-----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, FQMBzqLCAkqvLYT81HxxTg2iFS1FqeKBreV9rncy/0whl/Gl2KGUpswUC7HuaV/G 8oSynd4hckNm137TmykZGQ== 0001017062-97-001564.txt : 19970815 0001017062-97-001564.hdr.sgml : 19970815 ACCESSION NUMBER: 0001017062-97-001564 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12050 FILM NUMBER: 97663922 BUSINESS ADDRESS: STREET 1: 505 N EUCLID ST STREET 2: PO BOX 3210 CITY: ANAHEIM STATE: CA ZIP: 92803-3210 BUSINESS PHONE: 7147781005 10-Q 1 FORM 10-Q FOR PERIOD ENDED 06-30-1997 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 June 30, 1997 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) 505 NORTH EUCLID STREET ANAHEIM, CALIFORNIA 92801 (Address of principal executive offices) (Zip Code) (714) 778-1005 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of registrant's common stock, par value $.01 per share, at June 30, 1997, was 4,716,832 shares (not including 3,274,788 shares of common stock held in treasury). Page 1 of 13 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997 INFORMATION INCLUDED IN REPORT
Page ---- Part I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Position 3 Consolidated Statements of Income 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II. OTHER INFORMATION Item 1. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 Item 5. Other Information 11 Item 6. Exhibits and Reports on Form 8K 12 SIGNATURES 13
Page 2 of 13 PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (000's omitted, except share data)
June 30, 1997 December 31, 1996 ------------- ----------------- (Unaudited) ASSETS Current assets: Cash $ 1,612 $ 706 Investments available for sale, at estimated fair value 4,688 6,420 Investments held to maturity, at cost 1,599 2,681 Accounts and notes receivable, net of allowances of $547 in 1997 and $531 in 1996 8,982 6,375 Income taxes receivable 121 44 Prepaid expenses and other current assets 1,430 1,110 Deferred income taxes 165 165 Net assets of discontinued operations 7,076 6,250 ------- ------- Total current assets 25,673 23,751 ------- ------ Property and equipment, net 10,256 11,841 Investments held to maturity, at amortized cost 3,611 3,631 Notes receivable -- long-term 8,447 3,125 Other assets 335 231 Goodwill, net of accumulated amortization of $437 in 1997 and $134 in 1996 29,868 21,786 Intangibles and covenants not to compete, net of accumulated amortization of $1,824 in 1997 and $1,431 in 1996 4,246 3,751 ------- ------- Total assets $82,436 $68,116 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 5,875 $ 2,000 Current portion of note payable 1,692 1,192 Accounts payable and accrued expenses 4,196 4,759 Income taxes payable - - Reserves for incurred but not reported claims 1,856 3,130 Deferred revenue 1,325 552 ------- ------- Total current liabilities 14,944 11,633 ------- ------- Long-term debt 24,625 17,000 Note payable 1,990 2,086 Deferred income taxes 2,787 1,784 Accrued compensation agreement 401 413 Stockholders' equity Preferred stock - $.01 par value; 1,000,000 shares authorized; no shares issued or outstanding - - Common stock $.01 par value; 30,000,000 shares authorized; 4,707,000 in 1997 and in 1996 shares outstanding, stated at 21,255 21,255 Retained earnings 34,631 32,165 Net unrealized loss on investment securities available for sale, net of deferred taxes (74) (97) Treasury stock, at cost (18,123) (18,123) ------- ------- Total stockholders' equity 37,689 35,200 ------- ------- $82,436 $68,116 ======= =======
See accompanying Notes to Consolidated Financial Statements. Page 3 of 13 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (000's omitted, except per share data)
Three months ended Six months ended June 30, June 30, ------------------------------------------------------ 1997 1996 1997 1996 ---- ---- ---- -------- Revenues $ 25,610 $ 19,447 $ 50,663 $ 37,982 Expenses Health care services 17,132 14,592 34,130 28,713 Selling, general and administrative 6,104 3,388 11,853 6,655 ------- -------- -------- -------- Total expenses 23,236 17,980 45,983 35,368 ------- -------- -------- -------- Operating income 2,374 1,467 4,680 2,614 Other income 395 319 693 539 Interest expense (627) - (1,124) - ------- -------- -------- -------- Income from continuing operations before provision for income taxes, cumulative effect and discontinued operations 2,142 1,786 4,249 3,153 Provision for income taxes 906 714 1,783 1,247 ------- -------- -------- -------- Income from continuing operations before cumulative effect of a change in accounting principle and discontinued operations 1,236 1,072 2,466 1,906 Cumulative effect of change in accounting principle, net of income taxes of $536 in 1996 - - - 824 ------- -------- -------- -------- Income before discontinued operations 1,236 1,072 2,466 2,730 Discontinued operations: Loss from dental office operations to be disposed of (net of after tax deferred loss of $608 and $1,018 in 1997 and net of income tax benefits of $377 and $880 in 1997 and $272 and $538 in 1996) (566) (426) (1,320) (842) Gain on disposal of dental practices (net of income taxes of $377 and $880 in 1997 and $0 in 1996) 566 - 1,320 - ------- -------- -------- -------- Loss from discontinued operations - (426) - (842) ------- -------- -------- -------- Net income $ 1,236 $ 646 $ 2,466 $ 1,888 ======= ======== ======== ======== Earning per share: Income from continuing operations before cumulative effect of a change in accounting principle and discontinued operations $ 0.25 $ 0.22 $ 0.50 $ 0.38 Cumulative effect of change in accounting principle 0.00 0.00 0.00 0.17 Loss from discontinued operations 0.00 (0.09) 0.00 (0.17) ------- -------- -------- -------- Net income $ 0.25 $ 0.13 $ 0.50 $ 0.38 ======= ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. Page 4 of 13 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (000's omitted)
Six months ended June 30, -------------------- 1997 1996 --------- --------- Cash flows from operating activities: Net income $ 2,466 $ 1,888 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Loss from discontinued operations 2,183 843 Gain on disposal of discontinued dental practices (2,183) - Depreciation and amortization 1,900 911 Deferred income taxes 1,003 46 Changes in operational assets and liabilities: Accounts and current notes receivable, net (2,055) (308) Income taxes receivable (77) 45 Prepaid expenses and other current assets 23 (114) Accounts payable and accrued expenses (563) (1,358) Income taxes payable - 781 Deferred revenue 773 107 Reserves for incurred but not reported claims (1,274) (710) --------- --------- Net cash provided by continuing operations 2,196 2,131 Net cash used in discontinued operations (3,878) (1,860) --------- --------- Net cash (used in) provided by operating activities (1,682) 271 --------- --------- Cash flows from investing activities: Purchase of investments available for sale (2,862) (8,485) Proceeds from sales/maturity of investments available for sale 4,617 9,908 Purchase of investments held to maturity (10) (4,040) Proceeds from maturity of investments held to maturity 1,112 4,168 Purchases of property and equipment (1,120) (1,011) Capital expenditures of discontinued operations (394) (1,353) Cash paid for business acquired (1,043) - Additions to intangibles and other assets (104) - --------- --------- Net cash provided by (used in) investing activities 196 (813) --------- --------- Cash flows from financing activities: Proceeds from exercise of stock options - 42 Proceeds from long-term debt 3,000 - Payments on accrued compensation agreement (12) - Payments on notes payable (596) - --------- --------- Net cash provided by financing activities 2,392 42 --------- --------- Net increase (decrease) in cash 906 (500) Cash at beginning of period 706 506 --------- --------- Cash at end of period $ 1,612 $ 6 ========= ========= Purchase of business acquired: Fair value of assets acquired $ 12,376 $ - Less: cash acquired (905) - Less: note payable issued (1,000) - Less: long-term debt issued (8,500) - Less: liabilities assumed (928) - --------- --------- Cash paid for business acquired $ 1,043 $ - ========= =========
See accompanying Notes to Consolidated Financial Statements. Page 5 of 13 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Basis of Reporting - --------------------------- The accompanying unaudited Consolidated Financial Statements of Safeguard Health Enterprises, Inc. and subsidiaries (the "Company") for the quarter ended June 30, 1997, have been prepared in accordance with generally accepted accounting principles applicable to interim periods, and reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of results for the interim periods. The statements have been prepared in accordance with the regulations of the Securities and Exchange Commission, but omit certain information and footnote disclosures necessary to present the statements in accordance with generally accepted accounting principles. This information should be read in conjunction with the Consolidated Financial Statements and Notes including Significant Accounting Policies, contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. Management believes that the disclosures herein are adequate to make the information presented not misleading. As described in Note 4 herein, the operating results for the quarter ended June 30, 1997 have been restated to reflect the effect of the discontinued operation of the general dental practices. On January 1, 1996, the Company changed its method of recognizing revenues relating to providing orthodontic health care services to the proportional performance method. This change in method of revenue recognition results in revenues being recognized based on the ratio of costs incurred to total estimated costs, which better matches revenues and expenses over the life of an orthodontic contract. Previously, the Company recognized revenue on a contracted basis. The Company believes this method provides for a better matching of expenses to revenues over the life of each individual orthodontic contract. As of January 1, 1996, the company recorded a cumulative effect of $824, net of taxes, for this change. Note 2: Stockholders' Equity and Earnings Per Share - ---------------------------------------------------- Since October 1986, the Company's Board of Directors has, at various times, authorized the repurchase of up to 4,510,888 shares of its common stock through open market or private transactions. As of June 30, 1997, a total of 3,819,088 shares had been acquired at an average cost of $5.54 per share. All shares acquired prior to August 24, 1987, have been retired as required by California law. All shares acquired after the August 24, 1987 reincorporation in Delaware are being held as treasury stock. Earnings per share for the periods ended June 30, 1997 and 1996 were computed by dividing net income by 4,979,751 and 4,935,890 shares, respectively, which was the weighted average number of outstanding common shares and common share equivalents (stock options) during the respective periods. Note 3: Recent Accounting Pronouncements - ----------------------------------------- In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128 ("FAS 128"), Earnings Per Share, which becomes effective for fiscal years ending after December 15, 1997. FAS 128 specifies the computation, presentation and disclosure requirements for earnings per share, and its objective is to simplify the computation of earnings per share, and to make the U.S. standard for computing earnings per share more compatible with the standards of other countries. The statement requires that all prior period earnings per share data presented shall be restated. The Company will adopt FAS 128 in fiscal year 1997 as required, and its adoption is not expected to have a significant effect on the Company's financial position or results of operations. Note 4: Discontinued Operations - -------------------------------- On October 21, 1996, the Company implemented a strategic plan to sell all of the general dental practices owned by the Company ("General Practices"). Eleven (11) of the General Practices were sold during the six months ended June 30, 1997. Page 6 of 13 The assets of the General Practices sold, pursuant to the Company's plan, consist primarily of accounts receivable, supply inventories and leasehold improvements. Each General Practice sold may also enter into a long-term contract with the Company's newly formed practice management subsidiary, whereby the Company will provide certain services to support the dentists in the operation of their practices, including administrative support. The Company has retained the orthodontic practice in each of the General Practices. On August 1, 1997, the Company sold all of the tangible assets of its remaining fifteen (15) general dental practices to Associated Dental Services, Inc. ("Associated"). Under the terms of the sale, Associated paid an aggregate purchase price of $4.5 million for the assets, to be wholly financed by the Company pursuant to an 8.5%, thirty (30) year promissory note, secured by the assets sold. In addition, the Company shall provide Associated with a $1.0 million line of credit for a period of up to eighteen (18) months. The Company has also entered into a management services agreement with Associated to provide ongoing dental management services, including marketing and administrative support. In a transaction related to Associated, the Company sold all of the intangible assets of its remaining fifteen (15) general dental practices to Pacific Coast Dental, Inc. ("Pacific"). Under the terms of the sale, the total purchase price paid by Pacific was $3.5 million, to be wholly financed by the Company pursuant to an 8.5%, thirty (30) year promissory note, secured by the assets sold to Pacific. The Company expects to realize a modest gain on the final disposal of the discontinued operations that would offset the previous operating losses of the General Practices during the phase-out period through August 1997. The final net deferred gain will be recognized in the third quarter of 1997 with the completion of the sale of all the General Practices. Note 5: Acquisition - -------------------- On May 13, 1997, the Company completed the acquisition of all of the outstanding shares of common stock of Advantage Dental HealthPlans, Inc., a privately-held managed dental care company based in Fort Lauderdale, Florida for a total value of approximately $10.0 million, consisting of cash and debt. The acquisition added more than 125,000 members to the Company's existing membership, and is anticipated to contribute annualized revenues of over $6.0 million. Note 6: Subsequent Events - -------------------------- On August 7, 1997, the Company completed the acquisition of all the outstanding shares of Consumers Life Insurance Company of North Carolina ("Consumers"), a privately held dental indemnity insurance company with licenses in sixteen (16) states. The Company purchased the licenses and obtained all of the statutory deposits held on behalf of Consumers for a cash payment of $3.2 million, and capitalized Consumers with a total capital and surplus of $5.0 million. Page 7 of 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with the attached consolidated financial statements and notes thereto.
1997 versus 1996 Six months ended June 30, -------------------------------- Increase/ Percent Results of operations (000's omitted) (Decrease) Change - --------------------------------------------------------------------------------------------------- Health care revenues Managed care revenues $12,456 36.7 Orthodontic revenues 225 5.6 ------- ---- Total health care revenues $12,681 33.4 - --------------------------------------------------------------------------------------------------- Health care expenses Managed care expenses $ 5,049 19.3 Orthodontic expenses 368 14.5 ------- ---- Total health care expenses $ 5,417 18.9 - --------------------------------------------------------------------------------------------------- Total selling, general and administrative expenses $ 5,198 78.1 - --------------------------------------------------------------------------------------------------- Other income $ 154 28.6 - --------------------------------------------------------------------------------------------------- Interest expense $ 1,124 N/A - --------------------------------------------------------------------------------------------------- Income from continuing operations before cumulative effect of a change in accounting principle and discontinued operations $ 560 29.4 - --------------------------------------------------------------------------------------------------- Loss from discontinued operations, net of gain on sale of general dental practices, net $ (842) (100.0) - ---------------------------------------------------------------------------------------------------- Net income $ 578 30.4 - -----------------------------------------------------------------------------------------------------
1997 Versus 1996 - ---------------- Health care revenues for the six months ended June 30, 1997 were $50,663 or a 33.4% increase on an increase of 43.2% in membership over the corresponding period a year ago. This increase included the impact on revenues and membership for the acquisition of both First American Dental Benefits, Inc. ("First American"), completed on September 27, 1996 and Advantage Dental HealthPlans Inc. ("Advantage"), completed on May 13, 1997. Excluding the impact of the two acquisitions, revenues for the same period increased 15.2% on a 6.1% increase in membership. The revenue increases were attributable to growth in sales to new clients, moderate price increases to renewing clients, and the sale of other product offerings to existing clients. Orthodontic revenues grew by 5.6% due to an increase in the number of orthodontic cases over the prior year. Health care expenses for the six months ended June 30, 1997 increased $5,417, or 18.9%. Health care expense as a percentage of health care revenues improved by 8.2% from 75.6% of revenues for the six months ended June 30, 1996, to 67.4% for the same period in 1997. This was due primarily to improvements in managed care expenses as a result of the effect of the acquisition of First American and the acquisition in May 1997 of Advantage, both of which have lower health care costs as a percent of revenues. Additionally, the health care ratios were positively impacted by improved control of costs and the impact of moderate price increases. General and administrative expenses for the six months ended June 30, 1997 increased $5,198, or 23.4% of revenue. This was due primarily to the acquisitions of First American and Advantage, both of which had a higher ratio of general and administrative expenses to revenues than the Company had prior to the acquisitions. Additionally, goodwill expense of $693 related to the two acquisitions is included in general and administrative expenses. Excluding the impact of the acquisitions and the associated goodwill expense, the ratio of general and administrative expenses to Page 8 of 13 revenues was 19.9% for the six months ended June 30, 1997 compared to 17.5% for the corresponding period a year ago. This was due primarily to increases in telecommunications and computer network costs as well as increased management staffing levels. Other income increased 28.6% to $693 due to an increase in interest bearing notes receivables. Interest expense of $1,124 is a result of the borrowings entered into for the acquisition of both First American and Advantage. The operating results, net of taxes, of the discontinued general dental practices for the six months ended June 30, 1997, reflect a net loss of $1,320, net of an after tax deferred loss of $608. This compares to a net after tax loss of $842 for the same period in 1996. This net loss was entirely offset by an after tax gain of $1,320 on the sale of 11 general practices during the first six months of 1997. Net income for the six months ended June 30, 1997 was $2,466, which increased from the same period in 1996 due to the above discussed factors. Net income for the same period in 1996 was $1,888, which included the cumulative effect, after taxes, of $824 for the change in accounting principle adopted as of January 1, 1996. Business Segment Information - ---------------------------- The Company is engaged primarily in two distinct businesses; the operation of managed care dental programs and the operation of orthodontic practices. Summarized financial information by business segment is as follows (in $000's):
1997 versus 1996 Six months ended June 30, -------------------------------------------------------- 1997 Percent of 1996 Percent of Amount Revenue Amount Revenue - ----------------------------------------------------------------------------------------------------------------------- Health care revenues Managed care revenues $ 46,430 91.6 $ 33,974 89.4 Orthodontic revenues 4,233 8.4 4,008 10.6 -------- ----- -------- ----- Total health care revenues $ 50,663 100.0 $ 37,982 100.0 - ----------------------------------------------------------------------------------------------------------------------- Health care expenses Managed care expenses $ 31,217 67.2 $ 26,168 77.0 Orthodontic expenses 2,913 68.8 2,545 63.5 -------- -------- ----- Total health care expenses $ 34,130 67.4 $ 28,713 75.6 - ------------------------------------------------------------------------------------------------------------------------ Total Selling, General and Administrative Expenses $ 11,853 23.4 $ 6,655 17.5
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 flow and this is expected to continue. At June 30, 1997, the current ratio was 1.72 to 1.0. The Company's net worth was $37.7 million compared to $33.7 million a year earlier. The Company had $11.5 million of cash and investments as of June 30, 1997 compared to $16.8 million a year earlier. The Company believes that income from operations, together with the existing cash and investments on hand, its bank loan, and other available sources of financing, should be adequate to meet operating capital 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. Page 9 of 13 Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 - -------------------------------------------------------------------------------- The statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations concerning any future premium pricing levels, future dental health care expense levels, the Company's ability to control health care, selling, general and administrative expenses, and all other statements that are not historical facts, are forward looking statements. Actual results may differ materially from those projected in the forward-looking statements, if any, which statements involve risks and uncertainties. The Company's ability to expand is affected by competition not only in benefit program choices, but also the number of dental plan competitors in the markets in which the Company operates. Certain large employer groups and other purchasers of commercial dental health care services, continue to demand minimal premium rate increases, while limiting the number of choices offered to employees. In addition, securing cost effective contracts with dentists may become more difficult in part due to the increased competition among dental plans for dentist contracts. The Company's profitability depends, in part, on its ability to maintain effective control over health care costs, while providing members with quality dental care. Factors such as levels of utilization of dental health care services, new technologies, specialists costs, and numerous other external influences may effect the Company's operating results. The Company's expectations for the future are based on current information and evaluation of external influences. Changes in any one factor could materially impact the Company's expectations relating to premium rates, benefit plans offered, membership growth, the percentage of health care expenses, and as a result, profitability and therefore, effect the forward looking statements which may be included in these reports. In addition, past financial performance is not necessarily a reliable indicator of future performance. An investor should not use historical performance alone to anticipate future results or future period trends. Part II. Other Information Item 1. Legal Proceedings The Company is a defendant in litigation arising in the normal course of business. In the opinion of management, the defense costs and/or ultimate outcome of such litigation is covered by insurance or will not have material effect on the Company's financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders (the "Annual Meeting") of the Company was held on May 22, 1997, at the Company's Executive Offices in Anaheim, California. The following matters were addressed at the meeting: 1. ELECTION OF DIRECTORS William E. McKenna and John E. Cox were duly elected to the Board of Directors as Class I Directors at the Annual Meeting for a three (3) year term. Steven J. Baileys, D.D.S., Ronald I. Brendzel, J.D., Michael M. Mann, Ph.D., George H. Stevens and Bradford M. Boyd, D.D.S., are directors whose terms of office continued after the Annual Meeting. The votes of holders of 4,134,799 shares of the Company's common stock were cast "FOR" the election of Mr. McKenna and the votes of holders of 4,134,899 shares of the Company's common stock were cast "FOR" the election of Mr. Cox. The votes of holders of 151,100 shares of common stock were cast to "WITHHOLD" the election of Mr. McKenna, and the votes of holders of 151,000 shares of common stock were cast to "WITHHOLD" the election of Mr. Cox. The votes "FOR" represents approximately 87.7% and 93.8% of all shares of common stock outstanding and entitled to vote at the Annual Meeting, and of all shares voting at the Annual Meeting, respectively. 2. APPROVAL OF AMENDMENTS TO THE COMPANY'S STOCK OPTION PLAN This Proposal sought approval of Amendments to the Company's Stock Option Plan which would provide for an increase in the number of shares of common stock issuable thereunder, the extension Page 10 of 13 of the term of the Stock Option Plan through December 31, 2007, and other technical changes. The votes of holders of 2,852,825 shares of the Company's common stock were cast "FOR" the Amendments to the Company's Stock Option Plan and votes of holders of 1,299,975 shares of the Company's Common Stock were "AGAINST" the Amendments to the Company's Stock Option Plan. The votes "FOR" represent 60.5% and 68.9% of all shares of common stock outstanding and entitled to vote at the Annual Meeting, and of all shares voting at the Annual Meeting, respectively. Item 5. Other Information On August 7, 1997, SafeGuard Health Enterprises, Inc., a Delaware corporation ("Enterprises" or the "Company"), completed the acquisition of all the issued and outstanding shares of Consumers Life Insurance Company of North Carolina, a Texas corporation ("Consumers"), which is a privately-held, dental indemnity insurance company licensed to operate in the States of Alabama, Arizona, Arkansas, Delaware, Florida, Georgia, Indiana, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia. Pursuant to that certain Stock Purchase Agreement dated March 6, 1997, by and between Consumers' parent corporation, Consumers Life Insurance Company, a Delaware corporation, and Enterprises, Enterprises purchased all of the Consumers shares and licenses, and obtained all of the statutory deposits held on behalf of Consumers in sixteen (16) states in which Consumers is licensed for a cash payment of $3,248,630, and capitalized the Company with total capital and surplus of $4,966,000. The value of deposits and licenses purchased was determined based upon the market value of the deposits and the going rate value of life and health insurance licenses of insurance companies of similar size and states of licensure. The acquisition of Consumers by Enterprises was subject to Consumers being redomesticated from the State of North Carolina to the State of Texas, and the Texas Department of Insurance's approval of the acquisition of control of Consumers by Enterprises. By Order dated May 13, 1997, the State of North Carolina Department of Insurance approved the redomestication of Consumers from the State of North Carolina to the State of Texas. By Order dated May 23, 1997, the Commissioner of Insurance of the State of Texas approved the redomestication of Consumers from the State of North Carolina to the State of Texas. On July 7, 1997, the Texas Department of Insurance approved the acquisition of Consumers by Enterprises. On October 21, 1996, Enterprises announced its plans to sell the "staff model" general dental practices of its subsidiary, Guards Dental, Inc., a California corporation ("Guards"). Subsequent to the date of such announcement, Guards sold seventeen (17) of its general dental practices by July 31, 1997. On August 1, 1997, Guards sold all of the tangible non-orthodontic related assets of its remaining fifteen (15) general dental practices ("Remaining Practices"), to Associated Dental Services, Inc., a California corporation ("Associated"), pursuant to that certain Dental Practice Asset Purchase Agreement (the "Associated Purchase Agreement"), dated August 1, 1997, by and between Guards and Associated. Under the terms of the Associated Purchase Agreement, Associated paid an aggregate purchase price of Four Million Five Hundred Thousand Dollars ($4,500,000) for the transferred assets, to be wholly financed by Guards pursuant to an 8.5%, thirty (30) year negotiable promissory note in the principal amount of $4,500,000, secured by the assets sold to Associated by Guards. The amount of consideration paid for the Assets was determined based on the book value of the Assets according to Guards. In addition, pursuant to the Associated Purchase Agreement, Enterprises shall provide Associated with a One Million Dollar ($1,000,000) line of credit for a period of up to eighteen (18) months, commencing on August 1, 1997. Finally, as required by the Associated Purchase Agreement, Associated has entered into that certain Management Services Agreement dated August 1, 1997, with Enterprises' newly formed practice management subsidiary, Imprimis Practice Management Company, Inc., a Delaware corporation ("Imprimis"), whereby Imprimis will provide ongoing dental management services to support the dentists in the operation of the dental practices relating to the Remaining Practices, including marketing and administrative support. Page 11 of 13 In a transaction related to the transactions represented by the Associated Purchase Agreement, Guards sold all of the non-orthodontic Remaining Practices and all of the intangible non-orthodontic assets related to the Remaining Practices to Pacific Coast Dental, Inc., a California corporation ("Pacific"), pursuant to that certain Dental Practices Purchase Agreement (the "Pacific Purchase Agreement"), dated August 1, 1997, by and between Guards and Pacific. Under the terms of the Pacific Purchase Agreement, the total purchase price paid by Pacific to Guards for the transferred assets was Three Million Five Hundred Thousand Dollars ($3,500,000), to be wholly financed by Guards pursuant to an 8.5%, thirty (30) year negotiable promissory note in the principal amount of $3,500,000 secured by the assets sold to Pacific by Guards. Enterprises shall retain and currently intends to operate the orthodontic practices in each of the Remaining Practices. The amount of consideration paid for the intangible and non- orthodontic assets was determined based upon the book value of such assets according to Guards. On August 5, 1997, Enterprises announced that it had completed the sale of its thirty-two (32) Guards general dental practices for an aggregate value of $17.5 Million. The Guards offices were originally established primarily for the purposes of supplementing, where needed, plan coverage provided by independent panel offices. Enterprises retained its related orthodontic business. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits /1/ 2.1 Plans of Acquisition. 3.1 Article of Incorporation**** 3.2 Bylaws**** 10.1 1984 Stock Option Plan*** 10.2 Stock Option Plan Amendment* 10.3 Stock Option Plan Amendment+ 10.4 Stock Option Plan Amendment++ 10.5 Amended Stock Option Plan... 10.6 Corporation Grant Deed, dated December 21, 1984, relating to a property located at 505 North Euclid Avenue, Anaheim, California** 10.7 Employment Agreement, as Amended, dated May 25, 1995, between Steven J. Baileys, D.D.S. and the Company+++ 10.8 Employment Agreement, as Amended, dated May 25, 1995, between Ronald I. Brendzel and the Company+++ 10.9 Employment Agreement dated May 25, 1995, between John E. Cox and the Company+++ 10.10 Employment Agreement dated May 25, 1995, between Wayne K. Butts and the Company+++ 10.11 Form of Rights Agreement, dated as of March 22, 1996, between the Company and American Stock Transfer and Trust Company, as Rights Agent+++ 10.12 Employment Agreement dated January 5, 1997, between Herb J. Kaufman, D.D.S. and the Company... 10.13 Credit Agreement dated September 25, 1996, between Bank of America National Trust and Savings Association and the Company.. 10.14 Stock Purchase Agreement between Consumers Life Insurance Company and SafeGuard Health Enterprises, Inc. dated March 6, 1997 10.15 Purchase Agreement between Associated Dental Services, Inc. and Guards Dental, Inc. dated August 1, 1997 10.16 Purchase Agreement between Pacific Coast Dental, Inc. and Guards Dental, Inc. dated August 1, 1997 18.0 Independent Auditors' Preferability Letter for Change in Accounting Method... 21.1 Subsidiaries of the Company... 27.1 Financial Data Schedule... (b) Reports on Form 8-K Reports on Form 8-K were filed with the Securities and Exchange Commission on May 28, 1997. The Report on Form 8-K mentioned in this Item 6, is hereby incorporated herein to this Quarterly Report on Form 10-Q for the period ended June 30, 1997, as if entirely set forth herein. - ---------------- * 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. +++ Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Annual Report of Form 10-K for the period ended December 31, 1995. . Incorporated by reference herein to Exhibit D filed as an exhibit to the Company's Report on Form 8-K dated September 27, 1996. .. Incorporated by reference herein to Exhibit E filed as an exhibit to the Company's Report on Form 8-K dated September 27, 1996. ... 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, 1996. ____________________ /1/ Enterprises agrees to furnish to the Securities and Exchange Commission, upon request, a copy of the exhibits to the exhibits listed above. Page 12 of 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) or 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 14th of August, 1997. SAFEGUARD HEALTH ENTERPRISES, INC. By: STEVEN J. BAILEYS, D.D.S. -------------------------- STEVEN J. BAILEYS, D.D.S., Chairman, and Chief Executive Officer By: THOMAS C. TEKULVE ------------------ THOMAS C. TEKULVE, Vice President and Chief Financial Officer Page 13 of 13 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS JUN-30-1997 JAN-01-1997 JUN-30-1997 1,612 6,287 8,982 0 0 25,673 10,256 0 82,436 14,944 24,625 0 0 21,255 34,631 82,436 25,610 0 17,132 23,236 6,104 0 627 2,142 906 1,236 0 0 0 1,236 .25 .25
EX-99.1 3 STOCK PURCHASE AGREEMENT EXHIBIT 99.1 ================================================================================ STOCK PURCHASE AGREEMENT between CONSUMERS LIFE INSURANCE COMPANY Camp Hill, PA and SAFEGUARD HEALTH ENTERPRISES, INC. Anaheim, CA Dated as of March 6, 1997 ================================================================================ TABLE OF CONTENTS
ARTICLE I PURCHASE OF STOCK............................................ 1 Section 1.1 Purchase of Stock....................................... 1 Section 1.2 Purchase Price for Stock................................ 1 Section 1.3 Undertaking of Seller .................................. 2 Section 1.4 Undertaking of Seller and Buyer ........................ 2 Section 1.5 Efforts to Close........................................ 2 ARTICLE II CLOSING; EFFECTIVE DATE AND TERMINATION ..................... 3 Section 2.1 Closing ................................................ 3 Section 2.2 Termination ............................................ 3 ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER .................... 3 Section 3.1 Organization and Good Standing of Seller................ 3 Section 3.2 Organization and Good Standing of Consumers NC.......... 3 Section 3.3 Proper Corporate Action ................................ 4 Section 3.4 Absence of Conflicting Laws or Agreements .............. 4 Section 3.5 Financial Statements.................................... 4 Section 3.6 Litigation.............................................. 5 Section 3.7 Capitalization.......................................... 5 Section 3.8 No Liabilities.......................................... 5 Section 3.9 Title to Assets ........................................ 5 Section 3.10 Reinsured Policies ..................................... 5 Section 3.11 Disclosure.............................................. 6 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER...................... 6 Section 4.1 Organization and Good Standing.......................... 6 Section 4.2 Proper Corporate Action ................................ 6 Section 4.3 Absence of Conflicting Laws or Agreements .............. 6 Section 4.4 Disclosure.............................................. 6 ARTICLE V COVENANT .................................................... 7 Section 5.1 Access and Information.................................. 7 Section 5.2 Covenants of Seller..................................... 7 Section 5.3 Exclusive Dealing ...................................... 7 ARTICLE VI CONDITIONS PRECEDENT TO CLOSING.............................. 8 Section 6.1 Conditions Precedent to Buyer's Obligation to Close .... 8 Section 6.2 Conditions Precedent to Seller's Obligation to Close.... 9
i
ARTICLE VII SURVIVAL AND INDEMNIFICATION ............................... 10 Section 7.1 Survival of Representations, Warranties and Covenants... 10 Section 7.2 Indemnity by Seller .................................... 10 Section 7.3 Indemnity by Buyer...................................... 10 Section 7.4 Notice to Indemnify .................................... 10 Section 7.5 Retention of Rights .................................... 11 ARTICLE VIII ARBITRATION ................................................ 11 Section 8.1 Arbitration ............................................ 11 Section 8.2 Procedure .............................................. 12 ARTICLE IX MISCELLANEOUS ............................................... 12 Section 9.1 Exhibits................................................ 12 Section 9.2 Expenses................................................ 12 Section 9.3 Contents of Agreement; Parties in Interest.............. 12 Section 9.4 Further Documents ...................................... 13 Section 9.5 Execution .............................................. 13 Section 9.6 Effect of Table of Contents; Use of Descriptive Headings; Etc. .................... 13 Section 9.7 Notices................................................. 13 Section 9.8 Governing Law........................................... 14 Section 9.9 Section 338(h)(10) Election............................. 14 Section 9.10 Records; Taxes.......................................... 15 Section 9.11 No Third Party Beneficiaries............................ 15
ii STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT ("Agreement") is made this 6th day of March, 1997, by and between CONSUMERS LIFE INSURANCE COMPANY, a Delaware corporation having its principal place of business located in Camp Hill, Pennsylvania (hereinafter referred to as "Seller"), and SAFEGUARD HEALTH ENTERPRISES, INC., a Delaware corporation having its principal place of business located in Anaheim, California (hereinafter referred to as "Buyer"). WITNESSETH: WHEREAS, Seller owns all of the outstanding capital stock (the "Stock") of Consumers Life Insurance Company of North Carolina, a North Carolina corporation ("Consumers NC"); and WHEREAS, Buyer desires to purchase the Stock and Seller desires to sell the Stock on the terms and subject to the conditions set forth herein. NOW THEREFORE, in consideration of the premises and mutual covenants, representations, warranties, conditions and agreements set forth herein, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I PURCHASE OF STOCK Section 1.1 Purchase of Stock ----------------- At Closing, Seller shall sell, assign, convey, transfer and deliver to Buyer and Buyer shall purchase and accept the Stock. Seller shall deliver to Buyer the Stock free and clear of all liens, claims, charges, pledges, security interests or other encumbrances of any nature whatsoever, duly endorsed in negotiable form or with stock powers duly executed in blank. Section 1.2 Purchase Price for Stock ------------------------ At Closing, Buyer shall pay to Seller by cashier's check or wire transfer, as the Purchase Price for the Stock, an amount equal to (i) Consumers NC's statutory capital and surplus on the Closing Date in accordance with the methodology as set forth on Exhibit A, plus (ii) $416,000, which represents $26,000 for the license for each of the 16 states in which Consumers NC is authorized to conduct business (the "State Licenses"); provided however, that in the event any of the State Licenses other than North Carolina and Texas are not in good standing or are in any way impaired on the Closing Date, such shall not constitute a breach of the organization and good standing representation and warranty contained in Section 3.2 hereof, and the Purchase Price shall be reduced by an amount equal to $26,000 for the number of such impaired State Licenses. At Closing, Buyer shall be responsible for contributing any additional amounts to the statutory capital and surplus in order to maintain each of the State Licenses. Section 1.3 Undertaking of Seller --------------------- Seller agrees to complete the following at or prior to Closing: (a) Reinsure on an indemnity basis all of the credit insurance policies of Consumers NC which have not been previously reinsured, together with all liabilities relating thereto, to American Republic Insurance Company under the terms and conditions of a reinsurance agreement, as amended, attached hereto as Exhibit B (the "Credit Reinsurance Agreement"), (b) Reinsure on an indemnity basis all of the ordinary life insurance policies of Consumers NC which have not been previously reinsured, together with all liabilities relating thereto, to Seller under the terms and conditions of a reinsurance agreement attached hereto as Exhibit C (the "Ordinary Reinsurance Agreement"), (c) Cause Consumers NC to distribute to Seller all of its assets, except for those assets which are required to remain as assets of Consumers NC, pursuant to Section 6.1(g) hereof, including without limitation assets on deposit with various state insurance departments and the investment income due and accrued on such assets, (d) Assume all of the liabilities of Consumers NC which were not reinsured pursuant to (a) above, and (e) Terminate all contracts of Consumers NC, including all management contracts between Seller and Consumers NC, except for the reinsurance agreements listed on Exhibit D to this Agreement. Section 1.4 Undertaking of Seller and Buyer ------------------------------- At or prior to Closing, Seller and Buyer agree to take all actions necessary to obtain approval (i) from the Texas Insurance Department and the North Carolina Insurance Department for the redomestication of Consumers NC from the State of North Carolina to the State of Texas, (ii) from the insurance departments of each state in which Consumers NC is licensed which are necessary so that such licenses are valid and in full force and effect after such redomestication and the purchase by Buyer of the Stock, and (iii) of the change in control of Consumers NC from the Texas Insurance Department required by Section 5 of Article 21.49-1 of the Texas Insurance Laws (collectively, the "Regulatory Approvals"). Section 1.5 Efforts to Close ---------------- Seller and Buyer agree to use any and all good faith reasonable efforts to obtain all required third party and governmental consents to the transactions contemplated hereby and to cause each of the conditions precedent and obligations of Buyer and Seller hereunder to be satisfied, all as quickly as reasonably practical. 2 ARTICLE II CLOSING; EFFECTIVE DATE AND TERMINATION Section 2.1 Closing ------- The closing (the "Closing") shall take place at the offices of Seller, on a mutually agreed day and time within ten (10) days after all of the conditions precedent set forth in Article VI hereof are obtained or waived by the appropriate party or parties. The actual date of the Closing shall be the "Closing Date". Section 2.2 Termination ----------- This Agreement may be terminated (a) by the mutual written consent of the parties, (b) by Buyer, if there has been a material misrepresentation or breach of a warranty, covenant or other agreement by Seller contained herein, (c) by Seller, if there has been a material misrepresentation or breach of a warranty, covenant or other agreement by Buyer contained herein, or (d) by either party if the Closing has not occurred by May 31, 1997, unless both parties otherwise mutually agree in writing to extend such time period. In the event of termination, this Agreement shall be null and void, without further liability on the part of any party provided that such party made its representations and warranties hereunder in good faith, used its reasonable, best efforts to perform its obligations hereunder and, in the case of Seller, did not violate the provisions contained in Section 5.3 hereof. Nothing hereinabove contained shall preclude any party from obtaining specific performance or any other equitable remedy otherwise available to it for any breach hereof. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Buyer as follows: Section 3.1 Organization and Good Standing of Seller ---------------------------------------- Seller is a corporation duly incorporated and validly existing and in good standing under the laws of the State of Delaware. It has the corporate legal capacity, power and authority to enter into and consummate the transactions contemplated by this Agreement. This Agreement constitutes binding and valid obligations of Seller. In addition, at Closing there will be no legal impediments to proceeding with the transaction with respect to Seller. The Closing will not cause a default or event of termination under any material contract to which Seller is a party and all necessary third party consents have been or will be obtained prior to Closing. Section 3.2 Organization and Good Standing of Consumers NC ---------------------------------------------- Consumers NC is a corporation duly incorporated, validly existing in good standing under the laws of the State of North Carolina, with full corporate powers to own and operate its business and properties and to carry on its business substantially as presently conducted by it. Except as otherwise contemplated by this Agreement, Consumers NC is duly qualified, licensed and in good standing as a domestic life insurance company in the State of North Carolina and duly qualified, licensed and in good standing as a foreign life insurance company in the states territories identified in Exhibit B 3 attached hereto, and neither the character of the properties owned or held nor the nature of the businesses conducted by Consumers NC requires qualification in any other state or jurisdiction. There is no action pending by any state insurance department to suspend or revoke any license of Consumers NC. Consumers NC is not a party to any supervisory order, memorandum of understanding or similar arrangement nor has any such order or arrangement been threatened against Consumers NC by any state insurance department. Consumers NC is not in violation of its charter or bylaws or of any applicable federal or state law or regulation. A copy of the Articles of Incorporation and By-Laws of Consumers NC, as amended to date, have been delivered to Buyer, and are true, correct and are in full force and effect. Section 3.3 Proper Corporate Action ----------------------- The execution of this Agreement and the transactions contemplated herein have been duly authorized by the Board of Directors of Seller and Seller has delivered, or will deliver prior to or at Closing, to Buyer true, correct and certified copies of the resolutions of Seller's Board of Directors authorizing such transactions. Section 3.4 Absence of Conflicting Laws or Agreements ----------------------------------------- Subject to receiving any necessary third party consents and the Regulatory Approvals, the execution, delivery and performance of this Agreement by Seller does not, and the consummation of the transactions contemplated in this Agreement will not, (i) contravene any provision of the Articles of Incorporation or Bylaws of Seller or Consumers NC; (ii) conflict with, result in a breach of, or constitute a material default (or an event which would, with the passage of time or the giving of notice or both, constitute a material default) under, or give rise to a right to terminate, amend, modify, abandon or accelerate, any material contract, agreement, lease, indenture, instrument or license to which Seller or Consumers NC is a party or by which they or their assets or properties may be bound or affected; (iii) violate or conflict with any federal, state or local law, statute, rule, regulation, order, judgment or decree; or (iv) result in or require the creation or imposition of any mortgage, pledge, lien, security interest, claim, charge or encumbrance upon or with respect to the assets of Seller or Consumers NC. Section 3.5 Financial Statements -------------------- Seller has delivered or will deliver to Buyer prior to Closing copies of Consumers NC's statutory financial statements for the years ended December 31, 1995 and 1996 and any quarterly statutory financial statements for any subsequent interim periods, as filed with the North Carolina Insurance Department (collectively, the "Financial Statements"), prepared in accordance with the books and records of Consumers NC and in accordance with statutory accounting principles. Except for the Reinsurance Agreements listed on Exhibit C to this Agreement, there are no material liabilities of Consumers NC, contingent or otherwise of any nature whatsoever, which are not disclosed by or refected fully in the Financial Statements. The Financial Statements fairly represent and reflect in all material respects Consumers NC's statutory financial position and its statutory results of operations for the respective periods presented. Since September 30, 1996 there has been no material adverse change in the financial position, business or operations of Consumers NC. 4 Section 3.6 Litigation ---------- There is no decree, judgment, order, action, suit, investigation or claim or legal, administrative, arbitration or other proceeding pending or to the knowledge of Seller threatened against Consumers NC, at law or in equity, by or before any court or governmental agency, department or instrumentality or arbitration board (i) which might materially affect the financial condition of Consumers NC or the conduct of its business or (ii) which relate to the transactions contemplated by this Agreement. Consumers NC is not in default under any judgment, decree or order of any court, arbitrator, or any governmental or administrative agency against or affecting any of its assets or businesses. Section 3.7 Capitalization -------------- The Stock constitutes all of the outstanding shares of capital stock of Consumers NC. All of the shares of Stock are validly issued and outstanding, fully paid and nonassessable and are owned by Seller, free and clear of any and all liens and encumbrances. There is no existing option, warrant, call, commitment or other agreement to which Consumers NC is a party, and there are no convertible securities of Consumers NC outstanding which, upon conversion, would require the issuance of any additional shares of capital stock of Consumers NC or other securities convertible into shares of capital stock of Consumers NC. Buyer, upon delivery and payment for the Stock as provided herein, will obtain good and marketable title to the Stock, free and clear of any claim, lien, pledge, option, charge or encumbrance, except for such as may have arisen, or may arise, through the actions of Buyer. Section 3.8 No Liabilities -------------- At the time of the purchase of the Stock, Consumers NC will have no liabilities or obligations of any nature, whether accrued, fixed, contingent or otherwise, known or unknown and will not be party to any contracts other than those specified in Section 1 .3(e) hereof Buyer will not, as a result of its purchase of the Stock, incur or assume any liability of Consumers NC or Seller. Section 3.9 Title to Assets --------------- Consumers NC has good and marketable title to all of the assets which will remain as assets of Consumers NC, as provided in Section 1 .3(C) of this Agreement. Such assets are free and clear of all liens, pledges and encumbrances. Section 3.10 Reinsured Policies ------------------ At Closing, all policies reinsured under the Credit Reinsurance Agreement shall conform to the underwriting guidelines established under the Credit Reinsurance Agreement. In the event any policy does not conform to the said underwriting guidelines, such policy shall be assumed by Seller in accordance with Section 1.3(d). 5 Section 3.11 Disclosure ---------- No representation or warranty by Seller nor any statement or certificate furnished or to be furnished to Buyer pursuant hereto, or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein not misleading. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller as follows: Section 4.1 Organization and Good Standing ------------------------------ Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with full corporate powers to own and operate its business and properties and to carry on its business substantially as presently conducted. Section 4.2 Proper Corporate Action Buyer has full corporate power to enter into and perform this Agreement. This Agreement and the transactions contemplated to occur pursuant thereto, have been duly authorized by Buyer's Board of Directors and no further corporate action is required. Section 4.3 Absence of Conflicting Laws or Agreements ----------------------------------------- Subject to receiving any necessary third party consents and the Regulatory Approvals, the execution, delivery and performance of this Agreement by Buyer, does not, and the consummation of the transactions contemplated in this Agreement will not, (i) contravene any provision of the articles of incorporation or bylaws of Buyer; (ii) conflict with, result in a breach of, or constitute a material default (or an event which would, with the passage of time or the giving of notice or both, constitute a material default) under, or give rise to a right to terminate, amend, modify, abandon or accelerate, any material contract, agreement, lease, indenture, instrument or license to which Buyer is a party or by which its assets or properties may be bound or affected; or (iii) violate or conflict with any federal, state or local law, statute, rule, regulation, order, judgment or decree. Section 4.4 Disclosure ---------- No representation or warranty by Buyer nor any statement or certificate furnished or to be furnished to Seller pursuant hereto, or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein not misleading. 6 ARTICLE V COVENANTS Section 5.1 Access and Information ---------------------- From and after the date of this Agreement and until Closing, Seller shall give to Buyer and its representatives full access during normal business hours to all of the properties, books, contracts, documents, and records of Consumers NC and will furnish to Buyer all information with respect to the affairs of Consumers NC as Buyer may from time to time reasonably request, provided; however, that any furnishing of such information to Buyer and any investigation by Buyer shall not effect the right of Buyer to rely upon the representations and warranties made by Seller in or pursuant to this Agreement. Buyer and its representatives shall treat all information originally obtained from Seller and not otherwise known to Buyer or already in the public domain as confidential; provided however, that nothing herein shall be construed to prohibit Buyer from disclosing to any of its advisors any such information. If this Agreement is not consummated, Buyer shall return all copies made by Buyer and its representatives, of materials belonging to Seller. Seller shall treat as confidential any and all information not otherwise in the public domain concerning Buyer. Section 5.2 Covenants of Seller ------------------- Seller covenants that until Closing, it will: (a) Carry on Consumers NC's insurance business in the normal and ordinary course and without limitation maintain normal and usual business practices, except that Seller may cause Consumers NC to take actions consistent with the requirements of Section 1.3 hereof at any time prior to the Closing. (b) Be, and cause Consumers NC to be, in compliance with all applicable laws, rules and regulations. Section 5.3 Exclusive Dealing ----------------- Seller shall not solicit, or except to the extent required by applicable law relating to fiduciary obligations of directors upon advice of counsel, negotiate, or enter into any agreement with any other person or entity concerning the sale of Consumers NC or furnish to any person or entity interested in making any such acquisition any information concerning Consumers NC. Seller shall notify Buyer immediately upon the approach of any such person or entity, or of the occurrence of any other event or condition which jeopardizes or threatens to materially delay the completion of the transactions contemplated hereby. 7 ARTICLE VI CONDITIONS PRECEDENT TO CLOSING Section 6.1 Conditions Precedent to Buyer's Obligation to Close --------------------------------------------------- The obligation of Buyer to consummate the purchase of the Stock on the Closing Date is subject to the fulfillment by Seller or waiver by Buyer at or prior to the Closing of each of the following conditions: (a) All representations land warranties of Seller which are contained in this Agreement shall be true in all material respects at and as of Closing as though such representations and warranties were made at and as of such time; and Seller shall have performed and complied with all agreements and conditions required by this Agreement prior to or at Closing, and shall have delivered to Buyer an officer's certificate certifying thereto. (b) Receipt of any third party consents necessary for the consummation of the sale and purchase of the Stock and the Regulatory Approvals. (c) There shall not be in force any order or decree, or any complaint praying for an order or decree, restraining or enjoining the consummation of this Agreement and neither of the Parties shall have received notice from any governmental department, court, agency or commission of its intention to restrain or enjoin the consummation of this Agreement or to nullify or render ineffective this Agreement if consummated, or any inquiry from such governmental department, court, agency or commission indicating an intent to review this Agreement. (d) Delivery of the certificate of the Secretary of Seller setting forth the resolutions of Seller's Board of Directors authorizing the execution, delivery and performance of this Agreement. (e) An opinion of counsel for Seller, to the effect that execution of this Agreement and each act and document to be performed and executed by Seller are the valid and duly authorized or ratified act of Seller, and to such other matters as Buyer may reasonably request. (f) The recapture of all of Consumers NC's existing surplus relief reinsurance agreements. (g) The assets which comprise the capital and surplus of Consumers NC shall be sufficient to meet the capital requirements of North Carolina, Texas and the other states in which Consumers NC is licensed to do business and shall consist solely of cash, cash equivalents or other qualified assets under the insurance laws of the State of North Carolina and Texas and shall not include any equity securities or real estate. 8 (h) Except for the Reinsurance Agreements listed on Exhibit D to this Agreement, all of Consumers NC's contracts, including all management contracts between Seller and Consumers NC, shall have been terminated. (i) Receipt of the resignations of all of the directors and officers of Consumers NC. (j) Seller shall have entered into an administrative services agreement with American Republic Insurance Company to service the policies reinsured under the Credit Reinsurance Agreement. Section 6.2 Conditions Precedent to Seller's Obligation to Close ---------------------------------------------------- The obligation of Seller to consummate the sale of, the Stock on the Closing Date, is subject to the fulfillment by Buyer or waiver by Seller at or prior to the Closing of each of the following conditions: (a) All representations and warranties of Buyer which are contained in this Agreement shall be true in all material respects at and as of Closing as though such representations and warranties were made at and as of such time and Buyer shall have performed and complied with all agreements and conditions required by this Agreement and shall have delivered to Seller an officer's certificate certifying thereto. (b) Receipt of any third party consents necessary for the consummation of the sale and purchase of the Stock and the Regulatory Approvals. (c) There shall not be in force any order or decree, or any complaint praying for an order or decree, restraining or enjoining the consummation of this Agreement and neither of the Parties shall have received notice from any governmental department, court, agency or commission of its intention to restrain or enjoin the consummation of this Agreement or to nullify or render ineffective this Agreement if consummated, or any inquiry from such governmental department, court, agency or commission indicating an intent to review this Agreement. (d) Delivery of the certificates of the Secretary of Buyer setting forth the resolutions of the Boards of Directors of Buyer authorizing or ratifying the execution, delivery and performance of this Agreement. (e) An opinion of counsel for Buyer, to the effect that execution of this Agreement and each act and document to be performed and executed by Buyer is the valid and duly authorized or ratified act of Buyer, and to such other matters as Seller may reasonably request. 9 ARTICLE VII SURVIVAL AND INDEMNIFICATION Section 7.1 Survival of Representations, Warranties and Covenants ----------------------------------------------------- All representations, warranties and covenants of the parties made under or pursuant to this Agreement shall survive the Closing Date. Section 7.2 Indemnity by Seller ------------------- Subject to the provisions of Section 7.4 hereof, Seller hereby covenants and agrees to indemnify and hold harmless Buyer and its successors and assigns from and against any and all loss, liability, damage, including punitive or extra contractual damages, or expense (including, but not limited to, reasonable attorney's fees) arising out of, or resulting from (i) any misrepresentation or breach of any warranty, representation, covenant or agreement made by Seller in this Agreement, including the exhibits hereto and any and all written statements, certificates, instruments and documents delivered to Buyer pursuant to this Agreement on or before the Closing Date, (ii) any actions taken by Seller, its officers, employees, agents or representatives in the marketing, sales and administration of the insurance policies of Consumers NC or in the adjusting, denying, resisting or defending any claim under the said policies written and issued on or before the Closing Date, and (iii) any and all liabilities of Consumers NC of any nature, whether accrued, absolute, contingent or otherwise, including those liabilities resulting from the Reinsurance Agreements listed on Exhibit D to this Agreement, and all tax liabilities, for any period prior to the date of Closing, or arising out of transactions entered into, and any stated facts existing, prior to such date. To the extent the loss, liability, damage, including punitive or extra contractual damages, or expense has resulted from the reliance by Seller on statements made or information forwarded by Buyer, this paragraph on indemnification will not be applicable. Section 7.3 Indemnity by Buyer ------------------ Subject to the provisions of Section 7.4 hereof, Buyer hereby covenants and agrees to indemnify and hold harmless Seller and its successors and assigns from and against any and all loss, liability, damage, including punitive or extra contractual damages, or expense (including, but not limited to, reasonable attorney's fees) arising out of, or resulting from any misrepresentation or breach of any warranty, representation, covenant or agreement made by Buyer in this Agreement, including the exhibits hereto and any and all written statements, certificates, instruments and documents delivered to Seller pursuant to this Agreement on or before the Closing Date. To the extent the loss, liability, damage, including punitive or extra contractual damages, or expense has resulted from the reliance by Buyer on statements made or information forwarded by Seller, this paragraph on indemnification will not be applicable. Section 7.4 Notice to Indemnify ------------------- Within sixty (60) days after receipt by Seller or Buyer, as the case may be (the "Indemnified Party"), of notice of the commencement of any claim, action or proceeding against it, the Indemnified Party shall give written notice to the other party (the "Indemnifying Party") of such claim, action or proceeding and the Indemnifying Party shall at its expense assume the defense of any claim, action 10 or proceeding; provided, however, that the failure by the Indemnified Party to give timely written notice as provided herein shall absolutely relieve the Indemnifying Party of its indemnification obligations under this Agreement, unless the failure to give actual written notice to the Indemnifying Party results in no damage to the Indemnifying Party. In the defense of any such claim against the Indemnified Party (whether singly or with the Indemnifying Party) or of any action or proceeding in which the Indemnified Party is named as a party, the Indemnifying Party shall not, except with the consent of the Indemnified Party, consent to the entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to the Indemnified Party of a release from all liability with respect to such claim, action or proceeding. The Indemnified Party and the Indemnifying Party shall cooperate in the defense of any claim, action or proceeding and the records of each relating to the subject matter of such defense shall be available to the other with respect to such defense. Section 7.5 Retention of Rights --------------------- Notwithstanding anything in this Agreement to the contrary, the Indemnified Party shall have the right to employ separate counsel in any such claim, action or proceeding which counsel may participate actively and fully as Company- counsel in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the Indemnified Party unless (i) the Indemnifying Party has agreed in writing to pay such fees and expenses, (ii) the Indemnifying Party has failed to assume the defense and employ counsel in a timely manner, or (iii) the named parties to any such action, suit or proceeding (including any impleaded parties) include both the Indemnified Party and the Indemnifying Party and the Indemnified Party shall have been advised by its counsel that representation of the Indemnified Party and the Indemnifying Party by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed), due to actual or potential differing interests between them (in which case the Indemnifying Party shall not have the right to assume the defense of such action on behalf of the Indemnified Party). The Indemnifying Party shall not be liable for any settlement of any such claim, action or proceeding effected without its written consent (which consent shall not be unreasonably withheld) but if settled with such written consent, or if there be a final judgment for the plaintiff in any such claim, action or proceeding, the Indemnifying Patsy agrees to indemnify and hold harmless the Indemnified Party to the extent provided herein by reason of such settlement or judgment. ARTICLE VIII ARBITRATION Section 8.1 Arbitration ----------- The parties agree that should any dispute arise between the parties with reference to interpretation of this Agreement or their rights with respect to any transaction involving this Agreement, whether such dispute arises before or after termination hereof, such dispute shall be submitted to arbitration to be held in Philadelphia, Pennsylvania in accordance with the rules of Commercial Arbitration of the American Arbitration Association. 11 Section 8.2 Procedure --------- One arbitrator shall be chosen by Buyer, one by Seller, and an umpire chosen by the two arbitrators. If either party fails to name an arbitrator within thirty (30) days after receiving a written request by the other party to do so, the requesting party may choose two arbitrators who shall in turn choose an umpire. The arbitrators and the umpire shall be disinterested executive officers or former executive officers of credit insurance or credit reinsurance companies authorized to transact business in the United States or any Fellow of the Society of Actuaries (FSA) or any partner or principal in a nationally recognized accounting firm with credit insurance experience. The arbitrators shall be relieved from all judicial formalities and may abstain from following the strict rules of law. They shall interpret this Agreement as an honorable engagement and not merely as a legal obligation. A majority decision by the arbitrators and umpire shall be final and binding on both parties. Judgment may be entered upon the final decision of the arbitrators in any court having jurisdiction. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear, with the other party, the expense of the umpire and the arbitration, unless otherwise determined by the arbitrators and umpire. ARTICLE IX MISCELLANEOUS Section 9.1 Exhibits -------- All Exhibits hereto are deemed a part hereof and incorporated herein. All statements contained in any certificate or other instrument delivered by or on behalf of the parties hereto pursuant to this Agreement or in connection with the transactions contemplated hereby, or contained in any Exhibit hereof, shall be true at Closing as though such representations and warranties were made at and as of such time. Section 9.2 Expenses -------- The parties shall pay their own expenses, incident to the preparation and execution of this Agreement and the consummation of the transactions contemplated hereby, including but not limited to, the payment offers for professional services provided by their attorneys, accountants, actuaries and experts. Buyer shall have no liability or responsibility for payment of any finder's fee or broker's commission arising from any transaction under this Agreement. Section 9.3 Contents of Agreement; Parties in Interest ------------------------------------------ This Agreement sets forth the entire understanding of the parties. All terms and provisions of this Agreement shall be binding upon and inure to the benefit of, and be enforceable by their successors and assigns. No assignment of this Agreement shall be made, however, without the written consent of the other party, which consent shall not be unreasonably withheld. 12 Section 9.4 Further Documents ----------------- Each party shall cooperate and take such action as may reasonably be requested by the other party in order to carry out the provisions and purpose of this Agreement, and at the Closing Seller shall deliver all pertinent Consumers NC business records to Buyer. Section 9.5 Execution --------- This Agreement, upon completion of all Exhibits hereto to the mutual satisfaction of the parties and the attachment of such Exhibits to this Agreement, may be simultaneously executed in several counterparts, each of which when executed shall be deemed to be an original, and such counterparts shall together constitute one and the same instrument. Section 9.6 Effect of Table of Contents; Use of Descriptive Heading; Etc. ------------------------------------------------------------- The Table of Contents preceding this Agreement but under the same cover, and the descriptive headings of the several paragraphs and subparagraphs are for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. Whenever used in this Agreement, and the context so requires, the singular shall include the plural and the plural the singular, and the use of any gender shall be applicable to all genders. Section 9.7 Notices ------- All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been given if delivered to the person to whom it was addressed after being sent by facsimile, mailed by an overnight delivery service requiring a receipt (such as Federal Express) or mailed, postage prepaid, certified or registered air-mail, return receipt requested addressed to: (a) If to Seller to: Consumers Life Insurance Company 1200 Camp Hill By-Pass P. O. Box 26 Camp Hill, Pennsylvania 17001-0026 Facsimile: 717-761-9473 Attention: R. Fredric Zullinger, Senior Vice President and Chief Financial Officer With a copy to General Counsel (b) If to Buyer to: Safeguard Health Enterprises, Inc. 505 North Euclid Street Anaheim, California 92803 Attention: Ronald I. Brendzel, Senior Vice President and Secretary Either party may change its address for notice by providing notice to the other party in the manner set forth above. 13 Section 9.8 Governing Law ------------- This Agreement shall be governed and interpreted in accordance with the laws of the Commonwealth of Pennsylvania. Section 9.9 Section 338(h)(10)Election -------------------------- (a) Seller and Buyer will make, or will cause to be made, elections (the "Elections") under Section 338(h)(10) of the Internal Revenue Code and the regulations promulgated thereunder in respect of the purchase of the Stock and elections under any corresponding or similar provisions of state or local law in respect of such purchase. On all applicable tax returns, Seller and Buyer will report the transfer of the stock consistent with the Elections. Neither Seller nor Buyer will take a position contrary to the Elections unless required to do so by applicable tax laws pursuant to a determination as defined in Section 1313(a) of the Internal Revenue Code. (b) Buyer will prepare at its expense and deliver Form 8023-A, together with all required attachments, to Seller for its review, approval and signature not less than five business days prior to the Closing. After its review and approval, Seller will, prior to or at Closing, execute and return such Form to Buyer for filing, attach a copy of Form 8023-A as so filed to the federal tax return for Consumers NC for the year ended on the Closing Date and take such other actions as Buyer may reasonably request in order to effectuate the Elections. (c) The Purchase Price of the Stock shall be allocated among the assets of Consumers NC in accordance with the mutual agreement of the parties to be reached prior to the date required for filing any tax returns in which such election is relevant. Buyer shall propose an allocation and provide a copy of such allocation to Seller prior to the due date of the first such tax return, allowing Seller a reasonable time period during which to review such allocation. Buyer and seller agree to cooperate to resolve any disputes regarding such allocation prior to the due date of such tax return. (d) Each of Buyer and Seller agrees to cooperate in good faith with the other in preparing, executing and filing any tax forms and other documents required under Section 338(h)(10) of the Internal Revenue Code and other applicable laws so that the Elections will be made in a proper and timely manner. To the extent permitted by state and local laws, the principles and procedures of subsections (a) and (b) above shall also apply with respect to forms and related documents to be filed pursuant thereto. 14 Section 9.10 Records; Taxes -------------- Seller shall deal with the relevant insurance and tax departments with respect to their examination of Consumers NC's reports and returns covering the period through the Closing Date. Seller shall pay all fees and taxes assessed against Consumers NC for all such periods prior to the Closing and shall be entitled to all refunds of taxes, recoveries and other funds for such period. Seller will pay any and all stock transfer, sale, use and other similar taxes due as a result of the transactions contemplated hereby. At and after the Closing, Consumers NC shall retain title to and custody of all of its corporate records and documents, provided that Seller may retain custody of copies of any of such records and documents as Seller may need to perform its obligations under this Section 9.10. Section 9.11 No Third Party Beneficiaries ---------------------------- Nothing in this Agreement is intended nor shall it be construed to give any person, firm, corporation or other entity, other than the parties hereto and their respective successors and permitted assigns, any right, remedy or claim under or in respect of this Agreement or any of the provisions hereof. 15 IN WITNESS WHEREOF, the parties by their duly authorized officers have executed this Agreement on the day and year first above written. ATTEST: CONSUMERS LIFE INSURANCE COMPANY Illegible signature By /s/ R. FREDRIC ZULLINGER ___________________ ______________________________________ Secretary R. Fredric Zullinger Senior Vice President, Chief Financial Officer and Treasurer ATTEST: SAFEGUARD HEALTH ENTERPRISES, INC. Illegible signature By /s/ JOHN E. COX ___________________ ______________________________________ John E. Cox, Executive Vice President and Chief Operating Officer Illegible signature By /s/ RONALD I. BRENDZEL ___________________ ______________________________________ Ronald I. Brendzel, Senior Vice President and Secretary 16 EX-99.2 4 PURCHASE AGREEMENT WITH ASSOCIATED DENTAL SERVICES EXHIBIT 99.2 DENTAL PRACTICE ASSET PURCHASE AGREEMENT ---------------------------------------- THIS DENTAL PRACTICE ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into effective as of the 1st day of August, 1997 (the "Effective Date"), by and between GUARDS DENTAL, INC., a California corporation ("Guards") and ASSOCIATED DENTAL SERVICES, INC., a California corporation ("Associated"). W I T N E S S E T H: WHEREAS, Guards desires to sell and Associated desires to purchase substantially all of the tangible nonorthodontic-related assets of certain dental practices, as set forth below. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements, promises, covenants and conditions contained herein, and for other valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. The Assets. The assets sold hereunder shall consist of all of the ---------- tangible nonorthodontic-related assets as set forth on Schedule 1(a) attached ------------- hereto (the "Assets") associated with the fifteen (15) dental practices at the locations set forth on Schedule 1(b) attached hereto (the "Dental Practices"). 2. Assumption of Liabilities. As a material part of the consideration ------------------------- for the purchase and sale of the Assets, Associated shall assume, perform, discharge and pay when due any and all of the obligations and liabilities of Guards relating to the Assets; except for those transactions and invoices for services rendered or debt incurred prior to the Effective Date. 3. Sale and Purchase of Assets. Upon the execution of this Agreement, --------------------------- Guards shall sell, transfer, convey, assign and deliver the Assets to Associated, and Associated shall purchase, acquire and accept the Assets from Guards, on the terms and subject to the conditions set forth herein. 4. Purchase Price and Purchase Note. As full payment for the transfer -------------------------------- of Assets by Guards to Associated, Associated shall pay to Guards an aggregate purchase price of Four Million Five Hundred Thousand Dollars ($4,500,000) (the "Purchase Price"), which aggregate amount shall be paid to Guards by Associated delivering to Guards an eight and one-half percent (8.5%), thirty (30) year negotiable promissory note in the principal amount of Four Million Five Hundred Thousand Dollars ($4,500,000) in the form of Exhibit A attached hereto, executed --------- concurrently with this Agreement (the "Note"). 5. The Credit Program. ------------------ 5.1. Obligation to Lend. On the terms, and subject to the conditions ------------------ set forth herein, Guards or one of its affiliated companies ("Guards Affiliate") shall upon request by Associated, loan to Associated up to Two Hundred Thousand Dollars ($200,000), plus any unused amount from prior months, on a monthly basis (the "Credit Program") commencing on the Effective Date and ending on: (i) eighteen (18) months thereafter; or (ii) when the aggregate outstanding amount loaned to Associated under the Credit Program is equal to One Million Dollars ($1,000,000); or (iii) upon Associated's exercise of its option to purchase certain assets pursuant to that certain Option Agreement dated August 1, 1997 by and between Guards and Associated, whichever comes first. 5.2. Borrowings. Commencing on the Effective Date, Associated may ---------- submit to Guards a notice (a "Borrowing Notice") specifying the total amount of the loan (up to a maximum of $200,000 per calendar month plus any unused amount from prior months) from Guards or one of its affiliated companies (the "Loan Amount"). The Borrowing Notice shall also specify (i) the desired date for advance of the Loan Amount (the "Loan Date"), and (ii) a detailed breakdown of the anticipated uses by Associated of the Loan Amount, which uses will be limited to the permitted uses listed on Schedule 5.2. Guards or a Guards ------------ Affiliate shall advance to Associated the Loan Amount. 5.3. Conditions Precedent to Loan. Notwithstanding anything herein to ---------------------------- the contrary, Guards or Guards Affiliate shall not be obligated to advance any Loan Amount to Associated unless, at the time for such advance pursuant to this Agreement, Associated is in full compliance all of the terms of the Guards Agreements or such non-compliance has been waived by Guards in the exercise of its sole and unqualified discretion. 5.4. Interest. Each Loan Amount shall bear, and Associated shall pay, -------- interest on all outstanding principal amounts thereof at a rate per annum equal to ten percent (10%). 5.5. Repayment and Credit Notes. Each Loan Amount shall be evidenced -------------------------- by, and repaid with interest by Associated in accordance with, a promissory note in the form of Exhibit B, attached hereto (the "Credit Notes"). Each Credit Note --------- shall provide for monthly interest only payments on the Loan Amount during the eighteen (18) months following the Effective Date with the Loan Amount to be fully paid up and amortized during months nineteen (19) to forty-two (42) following the Effective Date. 6. Representations and Warranties of Guards. As of the date hereof, ---------------------------------------- Guards represents and warrants to Associated as follows. 6.1. No Breach. This Agreement does not constitute a breach or --------- violation of any deed, agreement or other contract by which Guards may be bound. 6.2. Title to Assets. Guards is the owner of the Assets, --------------- beneficially and of record, and has full right, power and authority to sell, transfer and deliver the Assets to Associated upon consummation of the purchase contemplated hereby. Associated will acquire from Guards good and marketable title the Assets, free and clear of any and all covenants, conditions, pledges, security agreements, voting trust arrangements, liens, charges, claims, equities, restrictions, options and encumbrances, except as specified in Section ------- 12 hereof. - -- 6.3. Enforceability. This Agreement is a valid and binding -------------- obligation of Guards, enforceable against Guards in accordance with its terms. 2 7. Representations, Warranties and Covenants of Associated. As of ------------------------------------------------------- the date hereof, Associated represents and warrants to Guards as follows: 7.1. Organization and Good Standing. Associated is a ------------------------------ corporation duly organized, validly existing and in good standing under the laws of California and it has all requisite power to own, lease and operate its assets, properties and business and to carry on its business as now conducted and as proposed to be conducted. 7.2 Authority to Execute and Perform Agreements. Associated has ------------------------------------------- all requisite power, authority and approval required to enter into, execute and deliver this Agreement and all other agreements and instruments to be executed by Associated in connection herewith (the "Purchase Documents") and to perform fully Associated's obligations hereunder and thereunder. 7.3 Due Authorization; Compliance with Laws. Associated has --------------------------------------- taken all actions necessary to authorize it to enter into and perform its obligations under this Agreement and the Purchase Documents and to perform fully Associated's obligations hereunder and thereunder. This Agreement and the Purchase Documents constitute the legal, valid and binding obligations of Associated, enforceable in accordance with their respective terms except as such enforceability may be limited by any applicable bankruptcy, reorganization, insolvency, moratorium or similar laws or by legal or equitable principles relating to or limiting the rights of contracting parties generally. Associated has complied with all applicable laws, orders, rules and regulations promulgated by any federal, state, municipal or other governmental authority, including without limitation, any of the foregoing applicable to Associated's activities in connection with the Dental Practices. 7.4. No Breach. This Agreement and the Purchase Documents do --------- not constitute a breach or violation of any deed, agreement or other contract by which Associated may be bound. 7.5. Enforceability. This Agreement and the Purchase Documents -------------- are valid and binding obligations of Associated, enforceable against Associated in accordance with their terms. 7.6. Covenant of Associated After Effective Date. Associated ------------------------------------------- covenants and agrees that for as long as any of Associated's obligations and duties remain outstanding under any Note or Credit Note, Associated shall comply with all applicable laws, orders, rules and regulations promulgated by any federal, state, municipal or other governmental authority, including without limitation, any of the foregoing applicable to Associated's activities in connection with the Dental Practices. 8. Access to Records and Property of Dental Practice. Each party ------------------------------------------------- agrees to cooperate with the other party's efforts in assessing the condition, location and utilization, of the Assets, and to facilitate each party's and its representatives' access to all contracts, books, records and all other information concerning the Assets as such party may reasonably request. All such data and information shall be kept confidential, except insofar as disclosure may be necessary in order to comply with applicable legal requirements; and all documents and other information 3 supplied to Associated or its representatives by Guards shall, upon request, be returned to Guards if such information is not reasonably required for the ongoing utilization of the Assets. 9. Practice Management Agreement. Concurrently with the execution of ----------------------------- this Agreement, Associated shall execute a service agreement in the form of Exhibit C attached hereto with Imprimis Dental Practice Management, Inc. (the - --------- "Service Agreement") 10. Agreement to Sublease and Sublease of Office Space. Concurrently -------------------------------------------------- with the execution of this Agreement, Associated shall execute agreements to sublease from Guards the premises set forth in Schedule 1(b) (except for the ------------- premises located at 40756 Grimmer Blvd., Fremont, CA 94538 (the "Fremont Premises")), in the form of Exhibit D attached hereto (the "Sublease"). --------- Additionally, concurrent with the execution of this Agreement, Guards shall execute agreements to sublease dental office space from Associated at the locations set forth in Schedule 1(b) (except for the Fremont Premises), in the ------------- form of Exhibit E attached hereto (the "Dental Office Space Sublease"). With --------- respect to the Fremont Premises, Guards agrees to cooperate and assist Associated in its leasing of the Fremont Premises, including, but not limited to Guards' guarantying a new lease for the Fremont Premises. 11. Execution of Documents. Each party shall execute and file, or ---------------------- join in the execution and filing of, any applications or other documents that may be necessary in order to obtain the authorization, approval, or consent of any governmental body that may be required or which the other party may reasonably request in connection with the execution of this Agreement or consummation of the transactions contemplated by this Agreement. 12. Additional Security. To secure the performance of Associated's ------------------- duties and obligations under this Agreement and under that certain Sublease, the Note, the Credit Notes, the Service Agreement and any and all other agreements, documents or instruments executed by Associated in connection with this Agreement and any and all agreements, documents or instruments executed by Pacific Coast Dental, Inc. ("Pacific") relating to and including that certain Dental Practices Purchase Agreement by and between Guards and Pacific (collectively, the "Guards Agreements"), Associated hereby collaterally assigns and grants a security interest to Guards in and to all of its assets, including without limitation the Assets transferred hereunder, now existing or hereafter acquired and/or accrued, including any proceeds or replacements relating to same. In connection with the granting of this security interest, Associated shall, immediately upon the request of Guards, execute appropriate Form UCC-l and/or financing statements necessary to perfect Guards' security interest as granted hereunder. Upon the event of breach of this Agreement or any of the Guards Agreements, Guards shall have all rights and remedies available at law or in equity to the collateral herein described, including but not limited to those afforded a secured creditor under the Uniform Commercial Code as adopted by the State of California and may, at Guards' sole discretion terminate any and/or all of the Guards Agreements. 13. Covenant Not to Compete. ----------------------- 13.1. Noncompetition. Associated will not, without the prior -------------- written consent of Guards, compete directly or indirectly with the orthodontic practice of Guards located at the Dental Practices (the "Guards Site") by engaging in the business of orthodontics within 4 five (5) miles of the Guards Site (these areas are hereinafter collectively referred to as the "Covered Areas") nor will Associated lease or sublease any of the Guards Sites to persons or entities who will engage in the practice of orthodontics other than Guards. Concurrently, Guards will not, without the prior consent of Associated, compete directly or indirectly with any Associated's operations relating to the Dental Practices within five (5) miles of any such site. The phrase "compete directly or indirectly," shall mean engaging or having an interest, directly or indirectly, as owner, partner, shareholder, independent contractor, capital investor, renderer of consultation services or advice or otherwise, either alone or in association with others, in the operation of any aspect of any type of business or enterprise competitive with the orthodontic practice of Guards or the business of Associated. Guards' covenant not to compete shall be effective at all times for a period of five (5) years from the Effective Date, or until such earlier time as (i) either party, its successors and assigns, shall cease to do business; or (ii) upon default by Associated under this Agreement or the Guards Agreements. Affiliated's covenant not to compete shall be effective at all times for a period of five (5) years from the Effective Date, or until such earlier time as either party, its successors and assigns, shall cease to do business. 13.2. Interpretation of Covenant. The parties hereto agree that -------------------------- both the scope and nature of the covenant and the duration and area for which the covenant not to compete set forth in this Section 13 is to be effective are ---------- reasonable in light of all facts and circumstances. In the event that any provision of this Section 13 shall to any extent be held invalid, unreasonable ---------- or enforceable in any circumstances, the parties hereto agree that the remainder of this Section 13 and the application of such provision of this Section 13 to ---------- ---------- other circumstances shall be valid and enforceable to the fullest extent permitted by law. If any provision of this Section 13, or any part thereof, is ---------- held to be unenforceable because of the scope or duration of or the area covered by such provision, the parties hereto agree that the court making such determination shall reduce the scope, duration and/or area of such provisions (and shall substitute appropriate provisions for any such unenforceable provisions) in order to make such provisions enforceable to the fullest extent permitted by law, and/or shall delete specific words and phrases, and such modified provisions shall then be enforceable and shall be enforced. 14. Indemnification by Associated. Associated shall indemnify, ----------------------------- defend and hold Guards, its directors, officers, shareholders, attorneys, agents and representatives, and their respective successors and assigns, harmless from and against any and all losses, liabilities, obligations, judgments, settlements, damages, costs and expenses, including without limitation, attorneys' fees, court costs and other expenses of litigation (collectively "Losses") suffered by any of such parties and arising out of, resulting from or due to: (i) any breach of any representation, warranty, covenant or agreement of Associated contained in this Agreement or any other instrument contemplated by this Agreement; (ii) any misrepresentation contained in any statement or certificate furnished by Associated pursuant to this Agreement or in connection with the transactions contemplated by this Agreement; (iii) the liabilities and obligations assumed by Associated pursuant to Section 2; or (iv) any liability or obligation of Associated in connection with the Assets, or conduct relating to the Dental Practices after the date hereof. 15. Brokers. Associated, on the one hand, and Guards, on the other ------- hand, represent to each other that there are no brokers' commissions or finder's fees payable in connection with the transactions contemplated by this Agreement and each party hereby agrees to indemnify and hold harmless the other from and against any demand, claim and/or liability 5 asserted or established by or in favor of any third party for brokerage commission or finder's fee based on an agreement with or the actions of such party. This provision shall survive the consummation of the sale hereunder. 16. Notices. All notices, requests, demands, consents and other ------- communications hereunder shall be in writing and shall be given or made in person, by fax or telecopy or by overnight delivery service, or mailed by first class registered or certified mail, postage prepaid, return receipt requested and addressed to the person and address set forth under each party's name on the signature page. Any party may change its address hereunder by notice in writing to the other party. Any notice, request, consent or other communication shall be deemed to have been given or made as of the date sent or given. 17. Governing Law. This Agreement shall be interpreted and construed ------------- in accordance with, and governed by, the internal laws, and not the laws pertaining to conflicts or choice of law, of the State of California. The exclusive forum for the determination of any action relating to the validity and enforceability hereof shall be either an appropriate court of said State or a court of the United States which includes said State within its territorial jurisdiction. 18. Entire Agreement. This Agreement, including all exhibits ---------------- referenced herein and attached hereto, constitutes the entire agreement between the parties hereto pertaining to the subject matter hereof (except for documents executed contemporaneously herewith or pursuant hereto), and supersedes all negotiations, preliminary agreements, and all prior and contemporaneous agreements, representations and understandings of the parties hereto in connection with the subject matters hereof. No supplement, modification, amendment or termination of any of the terms, provisions, or conditions of this Agreement shall be binding unless made in writing signed by all parties hereto, their successors and assigns. No waiver of any of the provisions of this Agreement shall be deemed to 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 signed by the party making the waiver. 19. Successors and Assigns. This Agreement shall be binding upon, ---------------------- and shall inure to the benefit of, the parties hereto and to their executors, administrators, legatees, beneficiaries, personal representatives and assigns, except that no assignment by Associated may be made without the prior written consent of Guards. 20. Descriptive Headings. The descriptive headings of the several -------------------- paragraphs and subparagraphs of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 21. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 6 22. Severability. In the event that any provision of this Agreement ------------ is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering other provisions contained herein invalid or unenforceable, and all such other provisions shall be given full force and effect as though the invalid or unenforceable provision was not contained herein. IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written. ASSOCIATED DENTAL SERVICES, INC. GUARDS DENTAL, INC. By:________________________ By:________________________ Name:______________________ Name: Kenneth E. Keating Title:_____________________ Title: Vice President - Operations Address: 25522 Marguerite Parkway Address: 505 North Euclid Street Mission Viejo, CA 92692 Anaheim, CA 92803-4685 7 Scedule 1(a) The Assets of the Dental Practices ---------------------------------- The Assets shall consist of the following tangible nonorthodontic-related assets located at each of the Dental Practices: . maintenance records and data; . leasehold improvements . facility records and data; . furniture, fixtures and non-dental equipment; . signs relating to the Dental Practices; . dental and office supplies; . telephone and facsimile numbers relating to each Dental Practice; and . petty cash. Schedule 1(b) Locations of the Dental Practices --------------------------------- The Dental Practices are located at the following sites: 1. CHULA VISTA 9. MODESTO 510 Broadway, Suites 4 & 5 2900 Standford Avenue, Suite #2 Chula Vista, CA 91910 Modesto, CA 95350 619-476-9400 209-577-5008 2. EL CAJON 10. NORTHRIDGE 2990 Jamacha Road, #132 17017 Devonshire Blvd. El Cajon, CA 92019 Northridge, CA 91324 619-670-1700 818-360-2216 3. FAIRFIELD 11. PALMDALE 1955 West Texas Street 38745 Tierra Subida St., Ste. #150 Fairfield, CA 94533 Palmdale, CA 93550 707-428-5400 805-272-9091 4. FREMONT 12. SACRAMENTO 40756 Grimmer Blvd. 3901 Madison Avenue Fremont, CA 94533 Sacramento, CA 95660 916-339-9000 5. FRESNO 13. SANTA ROSA 2745 W. Shaw Avenue #103 2525 Cleveland Avenue, Ste. B Fresno, CA 93711-3366 Santa Rosa, CA 95401 209-227-2900 707-578-3118 6. LA MESA 14. SAN RAMON 5601 Grossmont Center Drive 9130-A East Alcosta Blvd. La Mesa, CA 91942 San Ramon, CA 94593 619-462-2272 510-803-9700 7. LANCASTER 15. VISTA 1228 West Avenue K 1010 E. Vista Way, #A & #B Lancaster, CA 91942 Vista, CA 92083 805-949-1970 619-940-8811 8. LONG BEACH 17236 Downey Avenue Bellflower, CA 90706 310-531-0221 PROMISSORY NOTE AND SECURITY INTEREST $ 4,500,000 August 1, 1997 Irvine, California FOR VALUE RECEIVED, the undersigned, ASSOCIATED DENTAL SERVICES, INC., a California professional dental corporation ("Associated"), hereby unconditionally promises to pay to GUARDS DENTAL, INC., a California corporation ("Guards"), or its successors and assigns, at its offices at 505 North Euclid Street, Anaheim, CA 92803-4685, or at such other place as the holder of this promissory note (this "Note") may from time to time designate in writing, the principal amount of Four Million Five Hundred Thousand Dollars ($4,500,000) together with interest from the date hereof, at the rate of eight and one-half percent (8.5%) per annum or the maximum rate allowed by law, whichever rate is lower (the "Coupon Rate"), principal and interest payable in lawful money of the United States, without any deduction whatsoever, including but not limited to any deduction for any set-off or counterclaim over three hundred sixty (360) months (the "Term"), in monthly installments beginning one (1) month from the date of this Note, and in accordance with paragraphs 1 and 2 below. 1. Payments. -------- 1.1. Interest Only Payments. For the first twenty-four (24) months ---------------------- of the Term, Associated shall pay to Guards monthly interest only payments of __________________________________________ Dollars and ________ Cents ($_____.__) (the "Interest Only Payments") commencing on September 1, 1997 and payable thereafter on the first (1st) day of each month (a "Due Date"). 1.2. Principal and Interest Payments. Commencing on August 1, 1999, ------------------------------- Associated shall pay to Guards monthly principal and interest payments of __________________________________________ Dollars and ________ Cents ($_____.__) and payable thereafter on the first (1st) day of each month with the final such payment due on August 1, 2027 (the "Principal and Interest Payments") (the Interest Only Payments and the Principal and Interest Payments are collectively referred to herein as "Payments"). 1.3. Manner of Payments. All Payments due hereunder shall be made to ------------------ Guards by check delivered to the address set forth below (or such other address as Guards may designate from time to time by written notice), or by wire transfer of immediately available funds to such bank account as Guards may designate. Interest payable with respect to any period that is less than a full calendar month shall be calculated on the daily outstanding principal balance according to the actual number of days in such period as a fraction of a 360 day year. 2. Delinquent Payment. If any Payment is not paid within ten (10) ------------------ days after any Due Date, Associated shall pay to Guards, in addition to the Payment and without any requirement of notice or demand by Guards, a late payment charge equal to one percent (1%) per month of the amount of the Payment or the maximum amount permitted under applicable law from such Due Date until Associated pays the Payment and accrued interest. Associated expressly acknowledges and agrees that the foregoing late payment charge provision is reasonable under the circumstances existing on the date of this Note, that it would be extremely difficult and impractical to fix Guards' actual damages arising out of any late payment and that the foregoing late payment charge shall be presumed to be the actual amount of such damages incurred by Guards. No provision in this Note (including without limitation the provisions for a late payment charge and for interest on any amounts remaining unpaid after any Due Date) shall be construed as in any way excusing Associated from his obligation to make any Payment under this Note promptly when due. 3. Security Interest. As security for the payment of principal and ----------------- accrued interest under this Note, Associated hereby grants to Guards a security interest in and to all of Associated's tangible nonorthodontics-related assets associated with the Dental practices located at Schedule 3 attached hereto, or ---------- any other assets owned by Associated, now existing or hereafter acquired and/or accrued, including any proceeds or replacements relating to the same (the "Collateral"). The security interest hereby created shall attach immediately upon execution of this Note and concurrently herewith, Associated shall execute any financing statement or financing statements requested by Guards to perfect the security interest created hereby. Such financing statement or statements shall be on a form or forms approved by the California Secretary of State and Associated shall forthwith pay to Guards the filing fees required to file such statement or statements in the manner required by the Uniform Commercial Code of California. In addition, Associated shall pay from its own funds, as they become due, all taxes and assessments levied or assessed against the Collateral, or any part of the Collateral, prior to the final termination of this Note. Upon any event of default hereunder, Guards shall be entitled to all the rights and remedies of a secured creditor with respect to such Collateral as provided for in the Uniform Commercial Code of California. 4. Presentment, Notice of Dishonor and Protest. Associated consents ------------------------------------------- to renewals, replacements and extensions of time for any payment hereof, before, at or after maturity and waives, to the fullest extent permitted by applicable law, diligence, grace, presentment, exhibition, protest, demand, dishonor, exemption rights, nonpayment and notice, of every kind with respect to this Note or any payment hereunder. No delay or omission on the part of Guards in exercising any power, right, privilege or remedy under this Note shall operate as a waiver of such power, right, privilege or remedy or of any other power, right, privilege or remedy hereunder. It is agreed that the granting to Associated or any other party of an extension or renewal or extensions of the time for the payment or renewal of any sum or sums due hereunder or under any other instrument or for the performance of any covenant or stipulation thereof or the taking of security shall not in any way release or effect the liability of Associated on this Note. 2 5. Assignment. Guards shall have the right to sell, assign or ---------- otherwise transfer this Note, either in part or in its entirety, without Associated's consent. This Note may not be assigned by Associated without the prior written consent of Guards or Guards' successors, heirs, representatives or assigns. 6. Successors and Assigns. This Note and all of the covenants, ---------------------- promises and agreements contained in it shall be binding on and inure to the benefit of the respective legal and personal representatives, devisees, heirs, successors and assigns of Guards and Associated. 7. Modification. This Note may not be changed, modified, or ------------ terminated except by an agreement in writing signed by the parties or their successors and assigns. 8. Severability. If any provision of this Note, or the application ------------ of it to any party or circumstance, is held to be invalid, illegal or unenforceable, the remainder of this Note, and the application of such provision to other parties or circumstances, shall not be affected thereby, the provisions of this Note being severable in any such instance. 9. Attorneys' and Other Fees. Associated hereby agrees to pay all ------------------------- costs and expenses, including without limitation attorneys' fees and disbursements, incurred by Guards, or adjudged by a court, in connection with the collection or enforcement of this Note or any portion of this Note, whether or not a suit is filed. This provision is separate and severable and shall survive any merger of this Note into any judgment. 10. Notice. Notice to either party provided for in this Note shall ------ be given by personal delivery or by mailing such notice by first class or certified mail, return receipt requested, to the addresses stated below or such other address as either party may hereafter specify in writing: To Associated: -------------- 25522 Marguerite Parkway Mission Viejo, California 92692 Attention: Robert Stalcup/Frank Pellkofer To Guards: ---------- 505 North Euclid Street Anaheim, CA 92803-4685 Attention: Kenneth E. Keating 11. Governing Law. This Agreement shall be interpreted and ------------- construed in accordance with, and governed by, the internal laws and not the laws pertaining to conflicts or 3 choice of law of the State of California. The exclusive forum for the determination of any action relating to the validity and enforceability hereof shall be either an appropriate court of said State or a court of the United States which includes said State within its territorial jurisdiction. 12. Prepayment. Associated may prepay the principal amount ---------- outstanding in whole or in part at any time and from time to time without penalty and without any discount. Executed at Irvine, California, on the 1st day of August, 1997. ASSOCIATED DENTAL SERVICES, INC. By:_____________________________ Name:___________________________ Title:__________________________ 4 Schedule 3 Dental Practice Locations EX-99.3 5 PURCHASE AGREEMENT WITH PACIFIC COAST DENTAL DENTAL PRACTICES PURCHASE AGREEMENT ----------------------------------- THIS DENTAL PRACTICES PURCHASE AGREEMENT (this "Agreement") is made and entered into effective as of the 1st day of August, 1997 (the "Effective Date"), by and between GUARDS DENTAL, INC., a California corporation ("Guards") and PACIFIC COAST DENTAL, INC., a California corporation ("Pacific"). W I T N E S S E T H: WHEREAS, Guards desire to sell and Pacific desires to purchase certain nonorthodontic dental practices and all of the intangible nonorthodontic assets related thereto, as defined below. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements, promises, covenants and conditions contained herein, and for other valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. The Assets. The assets sold hereunder shall consist of those ---------- certain nonorthodontic dental practices as set forth on Schedule 1(a) (the ------------ "Dental Practices") attached hereto and all of the intangible nonorthodontic assets associated with such Dental Practices as set forth on Schedule 1(b) ------------ attached hereto (the "Assets"). 2. Assumption of Liabilities. As a material part of the ------------------------- consideration for the purchase and sale of the Assets, Pacific shall assume, perform, discharge and pay when due any and all of the obligations and liabilities of Guards relating to the Dental Practices and the Assets; except for: (i) liabilities and obligations of Guards relating to Guards' orthodontic practices at the Dental Practices; (ii) liabilities and obligations of Guards relating to malpractice claims for which work was performed prior to the Effective Date; (iii) transactions and invoices for services rendered or debt incurred prior to the Effective Date; and (iv) liabilities and obligations, including grievances and/or claims, relating to employee discrimination matters arising from events prior to the Effective Date. 3. Sale and Purchase of Assets. Upon the execution of this --------------------------- Agreement, Guards shall sell, transfer, convey, assign and deliver the Dental Practices and the Assets to Pacific, and Pacific shall purchase, acquire and accept the Dental Practices and the Assets from Guards, on the terms and subject to the conditions set forth herein. 4. Purchase Price. As full payment for the transfer of the Dental -------------- Practices and the Assets by Guards to Pacific, Pacific shall pay to Guards an aggregate purchase price of Three Million Five Hundred Thousand Dollars ($3,500,000) (the "Purchase Price"), which aggregate amount shall be paid to Guards by Pacific by delivering to Guards an eight and one-half percent (8.5%) thirty (30) year negotiable promissory note in the principal amount of Three Million Five Hundred Thousand Dollars ($3,500,000) in the form of Exhibit A attached hereto (the "Note"). 5. Representations and Warranties of Guards. As of the date hereof, ---------------------------------------- Guards represents and warrants to Pacific as follows: 5.1. Compliance with Laws; No Litigation. To the best of ----------------------------------- Guards' knowledge, Guards has complied with all applicable laws, orders, rules and regulations promulgated by any federal, state, municipal or other governmental authority relating to the operation and conduct of the Dental Practices. To the best of Guards' knowledge, Guards has not received any notice of violation of any applicable regulation or law or requirement relating to the operation of the Dental Practices. 5.2. No Breach. This Agreement does not constitute a breach or --------- violation of any deed, agreement or other contract by which Guards may be bound. 5.3. Title to Assets. Guards is the owner of the Dental --------------- Practices and the Assets, beneficially and of record, and has full right, power and authority to sell, transfer and deliver such Dental Practices and the Assets to Pacific upon consummation of the purchase contemplated hereby, Pacific will acquire from Guards good and marketable title to the Dental Practices and the Assets, free and clear of any and all covenants, conditions, pledges, security agreements, voting trust arrangements, liens, charges, claims, equities, restrictions, options and encumbrances, except as specified in Section 10 ---------- hereof. 5.4. Enforceability. This Agreement is a valid and binding -------------- obligation of Guards, enforceable against Guards in accordance with its terms. 6. Representations and Warranties of Pacific. As of the date hereof, ----------------------------------------- Pacific represents and warrants to Guards as follows: 6.1. Compliance with Laws; No Litigation. Pacific has complied ----------------------------------- with and is complying with all applicable laws, orders, rules and regulations promulgated by any federal, state, municipal or other governmental authority relating to Pacific's activities in connection with the Dental Practices. Pacific has not received any notice of violation of any applicable regulation or law or requirement relating to its operation regarding the Dental Practices and each dentist member of Pacific is duly qualified and licensed to practice dentistry within the State of California. 6.2. No Breach. This Agreement does not constitute a breach or --------- violation of any deed, agreement or other contract by which Pacific may be bound. 6.3 Enforceability. This Agreement is a valid and binding -------------- obligation of Pacific, enforceable against Pacific in accordance with its terms. 6.4. Organization and Good Standing. Pacific is a corporation ------------------------------ duly organized, validly existing and in good standing under the laws of California and it has all requisite power to own, lease and operate its assets, properties and business and to carry on its business as now conducted and as proposed to be conducted. 6.5 Authority to Execute and Perform Agreements. Pacific has ------------------------------------------- all requisite power, authority and approval required to enter into, execute and deliver this Agreement and all other agreements and instruments to be executed by Pacific in connection herewith (the "Purchase Documents") and to perform fully Pacific's obligations hereunder and thereunder. 2 6.6 Due Authorization; Compliance with Laws. Pacific has taken --------------------------------------- all actions necessary to authorize it to enter into and perform its obligations under this Agreement and the Purchase Documents and to perform fully Pacific's obligations hereunder and thereunder. This Agreement and the Purchase Documents constitute the legal, valid and binding obligations of Pacific, enforceable in accordance with their respective terms except as such enforceability may be limited by any applicable bankruptcy, reorganization, insolvency, moratorium or similar laws or by legal or equitable principles relating to or limiting the rights of contracting parties generally. 6.7. Covenant of Pacific After Effective Date. Pacific ---------------------------------------- covenants and agrees that for as long as any of Pacific's obligations and duties remain outstanding under the Note, Pacific and any dentists under its control shall comply with all applicable laws, orders, rules and regulations promulgated by any federal, state, municipal or other governmental authority, including without limitation, any of the foregoing applicable to Pacific and any dentists under its control regarding activities in connection with the Dental Practices. 7. Access to Records and Property of Dental Practices. Each party -------------------------------------------------- agrees to cooperate with the other party's efforts in assessing the affairs of the Dental Practices, and to facilitate each party's and its representatives' access to all the property, contracts, books, records and all other information concerning the affairs and condition of the Dental Practices as such party may reasonably request. All such data and information shall be kept confidential, except insofar as disclosure may be necessary in order to comply with applicable legal requirements; and all documents and other information supplied to Pacific or its representatives by Guards shall, upon request, be returned to Guards if such information is not reasonably required for the ongoing operations of the Dental Practices. 8. Practice Management Agreement. Concurrently with the execution of ----------------------------- this Agreement, Pacific shall execute a dental practice management services agreement with Associated Dental Services, Inc., who in turn will execute a dental practice management services agreement in the form of Exhibit B attached --------- hereto with Imprimis Dental Practice Management. 9. Execution of Documents. Each party shall execute and file, or ---------------------- join in the execution and filing of, any applications or other documents that may be necessary in order to obtain the authorization, approval, or consent of any governmental body that may be required or which the other party may reasonably request in connection with the execution of this Agreement or consummation of the transactions contemplated by this Agreement. 10. Additional Security. To secure the performance of Pacific's ------------------- duties and obligations under this Agreement, the Note and any and all other agreements, documents or instruments executed by Pacific in connection with this Agreement, any and all agreements, documents or instruments executed by Associated Dental Services, Inc. ("Associated") relating to and including that certain Dental Practice Asset Purchase Agreement by and between Guards and Associated (collectively, the "Guards Agreements") Pacific hereby collaterally assigns and grants a security interest to Guards in and to all of its assets, including without limitation the Assets transferred hereunder, now existing or hereafter acquired and/or accrued, including any proceeds or replacements relating to same. In connection with the granting of this security interest, Pacific shall, immediately upon the request of Guards, execute appropriate Form UCC-l and/or financing 3 statements necessary to perfect Guards' security interest as granted hereunder. Upon the event of breach of this Agreement or any of the Guards Agreements, Guards shall have all rights and remedies available at law or in equity to the collateral herein described, including but not limited to those afforded a secured creditor under the Uniform Commercial Code as adopted by the State of California and may, at Guards' sole discretion terminate any and/or all of the Guards Agreements. 11. Covenant Not to Compete. ----------------------- 11.1 Noncompetition. Pacific will not, without the prior -------------- written consent of Guards, compete directly or indirectly with the orthodontic practices of Guards as set forth on Schedule 11 attached hereto (the "Guards ----------- Site") by engaging in the business of orthodontics within 5 miles of the Guards Site (these areas are hereinafter collectively referred to as the "Covered Areas") nor will Pacific lease or sublease the Guards Site to persons or entities who will engage in the practice of orthodontics other than Guards. Concurrently, Guards will not, without the prior consent of Pacific, compete directly or indirectly with Pacific's operations relating to the Dental Practices within five (5) miles of any such site. The phrase "compete directly or indirectly with the orthodontic practice of Guards," shall mean engaging, or having an interest, directly or indirectly, as owner, partner, shareholder, independent contractor, capital investor, renderer of consultation services or advice or otherwise, either alone or in association with others, in the operation of any aspect of any type of business or enterprise competitive with the orthodontic practice of Guards. Guards' covenant not to compete shall be effective at all times for a period of five (5) years from the Effective Date, or until such earlier time as (i) either party, its successors and assigns, shall cease to do business; or (ii) upon default by Pacific under this Agreement or the Guards Agreements. Pacific's covenant not to compete shall be effective at all times for a period of five (5) years from the Effective Date, or until such earlier time as either party, its successors and assigns, shall cease to do business. 11.2 Interpretation of Covenant. The parties hereto agree that -------------------------- both the scope and nature of the covenant and the duration and area for which the covenant not to compete set forth in this Section 11 is to be effective are ---------- reasonable in light of all facts and circumstances. In the event that any provision of this Section 11 shall to any extent be held invalid, unreasonable ---------- or enforceable in any circumstances, the parties hereto agree that the remainder of this Section 11 and the application of such provision of this Section 11 to ---------- ---------- other circumstances shall be valid and enforceable to the fullest extent permitted by law. If any provision of this Section 11, or any part thereof, is ---------- held to be unenforceable because of the scope or duration of or the area covered by such provision, the parties hereto agree that the court making such determination shall reduce the scope, duration and/or area of such provisions (and shall substitute appropriate provisions for any such unenforceable provisions) in order to make such provisions enforceable to the fullest extent permitted by law, and/or shall delete specific words and phrases, and such modified provisions shall then be enforceable and shall be enforced. 12. Indemnification by Pacific. Pacific shall indemnify, defend and -------------------------- hold Guards, its directors, officers, shareholders, attorneys, agents and representatives, and their respective successors and assigns, harmless from and against any and all losses, liabilities, obligations, judgments, settlements, damages, costs and expenses, including without limitation, attorneys' fees, court costs and other expenses of litigation (collectively "Losses") suffered by 4 any of such parties and arising out of, resulting from or due to: (i) any breach of any representation, warranty, covenant or agreement of Pacific contained in this Agreement or any other instrument contemplated by this Agreement; (ii) any misrepresentation contained in any statement or certificate furnished by Pacific pursuant to this Agreement or in connection with the transactions contemplated by this Agreement; (iii) the liabilities and obligations assumed by Pacific pursuant to Section 2 or (iv) any liability or obligation of Pacific in connection with the Assets, or the operation or conduct relating to the Dental Practices after the date hereof. 13. Brokers. Pacific, on the one hand, and Guards, on the other ------- hand, represent to each other that there are no brokers' commissions or finder's fees payable in connection with the transactions contemplated by this Agreement and each party hereby agrees to indemnify and hold harmless the other from and against any demand, claim and/or liability asserted or established by or in favor of any third party for brokerage commission or finder's fee based on an agreement with or the actions of such party. This provision shall survive the consummation of the sale hereunder. 14. Notices. All notices, requests, demands, consents and other ------- communications hereunder shall be in writing and shall be given or made in person, by fax or telecopy or by overnight delivery service, or mailed by first class registered or certified mail, postage prepaid, return receipt requested and addressed to the person and address set forth under each party's name on the signature page. Any party may change its address hereunder by notice in writing to the other party. Any notice, request, consent or other communication shall be deemed to have been given or made as of the date sent or given. 15. Governing Law. This Agreement shall be interpreted and construed ------------- in accordance with, and governed by, the internal laws, and not the laws pertaining to conflicts or choice of law, of the State of California. The exclusive forum for the determination of any action relating to the validity and enforceability hereof shall be either an appropriate court of said State or a court of the United States which includes said State within its territorial jurisdiction. 16. Entire Agreement. This Agreement, including all exhibits ---------------- referenced herein and attached hereto, constitutes the entire agreement between the parties hereto pertaining to the subject matter hereof (except for documents executed contemporaneously herewith or pursuant hereto), and supersedes all negotiations, preliminary agreements, and all prior and contemporaneous agreements, representations and understandings of the parties hereto in connection with the subject matters hereof. No supplement, modification, amendment or termination of any of the terms, provisions, or conditions of this Agreement shall be binding unless made in writing signed by all parties hereto, their successors and assigns. No waiver of any of the provisions of this Agreement shall be deemed to 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 signed by the party making the waiver. 17. Successors and Assigns. This Agreement shall be binding upon, and ---------------------- shall inure to the benefit of, the parties hereto and to their executors, administrators, legatees, beneficiaries, personal representatives and assigns, except that no assignment by Pacific may be made without the prior written consent of Guards. 5 18. Descriptive Headings. The descriptive headings of the several -------------------- paragraphs and subparagraphs of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 19. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 20. Severability. In the event that any provision of this Agreement ------------ is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering other provisions contained herein invalid or unenforceable, and all such other provisions shall be given full force and effect as though the invalid or unenforceable provision was not contained herein. IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written. PACIFIC COAST DENTAL, INC. GUARDS DENTAL, INC. By:_______________________ By:_____________________ Name:_____________________ Name: Kenneth E. Keating Title:____________________ Title: Vice President - Operations Address:__________________ Address: 505 North Euclid Street __________________ Anaheim, CA 92803-4685 6 SCHEDULE 1(a) Locations of the Dental Practices --------------------------------- The Dental Practices are located at the following sites: 1. CHULA VISTA 9. MODESTO 510 Broadway, Suites 4 & 5 2900 Standford Avenue, Suite #2 Chula Vista, CA 91910 Modesto, CA 95350 619-476-9400 209-577-5008 2. EL CAJON 10. NORTHRIDGE 2990 Jamacha Road, #132 17017 Devonshire Blvd. El Cajon, CA 92019 Northridge, CA 91324 619-670-1700 818-360-2216 3. FAIRFIELD 11. PALMDALE 1955 West Texas Street 38745 Tierra Subida St., Ste. #150 Fairfield, CA 94533 Palmdale, CA 93550 707-428-5400 805-272-9091 4. FREMONT 12. SACRAMENTO 40756 Grimmer Blvd. 3901 Madison Avenue Freemont, CA 94533 Sacramento, CA 95660 916-339-9000 5. FRESNO 13. SANTA ROSA 2745 W. Shaw Avenue #103 2525 Cleveland Avenue, Ste. B Fresno, CA 93711-3366 Santa Rosa, CA 95401 209-227-2900 707-578-3118 6. LA MESA 14. SAN RAMON 5601 Grossmont Center Drive 9130-A East Alcosta Blvd. La Mesa, CA 91942 San Ramon, CA 94593 619-462-2272 510-803-9700 7. LANCASTER 15. VISTA 1228 West Avenue K 1010 E. Vista Way, #A & #B Lancaster, CA 91942 Vista, CA 92083 805-949-1970 619-940-8811 8. LONG BEACH 17236 Downey Avenue Bellflower, CA 90706 310-531-0221 SCHEDULE 1(b) The Intangible Assets --------------------- The following intangible nonorthodontic-related assets associated with the Dental Practices are sold to Pacific under this Agreement: . All patient charts; . All patient lists; . All patient records; . Goodwill of the Dental Practices; . The "doing business as" registered names/trade names; and . The accounts receivable. PROMISSORY NOTE AND SECURITY INTEREST $3,500,000 August 1, 1997 Irvine, California FOR VALUE RECEIVED, the undersigned, PACIFIC COAST DENTAL, INC., a California corporation ("Pacific"), hereby unconditionally promises to pay to GUARDS DENTAL, INC., a California corporation ("Guards"), or its successors and assigns, at its offices at 505 North Euclid Street, Anaheim, CA 92803-4685, or at such other place as the holder of this promissory note (this "Note") may from time to time designate in writing, the principal amount of Three Million Five Hundred Thousand Dollars ($3,500,000), together with interest from the date hereof, at the rate of eight and one-half percent (8.5%) per annum or the maximum rate allowed by law, whichever rate is lower (the "Coupon Rate"), principal and interest payable in lawful money of the United States, without any deduction whatsoever, including but not limited to any deduction for any set-off or counterclaim over three hundred sixty (360) months (the "Term"), in monthly installments beginning one (1) month from the date of this Note, and in accordance with paragraphs 1 and 2 below. 1. Payments. -------- 1.1. Interest Only Payments. For the first twenty-four (24) months -------------- of the Term, Pacific shall pay to Guards monthly interest only payments of ________________________________________ Dollars and __________ Cents ($____.___) (the "Interest Only Payments") commencing on September 1, 1997 and payable thereafter on the first day of each month (a "Due Date"). 1.2. Principal and Interest Payments. Commencing on August 1, 1999, ------------------------------- Pacific shall pay to Guards monthly principal and interest payments of _________________________ Dollars and _______________ Cents ($____.__) and payable thereafter on the first (1st) day of each month with the final such payment due on August 1, 2027 (the "Principal and Interest Payments") (the Interest Only Payments and the Principal and Interest Payments are collectively referred to herein as "Payments"). 1.3. Manner of Payments. All Payments due hereunder shall be made to ------------------ Guards by check delivered to the address set forth below (or such other address as Guards may designate from time to time by written notice), or by wire transfer of immediately available funds to such bank account as Guards may designate. Interest payable with respect to any period that is less than a full calendar month shall be calculated on the daily outstanding principal balance according to the actual number of days in such period as a fraction of a 360 day year. 2. Delinquent Payment. If any Payment is not paid within ten (10) ------------------ days after any Due Date, Pacific shall pay to Guards, in addition to the Payment and without any requirement of notice or demand by Guards, a late payment charge equal to one percent (1%) per month of the amount of the Payment or the maximum amount permitted under applicable law from such Due Date until Pacific pays the Payment and accrued interest. Pacific expressly acknowledges and agrees that the foregoing late payment charge provision is reasonable under the circumstances existing on the date of this Note, that it would be extremely difficult and impractical to fix Guards' actual damages arising out of any late payment and that the foregoing late payment charge shall be presumed to be the actual amount of such damages incurred by Guards. No provision in this Note (including without limitation the provisions for a late payment charge and for interest on any amounts remaining unpaid after any Due Date) shall be construed as in any way excusing Pacific from its obligation to make any Payment under this Note promptly when due. 3. Security Interest. As security for the payment of principal and ----------------- accrued interest under this Note, Pacific hereby grants to Guards a security interest in and to all of Pacific's assets related to or associated with the dental practices located on Schedule 3 attached hereto, or any other dental ---------- practices owned by Pacific, now existing or hereafter acquired and/or accrued, including any proceeds or replacements relating to the same (the "Collateral"). The security interest hereby created shall attach immediately upon execution of this Note and concurrently herewith, Pacific shall execute any financing statement or financing statements requested by Guards to perfect the security interest created hereby. Such financing statement or statements shall be on a form or forms approved by the California Secretary of State and Pacific shall forthwith pay to Guards the filing fees required to file such statement or statements in the manner required by the Uniform Commercial Code of California. In addition, Pacific shall pay from its own funds, as they become due, all taxes and assessments levied or assessed against the Collateral, or any part of the Collateral, prior to the final termination of this Note. Upon any event of default hereunder, Guards shall be entitled to all the rights and remedies of a secured creditor with respect to such Collateral as provided for in the Uniform Commercial Code of California. 4. Presentment, Notice of Dishonor and Protest. Pacific consents to ------------------------------------------- renewals, replacements and extensions of time for any payment hereof, before, at or after maturity and waives, to the fullest extent permitted by applicable law, diligence, grace, presentment, exhibition, protest, demand, dishonor, exemption rights, nonpayment and notice, of every kind with respect to this Note or any payment hereunder. No delay or omission on the part of Guards in exercising any power, right, privilege or remedy under this Note shall operate as a waiver of such power, right, privilege or remedy or of any other power, right, privilege or remedy hereunder. It is agreed that the granting to Pacific or any other party of an extension or renewal or extensions of the time for the payment or renewal of any sum or sums due hereunder or under any other instrument or for the performance of any covenant or stipulation thereof or the taking of security shall not in any way release or effect the liability of Pacific on this Note. 2 5. Assignment. Guards shall have the right to sell, assign or ---------- otherwise transfer this Note, either in part or in its entirety, without Pacific's consent. This Note may not be assigned by Pacific without the prior written consent of Guards or Guards' successors, heirs, representatives or assigns. 6. Successors and Assigns. This Note and all of the covenants, ---------------------- promises and agreements contained in it shall be binding on and inure to the benefit of the respective legal and personal representatives, devisees, heirs, successors and assigns of Guards and Pacific. 7. Modification. This Note may not be changed, modified, or ------------ terminated except by an agreement in writing signed by the parties or their successors and assigns. 8. Severability. If any provision of this Note, or the application ------------ of it to any party or circumstance, is held to be invalid, illegal or unenforceable, the remainder of this Note, and the application of such provision to other parties or circumstances, shall not be affected thereby, the provisions of this Note being severable in any such instance. 9. Attorneys' and Other Fees. Pacific hereby agrees to pay all costs ------------------------- and expenses, including without limitation attorneys' fees and disbursements incurred by Guards, or adjudged by a court, in connection with the collection or enforcement of this Note or any portion of this Note, whether or not a suit is filed. This provision is separate and severable and shall survive any merger of this Note into any judgment. 10. Notice. Notice to either party provided for in this Note shall ------ be given by personal delivery or by mailing such notice by first class or certified mail, return receipt requested, to the addresses stated below or such other address as either party may hereafter specify in writing: To Pacific: ---------- 25522 Marguerite Parkway Mission Viejo, CA 92692 Attention: Robert Stalcup/Frank Pellkofer To Guards: ---------- 505 North Euclid Street Anaheim, CA 92803-4685 Attention: Kenneth E. Keating 11. Governing Law. This Note shall be interpreted and construed in ------------- accordance with, and governed by, the internal laws, and not the laws pertaining to conflicts or 3 choice of law, of the State of California. The exclusive forum for the determination of any action relating to the validity and enforceability hereof shall be either an appropriate court of said State or a court of the United States which includes said State within its territorial jurisdiction. 12. Prepayment. Pacific may prepay the principal amount outstanding ---------- in whole or in part at any time and from time to time without penalty and without any discount. Executed at Irvine, California, on the 1st day of August, 1997. PACIFIC COAST DENTAL, INC. By:________________________ Name:______________________ Title:_____________________ 4 Schedule 3 Dental Practice Locations -----END PRIVACY-ENHANCED MESSAGE-----