or special meeting of shareholders. No action shall be taken by shareholders by written consent. ARTICLE 3 DIRECTORS 3.1 MANAGEMENT. The business and affairs of the Corporation shall be ---------- managed by the board of directors who may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Corporation's Certificate of Incorporation or by these bylaws directed or required to be exercised or done by the shareholders. 3.2 NUMBER; QUALIFICATION; ELECTION; TERM. The board of directors ---------------------------------------- shall consist of not less than three (3) nor more than seven (7) directors, none of whom shall be required to be shareholders of the Corporation or residents of the State of Delaware. Within the limits specified in these bylaws and the Corporation's Certificate of Incorporation, the number of directors shall be determined by resolution of the board of directors. The term of each director shall be for one (1) year, or until his successor is elected and qualified or until his death, resignation or removal. 3 3.3 CHAIRMAN. The board of directors shall at their first regular -------- meeting elect one (1) of their number to act as chairman of the board. It shall be the duty of the chairman of the board to preside over all meetings of shareholders and directors. The chairman of the board shall hold this office until the next regular meeting of the directors or until his successor is elected and qualified. 3.4 CHANGE IN NUMBER. The number of directors may be increased or ------------------ decreased from time to time as provided for in these bylaws, however, any bylaw amendment adopted by the board of directors increasing or reducing the authorized number of directors, shall require a resolution adopted by the affirmative vote of not less than seventy-five percent (75%) of the directors, and any amendment to these bylaws shall not have the effect of shortening the term of any incumbent director. Any directorship to be filled by reason of an increase in the number of directors may be filled by a majority of the directors then in office to serve until the next meeting of shareholders at which directors are elected or may be filled by election at an annual meeting or at a special meeting of shareholders called for that purpose. 3.5 REMOVAL. At any meeting of the shareholders, any director or ------- directors may be removed from office, without assignment of any reason therefore, by a majority vote of the shares or class of shares, as the case may be, which elected the director or directors to be removed if notice of intention to act upon such matter shall have been given in the notice calling such meeting. Failure to elect directors to fill the unexpired term of the director so removed shall be deemed to create a vacancy or vacancies in the board of directors. 3.6 VACANCIES. Any vacancy occurring in the board of directors, by --------- death, resignation, retirement, removal, increase in the number of directors or otherwise, may be filled by an affirmative vote of a majority of the directors representing the shares or class of shares, as the case may be, then in office, though less than a quorum of the board of directors. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. 3.7 ELECTION OF DIRECTORS. Directors shall be elected by plurality ----------------------- vote. Cumulative voting shall not be permitted, unless required by law that may be applicable to the Corporation. 3.8 PLACE AND MANNER OF MEETINGS. Meetings of the board of directors, ----------------------------- regular or special, may be held either within or without the State of Delaware. Members of the board of directors may participate in such meetings by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and participation in a meeting as provided herein shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. The secretary, or in the absence of the secretary, a person designated by the chairman of the meeting, shall act as secretary of the meeting. 3.9 FIRST MEETING. The first meeting of each newly elected board may -------------- be held without further notice immediately following the annual meeting of shareholders, and at the same place. 4 3.10 REGULAR MEETINGS. Regular meetings of the board of directors may ----------------- be held without notice at such time and place as shall from time to time be determined by the board. 3.11 SPECIAL MEETINGS. Special meetings of the board of directors may ----------------- be called by the chairman of the board, by the chief executive officer, or a majority of the board of directors on at least two (2) business days' notice to each director, unless the notice is given by regular mail in which case five (5) days' written notice shall be required. Notices may be delivered personally or as otherwise allowed by Section 5.1 of these bylaws. Except as otherwise expressly provided by statute, or by the Corporation's Certificate of Incorporation, or by these bylaws, neither the business to be transacted at, nor the purpose of, any special meeting need be specified in a notice or waiver of notice. 3.12 ACTION WITHOUT MEETING. Any action required by statute to be ------------------------ taken at a meeting of the board of directors, or any action which may be taken at a meeting of the board of directors, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all the members of the board of directors. Such consent shall have the same force and effect as a unanimous vote at a meeting. 3.13 QUORUM; MAJORITY VOTE. At all meetings of the board of directors ---------------------- a majority of the number of directors fixed by these bylaws shall constitute a quorum for the transaction of business unless a greater number is required by law or by the Corporation's Certificate of Incorporation. The act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the board of directors unless the act of a greater number is required by statute, by the certificate of incorporation or by these bylaws. If a quorum shall not be present at any meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. 3.14 COMPENSATION. By resolution of the board of directors, the ------------ directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefore. Members of a special or standing committees may, by resolution of the board of directors, be allowed like compensation for attending committee meetings. 3.15 PROCEDURE. The board of directors shall keep regular minutes of --------- its proceedings. The minutes shall be placed in the minute book of the Corporation. ARTICLE 4 COMMITTEES 4.1 DESIGNATION. The board of directors may, from time to time, by ----------- resolution adopted by a majority of the whole board, designate other committees to consist of two (2) or more of the directors of the Corporation, which shall have such powers and the members of which shall hold office for such periods as the board of directors in its sole and absolute discretion may determine. 5 4.2 PROCEDURE. Any committee so designated shall keep regular minutes --------- of its proceedings and report the same to the board of directors when required. 4.3 REMOVAL. Any members of any committee so designated may be removed ------- by the board of directors by the affirmative vote of a majority of the whole board, whenever in its judgment the best interests of the Corporation will be served thereby. ARTICLE 5 NOTICE 5.1 METHOD. Whenever by statute or the Corporation's Certificate of ------ Incorporation or these bylaws, notice is required to be given to any shareholder or director, and no provision is made as to how the notice shall be given, it shall not be construed to mean personal notice, but any such notice may be given in writing, postage prepaid, addressed to the director or shareholder at the address appearing on the books of the Corporation, or in any other method permitted by law. Any notice required or permitted to be given by mail shall be deemed given at the time when the same is thus deposited in the mails. Notice to directors may also be given by personal telephone call to the director, by overnight delivery by a nationally recognized overnight courier service, with such notice to be deemed given when delivered to the courier service addressed to the director at his address appearing on the books of the Corporation and with the courier's delivery charges prepaid or provided for by the Corporation, or by transmitting such notice by facsimile to the director at his facsimile number on the books of the Corporation, with such notice to be deemed given when such facsimile transmission is completed. 5.2 WAIVER. Whenever, by statute or the Corporation's Certificate of ------ Incorporation or these bylaws, notice is required to be given to any shareholder or director, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated in such notice, shall be equivalent to the giving of such notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except where the person attends the meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business on the grounds that the meeting is not lawfully called or convened. ARTICLE 6 OFFICERS 6.1 NUMBER. Subject to Section 6.3, the officers of the Corporation ------ may consist of a chairman of the board of directors, a chief executive officer, a president, a chief operating officer, one or more vice presidents, a secretary and a chief financial officer/treasurer, each of whom shall be elected by the board of directors. 6.2 ELECTION. The board of directors, at its first meeting after each -------- annual meeting of shareholders, shall choose each of the officers designated in these bylaws. None of whom need be a member of the board, a shareholder, or a resident of Delaware. 6.3 OTHER OFFICERS. The board of directors may elect or appoint such -------------- other officers and agents as it shall deem necessary, who shall be appointed for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board of directors. 6 6.4 TERM. Each officer of the Corporation shall hold office until his ---- successor is chosen and qualified in his stead or until his death or until his resignation or removal from office. 6.5 REMOVAL. The president or any other officer of the Corporation may ------- be removed by the board of directors whenever in its judgment the best interests of the Corporation will be served thereby but such removal shall be without prejudice to the contract rights, if any, held by such individual. Any other employee of the Corporation may be removed by the president whenever in his judgment the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any vacancy created by the removal of an officer or agent elected by the board of directors and removed by the board of directors or the president shall be filled by the board of directors. Election or appointment of an officer or agent or member of a committee shall not of itself create contract rights. 6.6 VACANCIES. Any vacancy in any office because of death, --------- resignation, removal or otherwise, may be filled by the board of directors for the unexpired portion of the term. 6.7 COMPENSATION. The compensation of all the officers and agents ------------ shall be fixed by a compensation committee of the board of directors to be designated by the board of directors from time to time pursuant to Section 4.1 of these bylaws, subject to such directives as may be prescribed from time to time by the board of directors. 6.8 CHAIRMAN OF THE BOARD. The chairman of the board of directors ------------------------ shall preside at all meetings of the board of directors. He shall have such other duties as may be from time to time assigned to him by the board of directors. The chairman of the board of directors need not be an employee of the Corporation. 6.9 CHIEF EXECUTIVE OFFICER. The chief executive officer shall, ------------------------- subject to the power and authority of the board of directors, have over all supervision, direction and control of the business and affairs of the Corporation. In addition to the above duties, he shall have such other duties as may from time to time be assigned to him by the board of directors. 6.10 VICE CHAIRMAN OF THE BOARD. In the absence or disability of the ---------------------------- chairman of the board, the vice chairman of the board of directors, if any, shall perform all the duties of the chairman of the board of directors and when so acting, shall have all of the powers and duties as may be assigned to him from time to time by the board of directors or prescribed by these bylaws. 6.11 PRESIDENT. The president shall have the general supervision, --------- direction and control of the business and the officers of the corporation. He shall also perform such other duties as may be assigned to him from time to time by the board of directors or the chief executive officer. 7 6.12 CHIEF OPERATING OFFICER. The chief operating officer shall, ------------------------- subject to the direction of the chief executive officer, have general charge and supervision of the operating elements of the Corporation. He shall also perform such other duties as may be assigned to him from time to time by the chief executive officer or the board of directors. 6.13 VICE PRESIDENTS. Executive vice presidents, senior vice ---------------- presidents and vice presidents of the Corporation shall perform such duties as may be assigned to them from time to time by the chief executive officer, the president or the chief operating officer. 6.14 SECRETARY. The secretary shall keep the minutes of the meetings --------- of the shareholders, the board of directors and all board of directors committee meetings. He shall be the custodian of the corporate seal and shall affix it to all documents which he is authorized by law or the board of directors to sign and seal. He also shall perform such other duties as may be assigned to him from time to time by the chief executive officer or the board of directors. 6.15 CHIEF FINANCIAL OFFICER/TREASURER. The chief financial ----------------------------------- officer/treasurer shall be the principle financial officer of the corporation. He shall be responsible to the chief executive officer for the management and supervision of all financial matters and to provide for the financial growth and stability of the Corporation. He shall also perform such additional duties as may be assigned to him from time to time by the chief executive officer or the board of directors. 6.16 ASSISTANT OFFICERS. The chief executive officer may appoint one ------------------- or more assistant secretaries, and such other assistant officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as may be specified from time to time by the chief executive officer. 6.17 WHEN DUTIES OF AN OFFICER MAY BE DELEGATED. In the case of the --------------------------------------------- absence or disability of an officer of the Corporation or for any other reason that may seem sufficient to the chief executive officer or the board of directors, an officer's duties and powers may be delegated to any other officer of the Corporation. 6.18 OFFICERS HOLDING TWO (2) OR MORE OFFICES. The same person may -------------------------------------------- hold any two or more of the above-mentioned offices. However, no officer shall execute, acknowledge or verify any instrument in more than one capacity, if such instrument is required by law, by the Corporation's Certificate of Incorporation or by these bylaws, to be executed, acknowledged or verified by any two (2) or more officers. 6.19 FILLING OF OFFICES. The board of directors shall not be required ------------------- to fill the offices of vice chairman of the board of directors, chief operating officer, or vice president, assistant secretary, and assistant treasurer, or to name any committee until, in the opinion of the board of directors, there is a need for such offices, committees, or any of them, to be filled. ARTICLE 7 CERTIFICATES, SHAREHOLDERS AND STOCK PLANS 7.1 CERTIFICATES. Certificates in the form determined by the board of ------------ directors shall be delivered representing all shares to which shareholders are entitled. Such certificates shall be consecutively numbered, and shall be entered in the books of the Corporation as they are issued. Each certificate shall state on the face thereof the holder's name, the number and class of 8 shares, the par value of shares or a statement that such shares are without par value, and such other matters as may be required by the laws of the State of Delaware. They shall be signed by the president or a vice-president and the secretary or assistant secretary, and may be sealed with the seal of the Corporation or a facsimile thereof. If any certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation or an employee of the Corporation, the signature of such officer may be a facsimile. In the event any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. 7.2 REPLACEMENT OF LOST OR DESTROYED CERTIFICATES. The board of -------------------------------------------------- directors may direct a new certificate representing shares to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost or destroyed upon the making of an affidavit of that fact by the person claiming the certificate to be lost or destroyed. When authorizing such issue of a new certificate, the board of directors, in its discretion and as a condition precedent to the issuance thereof, may prescribe such terms and conditions as it deems expedient, and may require such indemnities as it deems adequate, to protect the Corporation from any claim that may be made against it with respect to any such certificate alleged to have been lost or destroyed. 7.3 TRANSFER OF SHARES. Shares of stock shall be transferable only on ------------------- the books of the Corporation by the holder thereof in person or by his duly authorized attorney. Upon surrender, to the Corporation or its transfer agent, of a certificate representing shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, the Corporation or its transfer agent shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. 7.4 REGISTERED SHAREHOLDERS. The Corporation shall be entitled to ------------------------ treat the holder of record of any share or shares of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it has express or other notice thereof, except as otherwise provided by law. 7.5 STOCK OPTION PLANS. The Corporation may adopt and carry out a -------------------- stock option plan or agreement providing for the issue and sale, for such consideration as may be fixed, of its unissued shares, or of issued shares acquired or to be acquired, to one (1) or more of the employees of the Corporation or of a subsidiary or to a trustee on their behalf and for the payment for such shares in installments or at one time, and may provide for aiding any such persons in paying for such shares by compensation for services rendered, promissory notes or otherwise. ARTICLE 8 INDEMNIFICATION 8.1 INDEMNIFICATION. The Corporation shall indemnify any person who --------------- was, is, or is threatened to be made a part to a proceeding (as hereinafter defined) by reason of the fact that he (i) is or was a director or officer of the Corporation or (ii) while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, 9 venturer, proprietor, trustee, employee agent, or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise, to the fullest extent permitted under the Delaware General Corporation Law, as the same exists or may hereafter be amended. Such right shall be a contract right and as such shall run to the benefit of any director or officer who is elected and accepts the position of director or officer of the Corporation or elects to continue to serve as a director or officer of the Corporation while this Article 8 is in effect. Any repeal or amendment of this Article 8 shall be prospective only and shall not limit the rights of any such director or officer or the obligations of the Corporation with respect to any claim arising from or related to the services of such director or officer in any of the foregoing capacities prior to any such repeal or amendment to this Article 8. Such right shall include the right to be paid by the Corporation expenses incurred in defending any such proceeding in advance of its final disposition to the maximum extent permitted under the Delaware General Corporation Law, as the same exists or may hereafter be amended. If a claim for indemnification or advancement of expenses hereunder is not paid in full by the Corporation within sixty (60) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim, and if successful in whole or in part, the claimant shall also be entitled to be paid the expenses of prosecuting such claim. It shall be a defense to any such action that such indemnification or advancement of costs of defense are not permitted under the Delaware General Corporation Law, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation, including its board of directors or any committee thereof, independent legal counsel, or shareholders, to have made its determination prior to the commencement of such action that indemnification of, or advancement of costs of defense to, the claimant is permissible in the circumstances nor an actual determination by the Corporation, including its board of directors or any committee thereof, independent legal counsel, or shareholders, that such indemnification or advancement is not permissible shall be a defense to the action or create a presumption that such indemnification or advancement is not permissible. In the event of the death of any person having a right of indemnification under the foregoing provisions, such right shall inure to the benefit of his or her heirs, executors, administrators, and personal representatives. The rights conferred above shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, bylaw, resolution of shareholders or directors, agreement or otherwise. The Corporation may additionally indemnify any employee or agent of the Corporation to the fullest extent permitted by law. As used herein, the term "proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding, and any inquiry or investigation that could lead to such an action, suit or proceeding. 10 ARTICLE 9 GENERAL PROVISIONS 9.1 DIVIDENDS AND RESERVES. ------------------------- 9.1.1 DECLARATION AND PAYMENT. Subject to statute and the ------------------------- Corporation's Certificate of Incorporation, dividends may be declared by the board of directors at any regular or special meeting and may be paid in cash, in property, or in shares of the Corporation. The declaration and payment shall be at the discretion of the board of directors. 9.1.2 RECORD DATE. The board of directors may fix in advance a ------------ record date for the purpose of determining shareholders entitled to receive payment of any dividend, such record date to be not more than sixty (60) days prior to the payment date of such dividend. In the absence of any action by the board of directors, the date upon which the board of directors adopts the resolution declaring the dividend shall be the record date. 9.1.3 RESERVES. By resolution the board of directors may create -------- such reserve or reserves out of the earned surplus of the Corporation as the directors from time to time, in their discretion, think proper to provide for contingencies, or to equalize dividends, or to repair or maintain any property of the Corporation, or for any other purpose they think beneficial to the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. 9.2 DIRECTORS' RIGHT OF INSPECTION. Every director shall have the --------------------------------- right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the Corporation and/or its subsidiary corporations for a purpose reasonably related to his position as a director as may be determined by the remaining directors. Such inspection may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. 9.3 BOOKS AND RECORDS. The Corporation shall keep correct and complete ----------------- books and records of account and shall keep minutes of the proceedings of its shareholders and board of directors, and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of the shares held by each. 9.4 CHECKS AND NOTES. All checks or demands for money and notes of the ---------------- Corporation shall be signed by such officer or officers or such other person or persons as the board of directors may from time to time designate. 9.5 SECURITIES OF OTHER CORPORATIONS. The chief executive officer shall -------------------------------- have the power and authority to transfer, endorse for transfer, vote, consent, or take any other action with respect to any securities of another issuer held or owned by the Corporation, and to make, execute and deliver any waiver, proxy or consent with respect to any such security, subject to any directions by the board of directors. The chief executive officer, however, may appoint some other person or persons to vote such shares, in which case such person shall be entitled to vote such shares upon the production of a certified copy of such resolution. 11 9.6 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by ------------ resolution of the board of directors. 9.7 SEAL. The corporate seal shall have inscribed thereon the name of ---- the Corporation and shall be in such form as the board of directors may prescribe. Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced otherwise. 9.8 RESIGNATION. Any director, officer or agent may resign by giving ----------- written notice to the chief executive officer or the secretary. The resignation shall take effect at the time specified therein. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 9.9 AMENDMENT OF BYLAWS. The board of directors shall have the power --------------------- to make, alter, amend or repeal these bylaws at any meeting at which a quorum is present by an affirmative vote of the directors present at such meeting voting so as to conform to the requirements of the Corporation's Certificate of Incorporation, provided notice of the proposed repeal, alteration or amendment is contained in the notice of such meeting. 9.10 TABLE OF CONTENTS; HEADINGS. The table of contents and headings ----------------------------- used in these bylaws have been inserted for convenience only and do not constitute matter to be construed in interpretation. 9.11 CONSTRUCTION. Whenever the context so requires, the masculine ------------ shall include the feminine and neuter, and the singular shall include the plural, and conversely. If any portion of these bylaws shall be invalid or inoperative, then, so far as is reasonable and possible: (a) The remainder of these bylaws shall be considered valid and operative; and (b) Effect shall be given to the intent manifested by the portion held invalid or inoperative. The undersigned president and secretary of the Corporation hereby certify that the foregoing Amended and Restated Bylaws were unanimously adopted by the Board of Directors of the Corporation on the 12th day of April, 2001, to witness which they have hereunto affixed their signatures. /S/ James E. Buncher /S/ Ronald I. Brendzel - -------------------------- ------------------------- JAMES E. BUNCHER RONALD I. BRENDZEL President and Chief Executive Officer Senior Vice President and Secretary 12 -----END PRIVACY-ENHANCED MESSAGE-----