<PAGE>
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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-12050
SAFEGUARD HEALTH ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1528581
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
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, 1998, was 4,747,498 shares (not including 3,274,788
shares of common stock held in treasury).
Page 1 of 13
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
INFORMATION INCLUDED IN REPORT
<TABLE>
<CAPTION>
Page
----
<S> <C>
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 14
</TABLE>
Page 2 of 14
<PAGE>
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)
<TABLE>
<CAPTION>
June 30, 1998 December 31,1997
-------------- ----------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash $ 3,884 $ 3,652
Investments available for sale, at estimated fair value 3,205 5,557
Investments held to maturity, at amortized cost 1,249 3,697
Accounts and notes receivable, net of allowances of $1,235 in 1998
and $1,061 in 1997 9,477 7,227
Income taxes receivable 133 132
Prepaid expenses and other current assets 1,361 1,029
Deferred income taxes 1,829 1,047
Net assets of discontinued operations - 4,062
-------- --------
Total current assets 21,138 26,403
-------- --------
Property and equipment, net 10,184 9,351
Investments held to maturity, at amortized cost 5,600 5,656
Notes receivable long-term, net of allowances of $10,207 in 1998 and $3,595
in 1997 21,753 12,327
Other assets 245 247
Goodwill, net of accumulated amortization of $1,196 in 1998 and $815 in 1997 28,281 29,556
Intangibles and covenants not to compete, net of accumulated amortization of
$2,773 in 1998 and $2,287 in 1997 4,429 4,978
-------- --------
Total assets $ 91,630 $ 88,518
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term note payable $ 8,000 $ 8,500
Current portion of note payable 1,692 1,692
Accounts payable and accrued expenses 5,907 5,193
Reserves for incurred but not reported claims 3,306 3,631
Deferred revenue 1,341 1,177
-------- --------
Total current liabilities 20,246 20,193
-------- --------
Long-term debt 32,500 32,500
Note payable 798 1,394
Deferred income taxes 2,789 1,289
Accrued compensation agreement 365 383
Stockholders' equity
Preferred stock - $.01 par value; 1,000,000 shares authorized;
no shares issued or outstanding - -
Common stock $.01 par value; 30,000,000 shares authorized;
4,747,000 in 1998 and 1997 shares issued and outstanding, stated at 21,509 21,509
Retained earnings 32,401 29,816
Net unrealized loss on investments available for sale, net of deferred taxes (855) (443)
Treasury stock, at cost (18,123) (18,123)
-------- --------
Total stockholders' equity 34,932 32,759
-------- --------
$ 91,630 $ 88,518
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 3 of 14
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(000's omitted, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-----------------------------------------
1998 1997 1998 1997
--------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenues $24,540 $23,488 $48,935 $46,430
Expenses:
Health care services 16,288 15,546 32,719 31,217
Selling, general and administrative 6,567 6,104 13,397 11,853
------- ------- ------- -------
Total expenses 22,855 21,650 46,116 43,070
------- ------- ------- -------
Operating income 1,685 1,838 2,819 3,360
Other income 534 335 1,504 616
Interest expense (973) (627) (1,895) (1,124)
------- ------- ------- -------
Income from continuing operations before provision for income
taxes and discontinued operations 1,246 1,546 2,428 2,852
Provision for income taxes 538 654 1,057 1,215
------- ------- ------- -------
Income from continuing operations before discontinued
operations 708 892 1,371 1,637
Discontinued operations:
(Loss) from operations to be disposed of
(net of income tax benefits of $396 in 1998 and $110
and $257 in 1997) (620) (222) (620) (491)
Gain on disposal of dental practices (net of income
taxes of $1,182 in 1998 and $362 and $864 in 1997) 1,834 566 1,834 1,320
------- ------- ------- -------
Gain from discontinued operations 1,214 344 1,214 829
------- ------- ------- -------
Net income $ 1,922 $ 1,236 $ 2,585 $ 2,466
======= ======= ======= =======
Basic earning per share:
Income from continuing operations $ 0.15 $ 0.19 $ 0.29 $ 0.34
Income from discontinued operations $ 0.26 $ 0.07 $ 0.26 $ 0.18
------- ------- ------- -------
Net income $ 0.41 $ 0.26 $ 0.55 $ 0.52
======= ======= ======= =======
Weighted average shares outstanding 4,747 4,717 4,747 4,717
Diluted earning per share:
Income from continuing operations $ 0.15 $ 0.18 $ 0.29 $ 0.33
Income from discontinued operations $ 0.25 $ 0.07 $ 0.25 $ 0.17
------- ------- ------- -------
Net income $ 0.40 $ 0.25 $ 0.54 $ 0.50
======= ======= ======= =======
Weighted average shares outstanding 4,802 4,882 4,810 4,906
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 4 of 14
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(000's omitted)
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------------
1998 1997
---------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,585 $ 2,466
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Loss from discontinued operations 1,016 2,183
Gain on disposal of discontinued dental practices (3,016) (2,183)
Depreciation and amortization 1,271 1,900
Deferred income taxes 264 1,003
Changes in operational assets and liabilities:
Accounts and current notes receivable, net (2,250) (1,455)
Income taxes receivable (1) (77)
Prepaid expenses and other current assets (332) 23
Accounts payable and accrued expenses 714 (563)
Deferred revenue 164 773
Reserves for incurred but not reported claims (325) (1,274)
------- -------
Net cash provided by continuing operations 90 2,796
Net cash used in discontinued operations (2,016) (4,478)
------- -------
Net cash used in operating activities (1,926) (1,682)
------- -------
Cash flows from investing activities:
Purchase of investments available for sale (2,342) (2,862)
Proceeds from sales/maturity of investments available for sale 3,705 4,617
Purchase of investments held to maturity (1,658) (10)
Proceeds from maturity of investments held to maturity 4,739 1,112
Purchases of property and equipment (1,237) (1,120)
Capital expenditures of discontinued operations - (394)
Cash paid for business acquired - (1,043)
Additions to intangibles and other assets 65 (104)
------- -------
Net cash provided by investing activities 3,272 196
------- -------
Cash flows from financing activities:
Proceeds from long-term debt 8,000 3,000
Payments on accrued compensation agreement (18) (12)
Payments on notes payable (9,096) (596)
------- -------
Net cash provided by (used in) financing activities (1,114) 2,392
------- -------
Net increase in cash 232 906
Cash at beginning of period 3,652 706
------- -------
Cash at end of period $ 3,884 $ 1,612
======= =======
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
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 5 of 14
<PAGE>
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, 1998, have been prepared in accordance with generally accepted accounting
principles applicable to interim periods, and reflect all adjustments which are,
in the opinion of management, necessary for a fair presentation of results for
the interim periods. The statements have been prepared in accordance with the
regulations of the Securities and Exchange Commission, but omit certain
information and footnote disclosures necessary to present the statements in
accordance with generally accepted accounting principles. This information
should be read in conjunction with the Consolidated Financial Statements and
Notes including Significant Accounting Policies, contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. Management
believes that the disclosures herein are adequate to make the information
presented not misleading. As described in Note 4 herein, the operating results
for the quarters ended June 30, 1998 and 1997 have been reclassified to reflect
the effect of the discontinued operation of the general dental and orthodontic
practices.
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, 1998, a total of 3,819,088
shares had been acquired. All shares acquired prior to August 24, 1987, have
been retired as required by California law. All shares acquired after the
August 24, 1987 reincorporation in Delaware are being held as treasury stock at
an average cost of $5.54 per share.
Earnings per share have been restated to conform with the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share".
Basic earnings per share excludes the effect of all potentially dilutive
securities. Diluted earnings per share includes the effect of all potentially
dilutive common securities. For the quarters ended June 30, 1998 and 1997, the
current presentation of diluted earnings per share is identical to the Company's
former presentation of primary earnings per share.
Note 3: Recent Accounting Pronouncements
- -----------------------------------------
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 128 ("FAS 128"), Earnings Per Share, which becomes effective for fiscal
years ending after December 15, 1997. FAS 128 specifies the computation,
presentation and disclosure requirements for earnings per share, and its
objective is to simplify the computation of earnings per share, and to make the
U.S. standard for computing earnings per share more compatible with the
standards of other countries. The statement requires that all prior period
earnings per share data presented shall be restated. The Company adopted FAS
128 in fiscal year 1997 as required, and its adoption did not have a significant
effect on the Company's financial position or results of operations.
In June 1997, FASB issued Statement of Financial Accounting Standards No. 130
("FAS 130"), Reporting Comprehensive Income, which becomes effective for fiscal
years ending after December 15, 1997. FAS 130 requires that all components of
comprehensive income be displayed with the same prominence as other financial
statements. The Company adopted FAS 130 in fiscal year 1998 and its adoption
did not have a significant effort on the Company's financial position.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 ("FAS 131"), Disclosure About Segments of an Enterprises and Related
Information, which becomes effective for fiscal years ending after December 15,
1997. FAS 131 requires that future financial statements contain disclosures
about products and services, geographic areas and major customers related to its
reportable operating segments. The Company adopted FAS 131 in fiscal year 1998
and has identified only one reportable operating segment.
Page 6 of 14
<PAGE>
Note 4: Discontinued Operations
- --------------------------------
On October 21, 1996, the Company implemented a strategic plan to sell all of the
general dental practices owned by the Company. Four of the general practices
were sold during 1996, the remaining were sold during 1997. The assets of the
general dental practices sold, pursuant to the Company's plan, consisted
primarily of accounts receivable, supply inventories and leasehold improvements.
Each general dental practice sold could enter into a contract with the Company's
practice management subsidiary, whereby the Company would provide certain
services to support the dentists in the operation of their practices, including
administrative support. The Company terminated these agreements in 1998.
The Company projected a gain on the disposal of the discontinued operations that
offset the operating losses of the dental practices during the phase-out period
ended September 30, 1997. In the fourth quarter 1997, the Company recorded a
pretax charge of $8.5 million related to discontinued operations for both dental
and orthodontic practices. This charge included reserves for under-performing
notes and receivables ($5.6 million), litigation costs ($0.7 million) and other
transition costs ($2.2 million).
Operating losses for the discontinued general dental practices subsequent to the
measurement date of October 21, 1996, were recognized in the consolidated
statements of operations up to the amount of the net gain on disposal of the
discontinued general dental practices. The remaining losses were deferred as an
asset until the completion of the sale of all the dental practices as of
September 30, 1997. The statement of operations for prior years has been
restated and operating results of the dental and orthodontic practices are also
shown as discontinued operations.
Orthodontic Practices
- ---------------------
On February 26, 1998, the Company announced the discontinuance of its
orthodontic practices. On April 1, 1998, the Company completed the sale of its
orthodontic practices to Pacific Coast Dental, Inc./Associated Dental Services,
Inc., and affiliated dentists. The practices were sold for $15 million in 8.5%
long-term notes, discounted for up to $2.5 million for early cash payment by
December 31, 1998. The transaction includes the sale of all assets and
associated liabilities of the orthodontic practices and a long-term commitment
from the purchaser to continue to provide orthodontic services to SafeGuard
members. The assets of the orthodontic practices sold consist of accounts
receivable, supply inventory and dental equipment.
The Company recorded a gain on the disposal of the discontinued orthodontic
practices of $1.8 million, net of taxes of $1.2 million. The Company also
recognized a deferred loss of $620, net of taxes, with the gain recorded on the
sale. Additionally, the Company has accrued against the gain on these sales,
certain run-out expenses that the Company expects to incur in future periods
relating to the discontinuation of this business.
Note 5: Bank Credit Agreement
- ------------------------------
On January 29, 1998, the Company entered into an $8 million revolving working
capital credit facility with Silicon Valley Bank. The loan has a maturity date
of January 28, 1999. The interest rate during the quarter for the facility, as
amended, was established at the bank's prime rate plus .25%, or at the Company's
option, LIBOR plus 2.25%. The loan is secured by a first priority security
interest in all of the personal property of the Company, including accounts
receivable, fixed assets and intangibles and a negative pledge on the stock of
the Company's subsidiaries and on real property owned by the Company. In
connection with the bank loan, as amended, the Company is subject to certain
financial and operational debt covenants. As of June 30, 1998, the Company was
in compliance with, or has obtained a waiver with respect to those covenants.
Page 7 of 14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with the attached
consolidated financial statements and notes thereto. 1998 versus 1997 Six
months ended
<TABLE>
<CAPTION>
1998 versus 1997
Six months ended
June 30,
------------------------------
Increase/ Percent
Results of operations (000's omitted) (Decrease) Change
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Health care revenues $2,505 5.4%
- -------------------------------------------------------------------------------------------------------------
Health care expenses $1,502 4.8%
- -------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses $1,544 13.0%
- -------------------------------------------------------------------------------------------------------------
Other income, net $ 888 144.2%
- -------------------------------------------------------------------------------------------------------------
Interest expense $ 771 68.6%
- -------------------------------------------------------------------------------------------------------------
Income from continuing operations before discontinued operations $ (266) (16.2)%
- -------------------------------------------------------------------------------------------------------------
Gain (loss) from discontinued operations, net $ 385 46.4%
- -------------------------------------------------------------------------------------------------------------
Net income $ 119 4.8%
</TABLE>
1998 Versus 1997
- ----------------
Health care revenues for the quarter ended June 30, 1998 were $24,540, or a 4.5%
increase on a decrease of 1.9% in membership over the corresponding period a
year ago. There are three major factors that impacted the comparison between
years. The first reflects positive pricing changes that have been achieved
between years. Secondly, the acquisition of Advantage Dental HealthPlans, Inc.
("Advantage") on May 9, 1997 contributed toward revenues this quarter compared
to the prior year quarter. The third item to impact revenues this quarter was
the loss of a large private label HMO relationship in the first quarter this
year, which represented lower revenues per member, per month. This loss was
anticipated, and the Company's goal was to replace the loss in revenues
represented by this account. Though the membership was lower than comparable
periods in the prior year, due to the impact of this group, the Company was
successful in improving both membership and revenues over the previous quarter.
Revenues for the six months ended June 30, 1998 were $48,935, or a 5.4% increase
over the same period in the prior year.
Health care expenses for the six months ended June 30, 1998 increased $1,502, or
4.8%. Health care expense as a percentage of health care revenues improved by
.3% from 67.2% of revenues for the six months ended June 30, 1997, to 66.9% for
the same period in 1998. This improvement was due to the effect of the positive
pricing on improving margins as well as the effect of the acquisition of
Advantage, which has lower health care costs as a percent of revenues.
General and administrative expenses for the six months ended June 30, 1998,
increased $1,544, or 27.4% of revenue compared to 25.5% of revenue for the same
period a year ago. This was impacted by the acquisition of Advantage, which had
a higher ratio of general and administrative expenses to revenues than the
Company had prior to the acquisition. Additionally, goodwill and intangible
amortization expense of $220 related to the Advantage acquisition is included in
general and administrative expenses. Excluding the impact of the acquisition
and the associated goodwill and intangible expenses, the ratio of general and
administrative expenses to revenues was 26.1% for the six months ended June 30,
1998 compared to 25.3% for the corresponding period a year ago. This was due
primarily to additional sales account executives hired this quarter, increases
in telecommunication and computer network systems costs.
Other income for the six months ended June 30, 1998 was $1,504, which increased
from $616 for the same period a year ago. This was due to an increase in
interest bearing notes receivable resulting from the sale of the discontinued
general dental and orthodontic practices, as well as gains on the sale of
certain securities. Interest expense of $1,895 for the six months ended June
30, 1998 was an increase of $771 over the prior year, primarily as a result of
the borrowings obtained for the acquisition of Advantage in May 1997.
The operating losses of the discontinued orthodontic practices deferred in the
first quarter were $620, net of taxes, and have been recognized with the gain
recorded on the sale in April 1998. (see Note 4 of the Notes to the Consolidated
Financial Statements). Additionally, the Company has accrued against the gain on
these sales, certain run-out expenses that the Company expects to incur in
future periods relating to the discontinuation of this business.
Page 8 of 14
<PAGE>
The same period a year ago included a loss, net of taxes, of $491 for the
operating results of both the discontinued orthodontic and general dental
practices. This loss was offset by the net after tax gains on the sale of the
general practices during the first six months of 1997.
Net income for the six months ended June 30, 1998, was $2,585, which changed
from the same period in 1997 due to the above discussed factors. Net income for
the same period in 1997 was $2,466.
Business Segment Information
- ----------------------------
The Company is engaged in a single business segment, the operation of managed
care dental plans.
Liquidity and Capital Resources
- -------------------------------
The Company's capital and operational cash requirements have been met
principally from operating cash flows, and corporate borrowings, and this is
expected to continue.
At June 30, 1998, the current ratio was 1.04 to 1.0. The Company's net worth
was $34.9 million compared to $32.8 million a year earlier. The Company had
$13.9 million of cash and investments as of June 30, 1998 compared to $11.5
million a year earlier. As a result of its regulated nature, the Company is
required to maintain various regulatory bank accounts in an aggregate amount of
approximately $9.0 million to satisfy depository requirements imposed by state
regulatory agencies. Due to the significant cash and investments maintained by
the Company, these requirements do not pose a significant liquidity burden on
the Company. The Company believes that cash flow from continuing operations,
together with the existing cash and investments on hand and other available
sources of financing, should be adequate to meet operating capital and
regulatory needs for the foreseeable future.
Credit Facilities
- -----------------
On September 30, 1997, the Company completed a private placement of $32.5
million in long-term debt consisting of eight-year notes. The notes are
unsecured senior notes and bear a fixed interest rate of 7.91 percent. In
connection with the senior notes, the Company is subject to certain financial
and operational debt covenants. As of June 30, 1998, the Company was in
compliance, or has obtained a waiver, with respect to these covenants.
On May 13, 1997, the Company announced that it had completed the acquisition of
Advantage. The Company financed part of the acquisition through an unsecured
$8.5 million promissory note with the seller. The promissory note was paid on
April 2, 1998. The interest rate for the note was the Prime rate, which
averaged 8.5 percent during the six months ended June 30, 1998.
On January 29, 1998, the Company entered into a $8 million revolving working
capital credit facility with Silicon Valley Bank. The loan has a maturity date
of January 28, 1999. The interest rate was established at the bank's Prime
rate, plus .25 percent or at the Company's option, LIBOR plus 2.25 percent. The
loan is secured by a first priority security interest in all the personal
property of the Company and a negative pledge on the stock of the Company's
subsidiaries and on the real property owned by the Company. In connection with
the bank loan, as amended, the Company is subject to certain financial and
operational debt covenants. As of June 30, 1998, the Company was in compliance,
or has obtained a waiver, with respect to these covenants.
Impact of Inflation
- -------------------
Management believes that the Company's operations are not materially affected by
inflation. The Company believes that a majority of its costs are capitated or
fixed in nature and are directly related to membership levels, and therefore
related to premium levels.
Page 9 of 14
<PAGE>
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 29, 1998, at the Company's Executive Offices
in Anaheim, California. The following matter was addressed at the
meeting:
ELECTION OF OFFICERS
Ronald I. Brendzel, Michael M. Mann, Ph.D., and Bradford M. Boyd,
D.D.S. were duly elected to the Board of Directors as Class II
Directors at the Annual Meeting for a three (3) year term. Steven J.
Baileys, D.D.S., John E. Cox, William E. McKenna and George H. Stevens
are directors whose terms of office continued after the Annual
Meeting.
The votes of holders of 4,134,599 shares of the Company's common stock
were cast "FOR" the election of Mr. Brendzel and the votes of holders
of 4,134,607 shares of the Company's common stock were cast "FOR" the
election of Dr. Mann and Dr. Boyd, respectively. The votes of holders
of 3,793 shares of common stock were cast to "WITHHOLD" the election
of Mr. Brendzel, and the votes of holders of 3,783 shares of common
stock were cast to "WITHHOLD" the election of Dr. Mann and Dr. Boyd,
respectively. The votes "FOR" represents approximately 87.1% and 99.9%
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.
Page 10 of 14
<PAGE>
Item 5. Other Information
On January 29, 1998, the Company entered into an $8 million revolving
working capital credit facility with Silicon Valley Bank. The loan
has a maturity date of January 28, 1999. The interest rate for the
facility, as amended, was established at the bank's prime rate plus
.25%, or at the Company's option, LIBOR plus 2.25%. The loan is
secured by a first priority security interest in all of the personal
property of the Company, including accounts receivable, fixed assets
and intangibles and a negative pledge on the stock of the Company's
subsidiaries and on real property owned by the Company. In connection
with the bank loan, as amended, the Company is subject to certain
financial and operational debt covenants. As of June 30, 1998, the
Company was in compliance, or has obtained a waiver, with respect to
those covenants.
On February 26, 1998, the Company announced the discontinuance of its
orthodontic practices. On April 1, 1998, the Company completed the
sale of its orthodontic practices to Pacific Coast Dental,
Inc./Associated Dental Services, Inc., and affiliated dentists. The
practices were sold for $15 million in 8.5% long-term notes,
discounted for up to $2.5 million for early cash payment by December
31, 1998. The transaction includes the sale of all assets and
associated liabilities of the orthodontic practices and a long-term
commitment from the purchaser to continue to provide orthodontic
services to SafeGuard members. The assets of the orthodontic practices
sold consist of accounts receivable, supply inventory and dental
equipment. The principle followed in determining the amount of
consideration was the fair market value of the assets. The Company
recorded a gain on the disposal of the discontinued orthodontic
practices of $1.8 million, net of taxes of $1.2 million. The Company
also recognized a deferred loss of $620, net of taxes, with the gain
recorded on the sale. Additionally, the Company has accrued against
the gain on these sales, certain run-out expenses that the Company
expects to incur in future periods relating to the discontinuation of
this business.
Page 11 of 14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER
EXHIBIT OF
NUMBER COLUMNS DESCRIPTION
- --------- ----------- ----------------------------------------------------------------------------------------------------------
<C> <C> <S>
2.1 One Plans of Acquisition/8/
3.1 One Articles of Incorporation/4/
3.2 One Bylaws/4/
10.1 One 1984 Stock Option Plan/3/
10.2 One Stock Option Plan Amendment/1/
10.3 One Stock Option Plan Amendment/5/
10.4 One Stock Option Plan Amendment/6/
10.5 One Amended Stock Option Plan/10/
10.6 One Corporation Grant Deed, dated December 21, 1984, relating to a property located at 505 North Euclid
Street, Anaheim, California/2/
10.7 One Employment Agreement, as Amended, dated May 25, 1995, between Steven J. Baileys, D.D.S. and the Company/7/
10.8 One Employment Agreement, as Amended, dated May 25, 1995, between Ronald I. Brendzel and the Company/7/
10.9 One Employment Agreement dated May 25, 1995, between John E. Cox and the Company/7/
10.10 One Employment Agreement dated May 25, 1995, between Wayne K. Butts and the Company/7/
10.11 One Form of Rights Agreement, dated as of March 22, 1996, between the Company and American Stock Transfer and
Trust Company, as Rights Agent/7/
10.12 One Employment Agreement dated January 5, 1997, between Herb J. Kaufman, D.D.S. and the Company/10/
10.13 One Credit Agreement dated September 25, 1996, between Bank of America National Trust and Savings Association
and the Company/9/
10.14 One Stock Purchase Agreement between Consumers Life Insurance Company and SafeGuard Health Enterprises, Inc.
dated March 6, 1997/7/
10.15 One Purchase Agreement between Associated Dental Services, Inc. and Guards Dental, Inc. dated August 1,
1997/11/
10.16 One Purchase agreement between Pacific Coast Dental, Inc. and Guards Dental, Inc. dated August 1, 1997/11/
10.17 One Form of Note Purchase Agreement dated as of September 30, 1997, and form of Promissory Note/12/
18.1 One Independent Auditors' Preferability Letter for Change in Accounting Method/13/
23.1 One Independent Auditors' Consent/14/
24.1 One Power of Attorney/14/
27.1 One Financial Data Schedule
</TABLE>
__________
/1/ Incorporated by reference herein to the exhibit of the same number filed as
an exhibit to the Company's Registration Statement on Form S-1 filed on
September 12, 1983 (File No. 2-86472).
/2/ Incorporated by reference herein to the exhibit of the same number filed as
an exhibit to the Company's Registration Statement on Form S-1 filed on
August 22, 1985 (File No. 2-99663).
/3/ Incorporated by reference herein to the exhibit of the same number filed as
an exhibit to the Company's Registration Statement on Form S-1 filed on
July 3, 1984 (File No. 2-92013).
/4/ Incorporated by reference herein to the exhibit of the same number filed as
an exhibit to the Company's Annual Report of Form 10-K for the period ended
December 31, 1987.
/5/ Incorporated by reference herein to the exhibit of the same number filed as
an exhibit to the Company's Annual Report of Form 10-K for the period ended
December 31, 1989.
/6/ Incorporated by reference herein to the exhibit of the same number filed as
an exhibit to the Company's Annual Report of Form 10-K for the period ended
December 31, 1992.
/7/ Incorporated by reference herein to the exhibit of the same number filed as
an exhibit to the Company's Annual Report of Form 10-K for the period ended
December 31, 1995.
/8/ Incorporated by reference herein to Exhibit D filed as an exhibit to the
Company's Report on Form 8-K dated September 27, 1996.
/9/ Incorporated by reference herein to Exhibit E filed as an exhibit to the
Company's Report on Form 8-K dated September 27, 1996.
/10/ Incorporated by reference herein to the exhibit of the same number filed as
an exhibit to the Company's Annual Report on Form 10-K for the period ended
December 31, 1996.
/11/ Incorporated by reference to the exhibit of the same number filed as an
exhibit to the Company's quarterly statement on Form 10-Q for the period
ended June 30, 1997.
/12/ Incorporated by reference herein to Exhibit 99.1 filed as an exhibit to the
Company's Report on Form 8-K dated October 7, 1997.
/13/ Incorporated by reference herein to the exhibit of the same number filed as
an exhibit to the Company's Annual Report on Form 10-K for period ended
December 31, 1996.
/14/ Incorporated by reference to the exhibit of the same number in the
Company's Annual Report of Form 10-K for the period ended December 31,
1997.
Page 12 of 14
<PAGE>
(b) Reports on Form 8-K.
Report on Form 8-K was filed with the Securities and Exchange Commission on
April 9, 1998. 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, 1998, as if entirely set forth herein.
Page 13 of 14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Anaheim,
State of California, on the 14th of August, 1998.
SAFEGUARD HEALTH ENTERPRISES, INC.
By: JOHN E. COX
------------------------------------------
JOHN E. COX,
President and Chief Operating Officer
By: THOMAS C. TEKULVE
------------------------------------------
THOMAS C. TEKULVE,
Vice President and Chief Financial Officer
Page 14 of 14
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<PAGE>
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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0
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