SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission only (as permitted by Rule
14a-b(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
SAFEGUARD HEALTH ENTERPRISES, INC.
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(Name of Registrant as Specified In Its Charter)
SAFEGUARD HEALTH ENTERPRISES, INC.
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(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] $125 per Exchange Act Rules O-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11. (Set forth the amount on
which the filing fee is calculated and state how it was determined
4) Proposed maximum aggregate value of transaction
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount previously paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE>
PROXY SAFEGUARD HEALTH ENTERPRISES, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
ANNUAL MEETING OF THE STOCKHOLDERS - NOVEMBER 19, 1999
The undersigned hereby nominates, constitutes and appoints Steven J.
Baileys, DDS, and Ronald I. Brendzel, and each of them individually, the
attorney, agent and proxy of the undersigned, with full power of substitution,
to vote all stock of SAFEGUARD HEALTH ENTERPRISES, INC. (the "Company") which
the undersigned is entitled to represent and vote at the 1999 Annual Meeting of
Stockholders of the Company to be held at the offices of the Company at 95
Enterprise, Aliso Viejo, California, 92656-2601, on Friday, November 19, 1999,
at 4:00 p.m., and at any and all adjournments or postponements thereof, as fully
as if the undersigned were present and voting at the meeting, as follows:
THE DIRECTORS RECOMMEND A VOTE "FOR" ITEMS 1, 2, 3 AND 4
1. ELECTION OF DIRECTORS
-----------------------
[ ] FOR [ ] WITHHOLD AUTHORITY
all nominees listed below (except to vote for all nominees
as marked to the contrary below) listed below
Election of the following nominees as directors: Steven J. Baileys,
D.D.S., John E. Cox, Ronald I. Brendzel, J.D., William E. McKenna,
Michael M. Mann, Ph.D., George H. Stevens, and Bradford M. Boyd, D.D.S.
(INSTRUCTIONS: To withhold authority to vote for any nominee, print that
nominee's name in the space provided below.)
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2. The approval of the issuance to CAI Partners and Company II, L.P., CAI
Capital Partners and Company II, L.P. and Jack R. Anderson (the
"Investors") of (i) $20,000,000 aggregate principal amount of the
Company's 8% Senior Notes together with detachable warrants to purchase
2,500,000 shares of the Company's Common Stock, and (ii) $20,000,000
aggregate principal amount of the Company's 8% Convertible Debentures;
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. The approval of an amendment to the Company's Certificate of
Incorporation to grant voting rights to the holders of the
Company's 8% Convertible Debentures;
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Ratification of Deloitte & Touche LLP as independent auditors for the
fiscal year ending December 31, 1999;
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. In their discretion, on such other business as may properly come before
the meeting or any adjournment thereof.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
<PAGE>
IMPORTANT-PLEASE SIGN AND DATE ON OTHER SIDE AND RETURN PROMPTLY
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE
STOCKHOLDER. WHERE NO DIRECTION IS GIVEN, SUCH SHARES WILL BE VOTED "FOR" THE
ELECTION OF THE DIRECTORS NAMED ON THE REVERSE SIDE OF THIS PROXY, AND "FOR"
PROPOSALS NUMBERED 2, 3 AND 4 ON THE REVERSE SIDE.
Date ______________, 1999
(Signature of stockholder)
Please sign your name exactly as it appears hereon. Executors,
administrators, guardians, officers of corporations and others signing in a
fiduciary capacity should state their full titles as such.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE URGED TO SIGN
AND RETURN THIS PROXY, WHICH MAY BE REVOKED AT ANY TIME PRIOR TO ITS USE.
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
95 ENTERPRISE
ALISO VIEJO, CALIFORNIA 92656
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held November 19, 1999
To the Stockholders of SafeGuard Health Enterprises, Inc.:
Notice is hereby given that the Annual Meeting of Stockholders of SafeGuard
Health Enterprises, Inc., a Delaware corporation (the "Company"), will be held
at the offices of the Company located at 95 Enterprise, Aliso Viejo, California,
on Friday, November 19, 1999 at 4:00 p.m. Pacific Standard Time, to consider and
vote on the following matters:
(1) The election of a Board of Directors;
(2) The approval of the issuance to CAI Partners and Company II, L.P.,
CAI Capital Partners and Company II, L.P. and Jack R. Anderson (the "Investors")
of (i) $20,000,000 aggregate principal amount of the Company's 8% Senior Notes
together with detachable warrants to purchase 2,500,000 shares of the Company's
Common Stock, and (ii) $20,000,000 aggregate principal amount of the Company's
8% Convertible Debentures, all pursuant to the terms and conditions of a
Debenture and Note Purchase Agreement, dated as of June 29, 1999, by and among
the Company and the Investors;
(3) The approval of an amendment to the Company's Certificate of
Incorporation to grant voting rights to the holders of the Company's 8%
Convertible Debentures;
(4) The ratification of the appointment of Deloitte & Touche, LLP as
independent auditors of the Company for the fiscal year ending December 31,
1999; and
(5) Such other business as may properly come before the meeting or any
adjournment thereof.
The Debenture and Note Purchase Agreement, the exhibits thereto and related
matters, including the proposed amendment to the Company's Certificate of
Incorporation are more fully described in the accompanying Proxy Statement.
The Board of Directors has fixed the close of business on October 19, 1999,
as the record date for the determination of stockholders entitled to notice of
and to vote at the Annual Meeting or any adjournment thereof. The Company's
stock transfer books will not be closed on such date.
The Board of Directors welcomes the personal attendance of Stockholders at
the meeting. HOWEVER, PLEASE SIGN AND RETURN THE ENCLOSED PROXY, WHICH YOU MAY
REVOKE AT ANY TIME PRIOR TO ITS USE, WHETHER OR NOT YOU EXPECT TO ATTEND THE
MEETING. A self-addressed, postage prepaid envelope is enclosed for your
convenience. Your proxy will not be used if you attend the meeting and choose
to vote in person.
By Order of the Board of Directors
Ronald I. Brendzel
Aliso Viejo, California Corporate Secretary
October 22, 1999
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
95 ENTERPRISE
ALISO VIEJO, CALIFORNIA 92656
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
To Be Held November 19, 1999
at 4:00 p.m.
This Proxy Statement and the enclosed form of proxy are being furnished in
connection with the solicitation by the Board of Directors of SafeGuard Health
Enterprises, Inc. (the "Company") of proxies to be voted at the annual meeting
of stockholders, which will be held on Friday, November 19, 1999 at 4:00 p.m.,
local time, at the Company's principal executive offices, located at 95
Enterprise, Aliso Viejo, California 92656, and any adjournments or postponements
thereof (the "Annual Meeting"). The purpose of the Annual Meeting and the
matters to be voted upon are set forth in the accompanying Notice of Annual
Meeting of Stockholders. This Proxy Statement, Notice of Annual Meeting of
Stockholders and the enclosed form of proxy are being mailed to all stockholders
of the Company on or about October 22, 1999.
The Board of Directors urges you to complete, sign, date and return the enclosed
proxy card in the accompanying envelope. If your shares are held in the name of
a bank, broker or other nominee, only your bank, broker or nominee can vote your
shares and only upon your specific instructions. Please contact the person
responsible for your account and instruct him or her to vote the enclosed proxy
card as soon as possible.
RECORD DATE; SHARES OUTSTANDING AND ENTITLED TO VOTE; QUORUM
Only holders of record of the Company's Common Stock at the close of business on
October 19, 1999 (the "Record Date") are entitled to notice of and to vote at
the Annual Meeting. As of the Record Date, there were 4,747,498 shares of
Common Stock issued, outstanding and entitled to vote, held of record by
approximately 800 stockholders. A majority, or 2,373,750 of these shares,
present at the Annual Meeting in person or represented by proxy will constitute
a quorum for the transaction of business at the Annual Meeting. Each
stockholder is entitled to one vote for each share of Common Stock held of
record as of the Record Date. Abstentions and broker non-votes are each
included for the purposes of determining whether there is a quorum present at
the Annual Meeting.
VOTE REQUIRED
The election of directors as described in Proposal 1 will be by a plurality of
the votes represented and voting at the Annual Meeting, and abstentions and
broker non-votes will have no effect in the election of directors.
The Company values the advice and consent of its stockholders and is seeking
their consent to the Debenture and Note Purchase Agreement and the transactions
contemplated thereby. The Company is seeking the affirmative vote of the
holders of a majority of shares of the Company's Common Stock represented and
voting at the Annual Meeting to approve the Debenture and Note Purchase
Agreement and the transactions contemplated by Proposal 2. Abstentions will
have the same effect as votes against Proposal 2, and brokers non-votes will
have no effect.
The Company seeks its stockholders' consent to amend the Company's Certificate
of Incorporation in Proposal 3. Pursuant to the Delaware General Corporation
Law, the affirmative vote of at least a majority of all shares of the Company's
Common Stock outstanding on the Record Date is required for Proposal 3 to be
adopted. Abstentions and broker non-votes will have the same effect as votes
against Proposal 3.
The affirmative vote of at least a majority of the shares of the Company's
Common Stock represented and voting at the Annual Meeting is required for
Proposal 4 to be adopted. Abstentions will have the same effect as votes
against Proposal 4, and broker non-votes will have no effect.
1
<PAGE>
VOTING OF PROXIES; REVOCABILITY OF PROXIES
All shares of Common Stock represented by proxies that are properly executed and
that are not revoked, will be voted at the Annual Meeting in accordance with the
instructions indicated on the proxies or, if no direction is indicated, FOR the
election of the nominees for director listed below; FOR approval of the
Debenture and Note Purchase Agreement and the transactions contemplated thereby;
FOR approval of the amendment to the Certificate of Incorporation; and FOR
approval of the appointment of Deloitte & Touche, LLP. Any stockholder who has
given a proxy may revoke it at any time before it is exercised at the Annual
Meeting by (i) delivering to the Secretary of the Company (by any means,
including facsimile) a written notice, bearing a date later than the proxy,
stating that the proxy is revoked, addressed to Corporate Secretary, SafeGuard
Health Enterprises, Inc., 95 Enterprise, Aliso Viejo, California, 92656,
facsimile number (949) 425-4586, (ii) signing and delivering a proxy relating to
the same shares and bearing a later date than the earlier proxy, or (iii)
attending the Annual Meeting and voting in person (although attendance at the
Annual Meeting will not, by itself, revoke a proxy). If a quorum is not
obtained or if fewer shares of Common Stock than the number required therefor
are voted in favor of approval of the proposals to be voted upon at the Annual
Meeting, the Board of Directors expects to postpone or adjourn the Annual
Meeting in order to permit additional time for soliciting and obtaining
additional proxies or votes, and at any subsequent reconvening of the Annual
Meeting, all proxies will be voted in the same manner as such proxies would have
been voted at the original Annual Meeting, except for any proxies which have
theretofore effectively been revoked or withdrawn.
SOLICITATION OF PROXIES AND EXPENSES
The cost of soliciting proxies will be borne by the Company. In addition to
soliciting proxies by mail, the directors, officers and employees of the Company
may solicit proxies from stockholders in person or by telephone, telegram,
letter or facsimile. These individuals will not receive additional compensation
for such solicitation services. The Company will reimburse brokers,
fiduciaries, custodians, and other nominees for reasonable out-of-pocket
expenses incurred in forwarding proxy solicitation materials to, and obtaining
instructions and authorizations relating to such materials from, beneficial
owners of the Company's Common Stock.
DEADLINES FOR RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders that are intended to be presented by such stockholders
at the next annual meeting of the Company's stockholder must deliver or mail a
timely notice to the Company, together with a brief description of the business
desired to be brought before the meeting. Pursuant to the Company's Bylaws, to
be timely, a stockholder's notice must be delivered to the Company not later
than the close of business on the 60th day and no earlier than the close of
business on the 90th day prior to the first anniversary of the preceding year's
annual meeting, except that in the event the date of the annual meeting is more
than 30 days before or more than 60 days after such anniversary date, notice by
the stockholder to be timely, must be delivered no earlier than the close of
business on the 90th day prior to such annual meeting and not later than the
close of business on the later of the 60th day prior to such annual meeting, or
the 10th day following the day on which public announcement of the date of such
meeting is first made by the Company. If the stockholder's notice is not timely
made, the Company may exercise discretionary voting with respect to such
stockholder proposal pursuant to authority conferred by proxies to be solicited
by the Company's Board of Directors and delivered to the Company in connection
with such meeting.
2
<PAGE>
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The Company is incorporated under the laws of the State of Delaware. It is
permissible under Delaware law for a corporation to have a classified board of
directors. The Company's Bylaws provide that the Company's Board of Directors
is divided into three classes, with one class of directors elected at each
annual meeting of stockholders for a three-year term and until their respective
successors are elected and qualified. However, since a majority of the
Company's Common Stock is held by persons with California addresses and the
Company has substantial business contacts with the State of California, the
Company is subject to Section 2115 of the California General Corporation Law.
As a result, certain legal matters, including provisions relating to the
election of directors, are governed by California law and not by Delaware law or
the Company's Bylaws. Under applicable California law, the Company is not
permitted to have a classified board and all directors of the Company are
required to be elected each year. Also, under California law, stockholders are
permitted to exercise cumulative voting rights. This means that, in the
election of directors, each stockholder is entitled to a number of votes equal
to the number of his or her shares of stock multiplied by the number of
directors to be elected. A stockholder may cast all of such votes for a single
nominee or distribute them among the nominees as he or she sees fit. However,
no stockholder is entitled to cumulate votes for a nominee unless the nominee's
name has been placed in nomination prior to the vote and the stockholder has
given notice at the meeting, prior to voting, of the stockholder's intention to
cumulate his or her votes. If any stockholder gives such notice, all
stockholders may cumulate their votes for nominees. The persons named in the
enclosed form of Proxy may, in their discretion, cumulate votes pursuant to the
proxies for any one or more nominees.
The Board of Directors has nominated for election as directors the seven persons
named below, all of whom are incumbent directors. All of the nominees have
indicated that they are able and willing to serve as directors.
If the Company continues to be subject to Section 2115 of the California General
Corporation Law at the time of the next annual meeting of stockholders, the
directors elected at the next annual meeting will hold office until the next
annual meeting and until their respective successors are elected and qualified.
However, if at the time of the next annual meeting the Company is no longer
subject to Section 2115, Steven J. Baileys, D.D.S., the Company's Chairman of
the Board and Chief Executive Officer, and George H. Stevens, a current
director, will be deemed to have been elected as Class III directors to serve
for a term of three years and until their successors are elected and qualified,
Mr. Brendzel, Dr. Mann and Dr. Boyd will be deemed to have been elected as Class
II directors to serve for a term of two years and until his successor is elected
and qualified, and Mr. Cox and Mr. McKenna will be deemed to have been elected
as Class I directors whose terms will expire at the next annual meeting and upon
the election and qualification of their successors.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF
EACH OF THE NOMINEES NAMED BELOW. Shares represented by proxies will be voted
FOR the election to the Board of Directors each of the nominees named below.
The Board of Directors has no reason to believe that any of its nominees will be
unable to serve as a director; however, if any nominee is unable or declines to
serve, proxies will be voted for any substitute nominee designated by the Board
of Directors.
The Investors will have the right to representation on the Company's Board of
Directors following the consummation of the transactions described in Proposal 2
below. The Investors intend to appoint Jack R. Anderson, Leslie B. Daniels and
James E. Buncher to the Company's Board of Directors. To the extent that any
such director designees are affiliated or associated with any of the Investors,
such persons may be deemed to have interests in such transactions that are in
addition to the interests of the Company's stockholders generally. When the
Investors' designees become directors, they will also be entitled to receive
nominal compensation and benefits to which other non-employee members of the
Company's Board of Directors are entitled. Upon their appointment, the
authorized number of directors shall be reduced to six and William E. McKenna,
Michael M. Mann, Ph.D., George H. Stevens and Bradford M. Boyd, D.D.S. will
resign as Directors of the Company.
Directors will be elected by a plurality of the votes of the shares of Common
Stock present in person or represented by proxy at the Annual Meeting and
entitled to vote on the election of directors. Any stockholder entitled to vote
for the election of directors at a meeting may nominate persons for election as
directors only if written notice of the stockholder's intent to make such
nomination is given, either by personal delivery or by United States mail,
postage prepaid and addressed to: Corporate Secretary, SafeGuard Health
Enterprises, Inc., 95 Enterprise, Aliso Viejo, California 92656, not earlier
than 90 days prior to the Annual Meeting and not later than the later of 60 days
prior to the Annual Meeting, or the 10th day following the date on which public
announcement of the date of the Annual Meeting was first made by the Company.
3
<PAGE>
Each such notice must set forth (a) the name and address of the stockholder who
intends to make the nomination and of the person or persons to be nominated; (b)
a representation that such stockholder is a holder of record of stock of the
Company entitled to vote at the Annual Meeting and intends to appear in person
or by proxy at the meeting to nominate the person or persons specified in the
notice; (c) a description of all arrangements or understandings between such
stockholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
such stockholder; (d) such other information regarding each nominee proposed by
such stockholder as would have been required to be included in a proxy statement
pursuant to the proxy rules of the Securities and Exchange Commission if such
nominee had been nominated or intended to be nominated by the Board of
Directors; and (e) the consent of each nominee to serve as a director of the
Company, if elected. The Chairman of the Annual Meeting may refuse to
acknowledge the nomination of any person not made in compliance with the
foregoing procedure.
The following information sets forth biographical information, as of September
30, 1999, for the nominees for director of the Company:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
- ------------------------- --- --------------------------------------------------------------
<S> <C> <C>
Steven J. Baileys, D.D.S. 45 Chairman of the Board of Directors and Chief Executive Officer
of the Company
John E. Cox 48 President and Chief Operating Officer Of the Company
Ronald I. Brendzel, J.D. 50 Senior Vice President, General Counsel and Secretary of the
Company
William E. McKenna 80 General Partner, MCK Investment Company
Michael M. Mann, Ph.D. 59 President, Blue Marble Development Group, Inc.
George H. Stevens 46 President, Belle Haven Marina, Inc.
Bradford M. Boyd, D.D.S. 48 Dentist, Bradford M. Boyd, D.D.S.
</TABLE>
Dr. Baileys is Chairman of the Board of Directors and Chief Executive Officer.
He was President from 1981 until March 1997, Chief Executive Officer since May
1995 and Chairman of the Board of Directors since September 1995. He was Chief
Operating Officer of the Company from 1981 until May 1995. From 1975 until
1981, Dr. Baileys served in a variety of executive and administrative capacities
with the Company. From September 30, 1996 through March 31, 1998, Dr. Baileys
was also an officer, director and fifty percent (50%) stockholder in the Islas
Professional Dental Corporation which operated a dental practice under contract
to a subsidiary of the Company. Dr. Baileys is licensed to practice dentistry
in the State of California. He is also a member of the Southern California
chapter of the Young Presidents' Organization. Dr. Baileys is the
brother-in-law of Mr. Brendzel.
Mr. Cox was appointed President and Chief Operating Officer and elected as a
director of the Company in March 1997. He was Executive Vice President and
Chief Operating Officer of the Company from May 1995 to March 1997. From 1985
to 1995, he served in various executive capacities for CIGNA Dental Health,
including Vice President, National Sales and Account Services, Western Regional
President, Chief Financial Officer, and Controller. From 1981 to 1985, Mr. Cox
served in various financial capacities for Southeastern Health
Services/Prucare-Prudential Insurance Company's group model HMO in Atlanta,
Georgia. He is one of the Company's representatives to the National Association
of Dental Plans, and served on the Board of Directors of the California
Association of Dental Plans.
Mr. Brendzel is Senior Vice President, General Counsel, Secretary and a director
of the Company. He was Chief Financial Officer from April 1988 to May 1996,
Vice President-Corporate Development from August 1980 to April 1986, and held
various executive and administrative positions with the Company from 1978 until
1980. Mr. Brendzel is a member of the California State Bar and is licensed to
practice law in the State of California. He is also a member of the California
Knox-Keene Health Care Service Plan Advisory Committee, which assists the
California Department of Corporations in regulating managed health care service
plans. Mr. Brendzel is also a former member of the Texas Health Maintenance
Organization Solvency Surveillance Committee which assists the Texas Department
of Insurance in regulating health maintenance organizations.
4
<PAGE>
Mr. McKenna has been a director of the Company since September 1983. Since
December 1977, Mr. McKenna has been a general partner of MCK Investment Company,
a private investment company. Mr. McKenna was Chairman of the Board of
Directors of Technicolor, Inc. from 1970 to 1976 and was formerly Chairman of
the Board of Directors and Chief Executive Officer of Hunt Foods & Industries,
Inc. and its successor, Norton Simon, Inc. From 1960 to 1967, Mr. McKenna was
associated with Litton Industries, Inc. as a director and in various executive
capacities. He is currently a director of California Amplifier, Inc., Midway
Games, Inc., Drexler Technology Company and WMS Industries, Inc.
Dr. Mann has been a director of the Company since May 1987. He is also
Chairman, President and Chief Executive Officer of Blue Marble Development
Group, Inc., and Chairman of Blue Marble Partners, international corporate
development and consulting firms, and an Adjunct Professor of Industrial and
Systems Engineering at the University of Southern California. He also serves as
a member of the Board of Examiners for the Malcolm Baldrige National Quality
Award. During the period from September 1987 to July 1988, Dr. Mann was a
Senior Consultant of Arthur D. Little, Inc. From August 1986 until September
1987, Dr. Mann was a partner of Mann, Kavanaugh, Chernove & Associates, a
business development firm. He was President, Chief Executive Officer and a
director of Helionetics, Inc., a defense, energy and signal information
processing company, from December 1984 to July 1986, and Executive Vice
President from April to December 1984. Dr. Mann is currently a director of
Datum, Inc. and Management Technology, Inc.
Mr. Stevens has been a director of the Company since May 1989. Since 1982, he
has been President of Belle Haven Marina, Inc., a privately held leisure and
recreational organization located in Virginia. He is also President of Kingfish
Company, a privately held corporation which is engaged in the business of
chartering pleasure yachts in the mid Atlantic region. Mr. Stevens is also the
owner of Mariner Sailing School located in Virginia. Mr. Stevens' combined
organization is the largest operator of recreational vessels in the Washington
D.C. area.
Dr. Boyd has been a director of the Company since May 1995. He is licensed to
practice dentistry in the State of California and since 1983, has been the sole
proprietor of Bradford M. Boyd, D.D.S. located in Lancaster, California. Dr.
Boyd also is a private investor. He is a member of the American Dental
Association, California Dental Association, San Fernando Valley Dental Society
and an officer of Dental Foundation of California. Dr. Boyd is also a member of
the Board of Directors of High Desert Children's Dental, a charity organization
providing free dental services to underprivileged children.
Jack R. Anderson is a director-nominee who will be appointed to the Board of
Directors upon the closing of the transactions described in Proposal 2. Mr.
Anderson, age 73, has been President of Calver Corporation, a health care
consulting and investment firm, and a private investor, since 1982. Mr.
Anderson currently serves on the board of directors of PacificCare Health
Systems, Inc., Horizon Health Corporation and Genesis Health Ventures, Inc.
Leslie B. Daniels is a director-nominee who will be appointed to the Board of
Directors upon the closing of the transactions described in Proposal 2. Mr.
Daniels, age 52, was a founder of CAI in 1989 and has been a principal with that
entity since that time. Mr. Daniels has had substantial experience investing as
a principal in the health care industry. Over the last 20 years, Mr. Daniels
has invested in numerous start-up, venture capital and buyout transactions in
various sectors across the health care spectrum, including health maintenance
organizations, hospitals, nursing homes, cancer treatment centers, psychiatric
and substance abuse services, generic drugs, pre-clinical and clinical contract
research organizations and pharmacy benefit companies. Mr. Daniels was a past
Chairman of Zenith Laboratories, Inc. and has been a director of Ivaz Corp.,
Comprecare, Inc. and MIM Corp.
James E. Buncher is a director-nominee who will be appointed to the Board of
Directors upon the closing of the transactions described in Proposal 2. Mr.
Buncher, age 62, has been a private investor since September 1997. Mr. Buncher
was also President and Chief Executive Officer of Community Dental Services,
Inc., a corporation operating dental practices in California, from October 1997
until July 1998. Mr. Buncher was the President of Health Plans Group of Value
Health, Inc., a national specialty managed care company, from September 1995 to
September 1997 and served as Chairman, President and Chief Executive Officer of
Community Care Network, Inc., a Value Health Subsidiary, from August 1992 to
September 1997, Value Health was acquired by a third party and Mr. Buncher
resigned his positions with that company. He currently serves on the board of
directors of Horizon Health Corporation and Alliance Imaging, Inc.
5
<PAGE>
THE BOARD OF DIRECTORS AND COMMITTEES
The Board of Directors conducted five meetings during fiscal year 1998. All of
the persons who were directors of the Company during fiscal year 1998, and who
are currently directors of the Company, attended at least seventy-five percent
of the aggregate of: (i) the total number of meetings of the Board of
Directors, and (ii) the total number of meetings held by the committee on which
they served during fiscal year 1998.
Compensation of Directors.
Directors who were not otherwise employed by the Company were paid an annual fee
of $15,000 during fiscal year 1998. Each non-employee Board member, pursuant to
the Company's Automatic Option Grant program, received an automatic option grant
in November 1998 to purchase 4,000 shares of Common Stock under its Stock Option
Plan (the "Plan") with an exercise price of $5.00 per share, the market price of
the Common Stock on the grant date. Each option has a maximum term of ten years
and will become exercisable for all of the option shares upon the optionee's
completion of one year of continuous Board of Directors service measured from
the grant date.
Audit Committee.
The Audit Committee is composed of Messrs. McKenna, Stevens, and Drs. Mann and
Boyd, and is chaired by Mr. McKenna. The Audit Committee met three times in
fiscal year 1998. The functions performed by the Audit Committee included
recommendations to the Board of Directors regarding the selection of independent
accountants to serve the Company for the ensuing year, reviewing with the
independent accountants and management the general scope and results of the
Company's annual audit, the fees charged by the independent accountants and
other matters relating to internal control systems. In addition, the Audit
Committee is responsible for reviewing and monitoring the performance of
non-audit services by the Company's auditors and for recommending the engagement
or discharge of the Company's independent accountants.
Nominating Committee.
The Nominating Committee consists of Messrs. McKenna, Stevens, and Drs. Mann and
Boyd, and is chaired by Dr. Mann. The primary responsibilities of the
Nominating Committee are to consider and make recommendations to the full Board
of Directors of candidates to serve as directors of the Company. The Nominating
Committee met in March 1999 and recommended that all current board members be
recommended to serve as directors of the Company. All members of the Nominating
Committee attended this meeting. The Nominating Committee will not consider
nominees recommended by stockholders.
Compensation and Stock Option Committee.
The Company's Compensation and Stock Option Committee is composed of Messrs.
McKenna and Stevens, and Drs. Mann and Boyd, and is chaired by Mr. McKenna. All
members of this Committee are non-employee directors. The Committee is
responsible for reviewing the performance of the officers of the Company and,
subject to any existing employment agreements, establishing the annual
compensation for all officers, including salary and perquisites. The Committee
is also primarily responsible for the administration of the Plan. The
Compensation and Stock Option Committee met one time during fiscal year 1998.
CERTAIN TRANSACTIONS
On September 30, 1996, the Company sold to Islas Professional Dental Corporation
("Islas"), a dental practice (the "Practice") owned by a subsidiary of the
Company in the aggregate amount of $1,131,000. Steven J. Baileys, D.D.S., the
Company's Chairman of the Board of Directors and Chief Executive Officer, owned
a 50% interest in Islas, which secured two promissory notes from a subsidiary of
the Company in the amount of the purchase price. Said notes are payable in
equal monthly installments over a 30 year period and a five year period,
respectively, and bear interest at eight and one half percent. The Practice is
also under contract to provide services to a subsidiary of the Company. During
fiscal year 1998, the Company paid Islas $205,262.57 under said contract. The
sale of the Practice was reviewed and approved by the independent members of the
Board of Directors on September 27, 1996, which took into consideration
6
<PAGE>
information provided to it by the Company's independent accountants and outside
counsel concerning the value of the Practice as an ongoing business owned by the
Company contrasted to being owned by an independent dentist, the sale price of
dental practices of similar size and scope, and the sale of other dental
practices owned by the Company to unrelated parties. The action of the
independent members of the Board of Directors in approving the sale of the
Practice was ratified by the full Board of Directors of the Company on September
27, 1996. The Practice was sold to an unrelated third party effective on March
31, 1998, for the assumption of the obligation referred to above.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the beneficial ownership of the Common Stock of
the Company as of September 30, 1999, by each director, each executive officer
named in the Summary Compensation Table below and all current directors and
officers as a group. All shares of Common Stock are subject to the named
person's sole voting and investment power, except where otherwise indicated.
<TABLE>
<CAPTION>
Shares Beneficially APPROXIMATE PERCENT
Name Owned (1) OF CLASS
- ----------------------------------------------- -------------------- -------------------
<S> <C> <C>
Steven J. Baileys, D.D.S. (2) 1,982,099 41.8
Ronald I. Brendzel, J.D. (3) 136,573 2.9
John E. Cox (4) 85,000 1.8
William E. McKenna (5) 36,500 *
Michael M. Mann, Ph.D. (6) 29,000 *
George H. Stevens (7) 24,350 *
Herb J. Kaufman, D.D.S. (8) 16,768 *
Bradford M. Boyd, D.D.S. (9) 11,080 *
Kenneth E. Keating (10) 5,833 *
All current directors and officers as a group 2,346,202 49.4
(12 persons)
</TABLE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to those persons who, to
the Company's knowledge, beneficially owned five percent or more of Common Stock
as of September 30, 1999, except with respect to FMR Corp., Brinson Partners,
Inc., and Dimensional Fund Advisors, Inc., which are stated as of December 31,
1998, based on filings made with the Securities and Exchange Commission. For
purposes of this Proxy Statement, beneficial ownership of securities is defined
in accordance with the rules and regulations of the Securities and Exchange
Commission and generally means the power to vote or dispose of securities
regardless of any economic interest therein.
- -------------------------
* Less than one percent (1%).
(1) Some of the stockholders included in this table reside in states having
community property laws under which the spouse of a stockholder in whose
name securities are registered may be entitled to share in the management
of their community property which may include the right to vote or dispose
of such shares, and includes options to purchase 334,834 shares of Common
Stock exercisable as of April 1, 1999, or within 60 days thereafter.
(2) The shares indicated include options to purchase 183,332 shares of Common
Stock, 700,767 shares of Common Stock representing 14.8% owned by the
Baileys Family Trust, 303,000 shares of Common Stock representing 6.4% held
in various trusts for relatives of Dr. Baileys, for both of which Dr.
Baileys is Trustee and for which Dr. Baileys has sole power to vote the
securities, but for both of which Dr. Baileys disclaims beneficial
ownership, and 150,000 shares of Common Stock representing 3.2% held by the
Alvin and Geraldine Baileys Foundation, for which Dr. Baileys is an officer
and director and for which Dr. Baileys has shared power to vote the
securities, but for which Dr. Baileys disclaims beneficial ownership. In
addition, the shares owned by Dr. Baileys directly and the shares owned by
the Baileys Family Trust are subject to a voting agreement with the
Investors (see Proposal 2 - Stockholder Agreements) and if the transactions
described in Proposal 2 are concluded, the shares owned by Dr. Baileys
directly will be subject to certain voting and restrictive agreements (see
Proposal 2 - Agreement Among Investors).
(3) Includes options to purchase 25,000 shares of Common Stock.
(4) Includes options to purchase 75,000 shares of Common Stock.
(5) Includes options to purchase 29,000 shares of Common Stock.
(6) Represents options to purchase 29,000 shares of Common Stock.
(7) Includes options to purchase 24,000 shares of Common Stock.
(8) Includes options to purchase 16,666 shares of Common Stock.
(9) Includes options to purchase 10,000 shares of Common Stock.
(10) Represents options to purchase 5,833 shares of Common Stock.
7
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE AMOUNT AND NATURE PERCENT
NAME OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (1) OF CLASS
- ---------------------------------- ------------------------------ --------
<S> <C> <C>
Steven J. Baileys, D.D.S. (2) 1,982,099 41.8
Baileys Family Trust (3) 700,767 14.8
FMR Corp. (4) 462,700 9.8
Brinson Partners, Inc. (5) 403,755 8.5
Dimensional Fund Advisors, Inc. (6) 288,100 6.1
Donald W. Burton (7) 268,200 5.6
All Principal Stockholders 3,404,854 71.7
</TABLE>
Jack R. Anderson, an "Investor" as defined in Proposal 2 of this proxy
statement, filed a Schedule 13D with the SEC on July 8, 1999 disclosing
ownership of an aggregate of 5,235,000 shares of Common Stock of the Company,
which includes 5,000,000 shares underlying securities to be issued pursuant to
the Purchase Agreement. Excluding such 5,000,000 shares, according to the
Schedule 13D, Mr. Anderson beneficially owns 235,000 shares of Common Stock, or
4.95% of the issued and outstanding shares of Common Stock of the Company. Mr.
Anderson disclaimed beneficial ownership of all shares except for the 235,000
shares currently owned and 625,000 shares underlying the securities to be issued
to Mr. Anderson pursuant to the Purchase Agreement.
- -------------------------
(1) Except as otherwise stated herein, the persons and entities named in the
table have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them, subject to community
property laws where applicable, and include all shares held of record on
September 30, 1999, and shares subject to options outstanding and
exercisable within 60 days thereafter.
(2) Steven J. Baileys, D.D.S., an officer and director of the Company, located
at 95 Enterprise, Aliso Viejo, California 92656, has sole voting and
investment power with respect to the shares indicated. The shares indicated
include options to purchase 183,332 shares of Common Stock, 700,767 shares
of Common Stock representing 14.8% owned by the Baileys Family Trust,
303,000 shares of Common Stock representing 6.4% held in various trusts for
relatives of Dr. Baileys, for both of which Dr. Baileys is Trustee and for
which Dr. Baileys has sole power to vote the securities, but for both of
which Dr. Baileys disclaims beneficial ownership, and 150,000 shares of
Common Stock representing 3.2% held by the Alvin and Geraldine Baileys
Foundation, for which Dr. Baileys is an officer and director, and for which
Dr. Baileys has shared power to vote the securities, but for which Dr.
Baileys disclaims beneficial ownership. In addition, the shares owned by
Dr. Baileys directly and the shares owned by the Baileys Family Trust are
subject to a voting agreement with the Investors (see Proposal 2 -
Stockholder Agreements) and if the transactions described in Proposal 2 are
concluded, the shares owned by Dr. Baileys directly will be subject to
certain voting and restrictive agreements (see Proposal 2 - Agreement Among
Investors).
(3) The Baileys Family Trust of which Steven J. Baileys, D.D.S., is Trustee,
owns 707,767 shares of the Company's Common Stock and has sole voting and
investment power with respect to the shares indicated. The shares indicated
do not include 303,000 shares of Common Stock representing 6.4% held in
various trusts for relatives of Dr. Baileys, for which Dr. Baileys is
Trustee and for which Dr. Baileys has sole power to vote the securities,
but for which Dr. Baileys disclaims beneficial ownership, and 150,000
shares of Common Stock representing 3.2%, held by the Alvin and Geraldine
Baileys Foundation, for which Dr. Baileys is an officer and director, and
for which Dr. Baileys has shared power to vote the securities, but which
Dr. Baileys disclaims beneficial ownership. In addition, the shares owned
by Dr. Baileys directly and the shares owned by the Baileys Family Trust
are subject to a voting agreement with the Investors (see Proposal 2 -
Stockholder Agreements) and if the transactions described in Proposal 2 are
concluded, the shares owned by Dr. Baileys directly will be subject to
certain voting and restrictive agreements (see Proposal 2 - Agreement Among
Investors). The address of the Baileys Family Trust is P.O. Box 9109,
Newport Beach, California 92658. A Schedule 13G dated February 10, 1999,
was filed with the Securities and Exchange Commission with respect to such
shares.
(4) These securities are owned by various individual and institutional
investors including Fidelity Low-Priced Stock Fund, which owns the shares
indicated, for which Fidelity Management and Research Company ("Fidelity")
serves as investment advisor with power to direct investments and/or sole
has the power to vote the securities. For purposes of the reporting
requirements of the Securities Exchange Act of 1934, Fidelity is deemed to
be a beneficial owner of such securities; however, Fidelity expressly
disclaims that it is, in fact, the beneficial owner of such securities. The
address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts 02109.
A Schedule 13G dated February 12, 1999, was filed with the Securities and
Exchange Commission with respect to such shares.
(5) Brinson Partners, Inc. ("BPI"), a wholly owned subsidiary of Brinson
Holdings, Inc. ("BHI") and Brinson Trust Company ("BTC"), a wholly owned
subsidiary of BPI, 209 South La Salle, Chicago, Illinois 60604-1295 have
the sole voting and dispositive power of the shares indicated. A Schedule
13G dated February 3, 1999, was filed with the Securities and Exchange
Commission with respect to such shares.
(6) These securities are owned by four institutional investment companies for
which Dimensional Fund Advisors, Inc. ("Dimensional") serves as investment
advisor with power to direct investments and/or has the sole power to vote
the securities. For purposes of the reporting requirements of the
Securities Exchange Act of 1934, Dimensional is deemed to be a beneficial
owner of such securities; however Dimensional expressly disclaims that it
is, in fact, the beneficial owner of such securities. The address of
Dimensional Fund Advisors, Inc. is 1299 Ocean Avenue, 11th Floor, Santa
Monica, California 90401. A Schedule 13G dated February 11, 1999, was filed
with the Securities and Exchange Commission with respect to such shares.
(7) These securities are owned by the Burton Partnership, a limited partnership
of which Donald W. Burton is general partner and has the sole voting and
dispositive power of the shares indicated. The address of the Burton
Partnership is P.O. Box 4643, Jackson, Wyoming 88301. A Schedule 13D dated
June 30, 1999, was filed with the Securities and Exchange Commission with
respect to such shares.
8
<PAGE>
Leslie B. Daniels, a principal of CAI Partners & Company II, L.P. and CAI
Capital Partners & Company II, L.P., also "Investors" as defined in Proposal 2
of this proxy statement, filed a Schedule 13D with the SEC on July 8, 1999. In
the Schedule 13D, Mr. Daniels disclosed ownership of an aggregate of 5,037,155
shares, including 5,000,000 shares underlying securities to be issued pursuant
to the Purchase Agreement. Excluding such 5,000,000 shares, according to the
Schedule 13D, Mr. Daniels beneficially owns 37,155 shares of Common Stock, or
0.78% of the issued and outstanding shares of Common Stock of the Company. Mr.
Daniels disclaimed beneficial ownership of 625,000 shares underlying the
securities to be issued to Mr. Anderson pursuant to the Purchase Agreement.
COMPENSATION OF EXECUTIVE OFFICERS
The following table discloses compensation received by the Company's Chief
Executive Officer and the four remaining most highly paid executive officers who
received total compensation in excess of $100,000 for the previous years ended
December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation
Compensation Awards
--------------------------------------------
Other Stock
Name and Principal Position Year Salary ($) Bonus ($) ($)(1) Options
- ---------------------------------------- ---- ---------- --------- ------ -------
<S> <C> <C> <C> <C> <C>
Steven J. Baileys, D.D.S., 1998 400,000 * 1,260 70,000
Chairman of the Board of Directors and 1997 400,000 * 1,260 50,000
Chief Executive Officer 1996 400,000 * 1,260 25,000
John E. Cox, President and Chief 1998 275,000 * * 25,000
Operating Officer 1997 258,221 * * 25,000
1996 200,000 * * 25,000
Ronald I. Brendzel, J.D., Senior 1998 185,000 * 900 5,000
Vice President, General Counsel 1997 185,000 * 900 5,000
and Secretary 1996 185,000 * 900 10,000
Herb J. Kaufman, D.D.S., Senior Vice 1998 165,530 * 249 7,500
President and Chief Dental Officer (2) 1997 153,907 * 249 25,000
Kenneth E. Keating, Western Regional 1998 150,000 * * 5,000
Vice President 1997 150,000 * * 2,500
1996 170,823 * * 7,500
</TABLE>
- -------------------------
* None.
(1) Represents premiums paid for life insurance policies for the named
individuals.
(2) Joined the Company on January 5, 1997.
9
<PAGE>
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
The Company has written employment agreements with Steven J. Baileys, D.D.S.,
John E. Cox, Ronald I. Brendzel, J.D., and Herb J. Kaufman, D.D.S. The
employment agreements for Dr. Baileys, Mr. Cox and Mr. Brendzel are for a term
through May 31, 2000, and provide for an annual salary of $400,000, $275,000,
and $185,000, respectively. The employment agreement for Dr. Kaufman is for a
term through January 5, 2002, and provides for an annual salary of $170,000.
The Company may terminate the agreements for cause. The employee may terminate
his agreement for any reason. Should there be a change in control of the
Company in that more than 50% of the Company's then outstanding Common Stock is
purchased by a then non-existing stockholder, and newly elected directors
constitute a majority of the Company's Board of Directors, the employee, at his
option, may terminate his employment. In such event, the Company would be
obligated to pay Dr. Baileys, Mr. Cox and Mr. Brendzel an amount equal to three
times, and in the case of Dr. Kaufman, one times the employee's then current
salary and bonus, paid on or before the fifth day following such change in
control, along with the continuance of all employee benefits for the length of
the employment agreement. It is a condition to closing of the Debenture and
Note Purchase Agreement described in Proposal 2 that each of Messrs. Cox and
Brendzel, and Drs. Baileys and Kaufman, have agreed to waive their rights with
respect to any change of control which may be deemed to occur as a result of the
issuance of the securities described in Proposal 2.
STOCK OPTIONS
The following table contains information concerning the grant of stock options
during the fiscal year ended December 31, 1998, to the named executives:
<TABLE>
<CAPTION>
STOCK OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation
Individual Grants for Option Term(1)
- -----------------------------------------------------------------------------------------------
Percent of
Number of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees Base Price Expiration
Name Granted(#)(2) In Fiscal Year ($/Share) Date 5%($) 10%($)
- ------------------------- ------------ -------------- --------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Steven J. Baileys, D.D.S. 70,000 39.2 10.038 3/27/03 194,132 428,981
John E. Cox 25,000 13.1 9.125 3/27/08 143,467 363,572
Ronald I. Brendzel, J.D. 5,000 2.6 9.125 3/27/08 28,693 72,714
Herb J. Kaufman, D.D.S. 7,500 3.9 9.125 3/27/08 43,040 109,072
Kenneth E. Keating 5,000 2.6 9.125 3/27/08 28,693 72,714
</TABLE>
- -------------------------
(1) Potential realizable value is based on an assumption that the market price
of the Common Stock of $3.3125 as of December 31, 1998, appreciates at the
stated rate, compounded annually, from the date of grant to the expiration
date. These values are calculated based on requirements promulgated by the
Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price appreciation. Actual gains, if any, are
dependent on the future market price of the Company's Common Stock.
(2) All options were granted under the Company's Stock Option Plan. The options
described in this column vest in equal one-third (1/3) amounts over a three
year period following the date of grant. Unvested options terminate upon
the employee's termination from the Company, for any reason.
10
<PAGE>
STOCK OPTION EXERCISES AND HOLDINGS
The following information is with respect to the named executive officers and
indicated groups concerning the exercise of options during fiscal year December
31, 1998, and unexercised options held as of December 31, 1998.
<TABLE>
<CAPTION>
AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
Shares
Acquired Value Number of Securities Value of
on Exercise Realized Underlying Unexercised Unexercised In-the- Money
Name (#) ($) Options at FY-End(#) Options at FY-End($)(1)(2)
- ------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Steven J. Baileys, D.D.S. * * 228,333 111,667 0 0
John E. Cox * * 75,000 50,000 0 0
Ronald I. Brendzel, J.D. * * 33,333 11,667 0 0
Herb J. Kaufman, D.D.S. * * 8,333 24,167 0 0
Kenneth E. Keating * * 5,833 9,167 0 0
All executive officers as a group * * 379,833 237,667 0 0
(10) persons)
All directors who are not executive * * 81,333 26,667 0 0
officers as a group (4 persons)
All employees who are not executive * * 15,233 37,067 0 0
officers as a group (29 persons)
</TABLE>
REPORT OF COMPENSATION AND STOCK OPTION COMMITTEE ON EXECUTIVE COMPENSATION
Compensation Philosophy.
The Compensation and Stock Option Committee of the Board of Directors of the
Company (the "Committee") consists of four independent directors who are neither
employees nor officers of the Company. The Committee reviews the Company's
executive compensation program and policies, determines the compensation of the
Company's Chief Executive Officer ("CEO"), and reviews and approves the CEO's
recommendations for the compensation of the other senior executive officers of
the Company.
The Committee's philosophy regarding compensation of the Company's senior
management is to link rewards to financial and operational performance, to
encourage creation of stockholder value and to achieve the Company's strategic
goals and objectives. Through its executive compensation policies, the
Committee seeks to attract, retain and motivate highly qualified executives who
will contribute to the Company's success. Thus, the Committee believes the
Company's compensation arrangements must remain competitive with those offered
by other companies of similar size and scope of operations, including other
publicly and privately-held managed dental care organizations. To achieve these
goals, the executive compensation program consists of three primary components
which, taken together, constitute a flexible and balanced method of establishing
total compensation for senior management. These components are: (i) base
salary which reflects individual performance and contribution to the Company,
(ii) discretionary annual bonus awards payable in cash and tied to the Company's
achievement of financial targets, and (iii) long-term stock based incentive
awards designed to strengthen the mutuality of interests between the Executive
Officers and the Company's stockholders. Option grants to Executive Officers
are made under the Plan by the Committee.
- -------------------------
* None.
(1) Assumes a price per share of Common Stock of $3.3125 as of December 31,
1998. Gains are reported net of the option exercise price, but before any
taxes associated with exercise. Actual gains, if any, on stock option
exercises are dependent on future performance of the Common Stock, as well
as the optionee's continued employment throughout the vesting period.
(2) No stock appreciation rights were outstanding at the end of the 1998 fiscal
year or exercised during that year.
11
<PAGE>
Cash Based Compensation.
Salary. Consistent with the Company's position, the Committee's approach to
base compensation is to offer competitive salaries in comparison with market
practices. Salary decisions are based on an annual review with the CEO,
considering the decision-making responsibilities of each position and the
experience, work performance, and team-building skills of position incumbents,
subject to existing employment agreements. During 1997, the Committee
determined that the salary of the CEO and the four other most highly compensated
individuals would remain unchanged for 1998, with the exception of Herb J.
Kaufman, D.D.S., the Company's Senior Vice President and Chief Dental Officer,
whose compensation was increased effective April 1, 1998, to $170,000 annually,
commensurate with his position as a Senior Vice President of the Company.
The cash salary of each of the other Executive Officers is determined by the
individual's performance and past and potential contributions to the Company.
This particular component of executive compensation is not affected to any
significant extent by the Company's performance factors. However, the Committee
believes that the Company's use of the Plan as the main supplement to base
salary results in the compensation of its Executive Officers and other key
employees being related to the Company's performance.
The Committee did not provide for any qualifying compensation to be paid to any
Executive Officer for deductibility under Section 162(m) of the Internal Revenue
Code for 1998. The Committee has not provided for such qualifying compensation
and does not intend to provide for such qualifying compensation to its Executive
Officers in the foreseeable future.
Bonuses. The Committee has in the past and may in the future, authorize the
payment of discretionary bonus compensation based upon an assessment of an
individual's exceptional contributions to the Company. Bonuses are based upon
the overall achievement in increasing the Company's revenue, its level of
profitability and increasing the number of members covered by the benefit plans
provided by the Company. In 1998, the Committee did not authorize any bonus to
be paid to any Executive Officer.
As a general matter, the Committee endorses the philosophy that executive
compensation should reflect company performance. The Company, to date, has not
yet adopted any compensation plans which are tied directly to Company
performance by formula.
Equity Based Compensation.
The Executive Officers have, from time to time, received option grants under the
Plan. The purpose of the Plan is to provide such individuals with additional
incentives to maximize stockholder value. The Plan also utilizes vesting
periods to encourage key employees to continue in the employ of the Company.
The size of the option grant to each Executive Officer is set at a level which
is intended to create a meaningful opportunity for stock ownership based upon
the individual's current position with the Company and may also be based in part
upon Company performance factors such as earnings per share and revenue growth.
However, the extent to which these latter factors are taken into consideration
will vary from individual to individual at the Committee's sole discretion. In
1998, the Committee granted stock options to Executive Officers as listed in the
table set forth on Page 8.
Chief Executive Officer Compensation.
The process of determining the compensation for the Company's CEO and the
factors taken into consideration in such determination are generally the same as
the process and factors used in determining the compensation of all of the
executive officers of the Company, subject to an existing employment agreement.
The Committee considers both the Company's overall performance and the CEO's
individual performance. Bonuses for the CEO are based upon the overall
achievements in increasing the Company's revenue, its level of profitability,
and increasing the number of members covered by the benefit plans provided by
the Company. In 1998, the Company did not pay the CEO a bonus. Dr. Baileys'
salary was determined based on an analysis of salaries paid by peer companies
and on Dr. Baileys' knowledge, experience and individual performance.
12
<PAGE>
The forgoing report has been furnished by the Compensation and Stock Option
Committee of the Board of Directors of the Company.
William E. McKenna, Chairman
Michael M. Mann, Ph.D.
George H. Stevens
Bradford M. Boyd, D.D.S.
COMPENSATION AND STOCK OPTION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION
The following persons served on the Compensation and Stock Option Committee of
the Company's Board of Directors during fiscal year 1998: William E. McKenna,
Michael M. Mann, Ph.D., George H. Stevens and Bradford M. Boyd, D.D.S. None of
these persons is a current or former officer or employee of the Company. There
are no "interlocks," as defined by the Securities and Exchange Commission, with
respect to any member of the Compensation and Stock Option Committee.
PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the Company's
cumulative total stockholder return on stock with: (i) the cumulative total
return of the Nasdaq market index, and (ii) the cumulative total return of the
National Association of Securities Dealers Health Services Industry Index over
the five year period from January 1, 1993 through December 31, 1998.
[GRAPHIC OMITED]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
---- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
SFGD 100 67.3 84.5 127.3 98.2 24.1
NASDAQ 100 114.8 138.2 158.7 208.7 292.8
HEATLH SRVC 100 115.4 136.3 136.4 139.0 118.7
</TABLE>
The graph shall not be deemed incorporated by any general statement
incorporating by reference this Proxy Statement into any filing under the
Securities Act or under the Exchange Act, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
COMPLIANCE WITH SECTION 16(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of
Common Stock, to file initial reports of ownership and reports of changes in
ownership with the Securities and Exchange Commission and the National
Association of Securities Dealers. Officers, directors and greater than ten
percent beneficial owners are required by the Securities and Exchange Commission
regulations to furnish the Company with copies of all Section 16(a) forms they
13
<PAGE>
file. Specific due dates for these reports have been established and the
Company is required to disclose in this Proxy Statement any late filings during
the most recent fiscal year. To the Company's knowledge, based solely on its
review of the copies of such reports required to be furnished to the Company
during the most recent fiscal year, all of these reports were timely filed with
the Securities and Exchange Commission and the National Association of
Securities Dealers.
14
<PAGE>
PROPOSAL NO. 2
APPROVAL OF DEBENTURE AND NOTE PURCHASE AGREEMENT
BACKGROUND
The Company has been generally profitable from 1988 to 1996, before reporting a
net loss of $2,349,000 or $0.50 per share for the year ended December 31, 1997.
For the year ended December 31, 1998, the Company experienced a net loss of
$11,094,000 or $2.35 per share. The majority of that loss was related to the
Company's previously discontinued general and orthodontic dental offices,
resulting from a reduction in the value of the promissory notes received by the
Company in connection with the sale of those dental offices. Also contributing
to such loss were charges related to the reduction of value of the Company's
former headquarters building in Anaheim, California, severance costs for
employees who left the Company in the fourth quarter as a result of the
Company's streamlining efforts, and expenses relating to the reduction of the
Company's accounts receivable balances which are identified from the Company's
data systems conversions, which occurred in the fourth quarter of 1998. As a
result of the losses incurred by the Company in 1998, it was not within its
covenant compliance requirements for its senior noteholders and line of credit
lender. Commencing in early 1998, the Company began negotiating with the
noteholders and lender to restructure its credit facilities.
In June 1998, the Company determined that it would be in the best interests of
the Company and its stockholders to consider the possibility of seeking and
receiving an equity investment from an unaffiliated third party. During the
next several months, the Company began having discussions with several
investment funds and a subsidiary of a large nationally known industrial
conglomerate which has interests in insurance and related consumer products.
About that same time the Company had discussions with Jack R. Anderson, a well
known health care consultant and investor who was familiar with the Company and
who at one time during the past ten years owned shares of the Company's Common
Stock, and CAI Partners and Company II, L.P., through its principal, Leslie B.
Daniels.
In September 1998, discussions with these entities became more serious and the
Company determined that it would be in the best interests of the Company and its
stockholders to hire an investment banking firm to assist in the process. After
interviewing several firms, the Corporation selected Trenwith Securities, Inc.
("Trenwith") of Newport Beach, California and the Company entered into a
contract for investment banking services with Trenwith in October 1998. As
consideration for services rendered in connection with this proposed
transaction, the Company agreed to pay Trenwith a fee of $250,000.
Discussions with all parties continued when in November 1998, Mr. Anderson
through a company he controlled, Calver Corporation ("Calver") and CAI Advisors,
made a proposal to take the Company private in a leveraged buy-out pursuant to
an offer made in a Letter of Intent dated November 6, 1998. Since the leveraged
buy-out included participation by management in the ownership of the new
privately held company, the Board of Directors created a Special Committee
consisting of the four non-employee directors of the Company to consider the
proposal set forth by Mr. Anderson and CAI Advisors. The Special Committee
utilized the services of Trenwith and outside legal counsel and after due
consideration, determined that the offer by Mr. Anderson contained an
unacceptable number of conditions for the Special Committee to approve,
including a condition whereby the purchaser's group could terminate the
transaction if unable to secure financing. In late November 1998, the Special
Committee made a recommendation to the full Board of Directors that the offer
made by Mr. Anderson and CAI Advisors as set forth in the Letter of Intent be
rejected.
During this period of time, the Company ascertained that as a result of lower
than expected operating results for the third and fourth quarter of 1998, the
Company would not be in compliance with certain of its loan covenants with its
senior note holder, John Hancock Mutual Life Insurance Company ("Hancock") and
its line of credit lender, Silicon Valley Bank ("SVB"). As a result of these
conditions, in February 1999, the Company retained the services of a debt
restructuring specialist to advise the Company on certain aspects of
restructuring its debt with Hancock and SVB. The Company's efforts were then
directed towards renegotiating its debt and resulted in the renegotiated debt
agreements as set forth in the Company's Report on Form 8-K dated as of June 4,
1999.
The renegotiated agreement with Hancock required that the Company pay a higher
rate of interest which would decrease to the then current rate upon the
satisfaction of certain conditions, required the issuance of warrants to Hancock
representing the right to acquire 382,000 shares of the Company's Common Stock,
to be issued to Hancock at an exercise price of $4.54, and the payment of
attorneys' fees and expenses. The restated agreement with SVB required that the
Company pay an increased interest rate of prime plus 4%, thereafter decreasing
to the original stated rate of prime plus 1.5% upon the satisfaction of certain
conditions. The Corporation was also obligated to pay for certain consulting
fees, attorneys' fees and costs and was obligated to comply with modified
operating covenants.
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During this time, the Company, Mr. Anderson and Mr. Daniels continued their
discussions. These discussions led to a proposal made by Mr. Anderson and CAI
Advisors as set forth in a Letter of Intent dated as of March 24, 1999. The
Board of Directors first considered the proposed Letter of Intent at a meeting
held on March 26, 1999 where the specifics of the proposed letter were reviewed
in detail. Outside legal counsel to the Company along with the debt
restructuring specialists retained by the Company participated in these
discussions, along with a representative of an investment banking firm proposed
to be hired by the Company to render a fairness opinion on the proposed
transaction. At that meeting the Board of Directors authorized retaining an
investment banking firm, Cruttenden Roth Incorporated ("Cruttenden") to issue a
fairness opinion on the proposed transaction, and authorized the Company to
continue its discussions with Mr. Anderson and Mr. Daniels.
On April 8, 1999, the Board of Directors considered the report by Cruttenden
dated as of April 8, 1999 relating to the proposals set forth in the Letter of
Intent from Mr. Anderson and CAI Advisors dated March 24, 1999 as amended on
April 7, 1999 and April 8, 1999. At that time, Cruttenden opined that the
proposals set forth in the Letter of Intent, as amended, was fair from a
financial point of view to the Company and its stockholders. The basis of the
opinion by Cruttenden and the factors utilized by it in rendering its opinion
are set forth in Exhibit 1 of this Proxy Statement. The Board of Directors also
took into consideration the fact that the proposals made by Mr. Anderson and CAI
Advisors were an integral portion of the debt restructuring negotiations which
were ongoing at the same time with Hancock and SVB. The Board of Directors took
into consideration that although other opportunities may be available to the
Company, the urgency with which the Company must complete its debt restructuring
negotiations with Hancock and the Bank, required that the Company consider
seriously the CAI/Anderson proposal. After considering all the relevant
information available, and with advice from the Company's investment banker,
outside legal counsel, and debt restructuring specialist, the Board of Directors
authorized the execution of the Letter of Intent with the CAI/Anderson Group on
April 8, 1999. With that Letter of Intent, the Company was able to obtain the
agreements of the Hancock and SVB to waive the existing defaults and restructure
the existing debt.
After execution by the Company of the Letter of Intent and prior to the
execution of the definitive documents relating to the transaction with the
CAI/Anderson Group, in May 1999 the Company received an unsolicited proposal
from an unrelated third party to acquire all of the outstanding stock of the
Company. Since the proposed transaction involved a leveraged buy-out of the
Company's common stock and potentially involved current members of management as
owners of the stock of the recapitalized corporation, the Board of Directors
reactivated the Special Committee referred to above to consider the offer of
this third party.
After negotiations between the Special Committee, with the assistance of
Trenwith and the representatives of the offeror, it was ascertained by the
Special Committee that the proposal contained an unacceptable number of the
condition relating to the proposal, including a condition whereby the proposed
purchaser could terminate the transaction if unable to secure financing.
Moreover, the Special Committee concluded that the proposed transaction could
not be completed in a reasonable period of time, given its conditional nature.
As a result, after careful consideration and with advice from the Company's
investment banker and outside legal counsel, the Special Committee recommended
to the full Board of Directors that this proposal not be given any further
consideration at this time. That information was provided to the proposed
purchaser in early June 1999.
After lengthy negotiations between the parties relating to the definitive
documents in connection with the proposed transaction between the Company and
the CAI/Anderson Group, on June 23, 1999 the final definitive documents were
thoroughly reviewed by the Board of Directors. After careful consideration and
significant discussion concerning the negotiating process that had been
conducted between the respective parties, the Company was authorized to execute
the definitive documents. Such documents were executed by all parties on June
29, 1999 and are attached to the Company's Report on Form 8-K dated as of June
30, 1999 with regard to the CAI/Anderson proposal.
In August 1999, the Company received another unsolicited proposal from an
unrelated third party to merge the Company with a subsidiary of the party making
the proposal. The transaction as contemplated by the offeror would have
resulted in it making an equity investment in the Company and the offeror
merging a subsidiary with a subsidiary of the Company, obtaining and receiving
significant regulatory approval since the proposed merger also involved a
secondary asset conversion transaction, and other regulatory approvals. A
preferred stock investment along with a loan and the purchase of warrants formed
the basis of the offer. In addition, the proposal would have required that the
Company sell to the offeror one of its existing subsidiaries as part of the
transaction.
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Since the terms of the transaction documents with the CAI/Anderson Group
contains a no-shop provision, and a fiduciary termination provision of any
subsequently received offer was deemed to be a Superior Proposal as that term is
defined in the Purchase Agreements, the Company's Board of Directors once again
engaged the services of Trenwith to evaluate the proposal and provide advice
and guidance of the Board. In addition, the Company's outside legal counsel
conducted a review of the proposal in connection therewith.
After receiving the report of Trenwith and considering all of the relevant facts
and circumstances, the Board ascertained that the proposal was not a Superior
Proposal as that term is defined in the CAI/Anderson Group Purchase Agreements.
Numerous factors were relied upon by the Board, including the report of Trenwith
and advice from the Company's outside legal counsel. In September, the Company
advised the offeror of that information and indicated that the Company would be
continuing with the CAI/Anderson Group transaction as contemplated.
Simultaneously, the offeror advised the Company that it was withdrawing its
proposal at this time.
THE DEBENTURE AND NOTE PURCHASE AGREEMENT
The following description of the Debenture and Note Purchase Agreement, dated
June 29, 1999, and amendments and exhibits thereto does not purport to be
complete and is qualified in its entirety by reference to the text of such
documents which were filed as exhibits to the Company's Current Report on Form
8-K dated June 30, 1999, Quarterly Report on Form 10-Q for the quarter ended
June 24, 1999, and Current Report on Form 8-K dated October 6, 1999, on file
with the Securities and Exchange Commission ("SEC"). Copies of such documents
are available upon request to the Corporate Secretary of the Company.
The Debenture and Note Purchase Agreement, as amended, provides that the Company
will issue and sell to the Investors, and the Investors, severally and not
jointly, will purchase from the Company, on the terms and subject to the
conditions set forth in the Purchase Agreement:
(i) An aggregate of $20,000,000 principal amount of the Company's
8% Senior Notes, in the form attached to the Purchase Agreement as Exhibit C
(the "Senior Notes") and described more fully below;
(ii) Detachable warrants to purchase up to an aggregate of
2,500,000 shares (subject to adjustment) of Common Stock, in the form attached
to the Purchase Agreement as Exhibit D (the "Warrants") and described more fully
below;
(iii) An aggregate of $20,000,000 of the Company's 8% Convertible
Debentures (the "Debentures"). The Debentures will be in the form attached to
the Purchase Agreement as Exhibit A, will be convertible into Common Stock at an
initial conversion price (subject to adjustment) of $4.00 and will have the
right and power to vote, on an "as converted" basis, in respect of the corporate
affairs and management of the Company as set forth in the form of Certificate of
Amendment to the Company's Certificate of Incorporation attached to the Purchase
Agreement as Exhibit E (see Proposal 3 below). As a result of the voting rights
of the Debentures, the Investors would control a majority of the voting power of
the Company and would be able to designate 50% of the directors of the Company.
The Notes and Debentures are sometimes referred to herein as the "Securities".
The net proceeds of the issuance and sale of the Securities are expected to be
approximately $40 million, and will be used to repay certain indebtedness of the
Company under the Company's existing senior notes and its bank line of credit
(an aggregate of approximately $39,500,000 as of September 30, 1999), and for
working capital purposes. At the closing of this transaction, all existing
agreements with the Company's current senior note holders and line of credit
lender will be terminated.
As a specific condition to the closing of the transactions contemplated by the
Purchase Agreement, the number of directors of the Company shall be decreased
from seven directors to six directors, and the Investors shall have the right to
appoint three of the six directors. As discussed in Proposal 1, the Investors
intend to appoint Jack R. Anderson, Leslie B. Daniels and James E. Buncher to
serve as directors of the Company upon the closing of the transaction at which
time William E. McKenna, Michael M. Mann, Ph.D., George H. Stevens and Bradford
M. Boyd, D.D.S., will resign as directors of the Company.
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DESCRIPTION OF THE SENIOR NOTES
Principal Amount. The principal amount of the Senior Notes will be $20,000,000.
Such amount will become due and payable in annual installments of $4,000,000
each on each of the sixth through the ninth, inclusive, anniversaries of the
closing date and a final installment of all remaining outstanding principal
shall be due and payable on the tenth anniversary of the closing date.
Additionally, within 90 days of the end of each fiscal year, the Company is
required to prepay a portion of the principal equal to 75% of the "excess cash
flow" of the Company for such preceding fiscal year. "Excess cash flow" is
equal to consolidated net income of the Company for such fiscal year, plus
depreciation and amortization expense to the extent deducted in determining
consolidated net income, plus consolidated tax expense to the extent deducted in
determining consolidated net income, minus the aggregate amount actually paid in
cash by the Company and its subsidiaries in consolidated tax expense plus (or
minus) increases (or decreases) in consolidated working capital from the last
day of the preceding fiscal year to the last day of such fiscal year, minus the
aggregate amount actually paid in cash by the Company and its subsidiaries for
capital expenditures permitted under the Purchase Agreement (to the extent not
financed with purchase money indebtedness or insurance), minus all regularly
scheduled principal payments of the Senior Notes made during such fiscal year,
minus all regularly scheduled principal payments made during such fiscal year in
respect of other indebtedness for money borrowed to the extent such indebtedness
and payments are permitted under the Purchase Agreement.
Interest. The Senior Notes will bear interest at 8% per annum. Interest
accruing on the Senior Notes will become payable and shall be paid semi-annually
in arrears beginning 90 days following the Closing Date.
Prepayments. The Senior Notes may be prepaid at any time without premium or
penalty, so long as all accrued interest on the amount of each such prepayment
is paid to the date of such prepayment.
Mandatory Payment. In the event of a liquidation of the Company, including by
reason of a merger or sale of assets, all principal of and unpaid interest on
the Senior Notes shall be immediately due and payable. Additionally, upon an
Event of Default as defined in the Purchase Agreement and described below, all
principal of and unpaid interest on the Senior Notes may become immediately due
and payable.
Events of Default and Acceleration. The Purchase Agreement specifies certain
events of default, including non-payment, failure to perform or observe certain
covenants contained in the Purchase Agreement, certain misrepresentations about
the Company to the Investors, and upon voluntary or involuntary bankruptcy or
the appointment of a receiver or custodian. Upon an Event of Default, the
holders of a majority of the aggregate principal amount of outstanding
Debentures or Senior Notes may declare the entire unpaid principal and accrued
interest immediately due and payable.
Subordination. The Senior Notes will represent unsecured obligations of the
Company, subordinated to all existing indebtedness of the Company to banks,
insurance companies and other financial institutions regularly engaged in the
business of lending money.
DESCRIPTION OF THE CONVERTIBLE DEBENTURES
Principal Amount. The principal amount of the Debentures will be $20,000,000.
Interest. The Debentures will bear interest at 8% per annum. Interest accruing
on the Debentures will become payable semi-annually in arrears beginning six
months following the Closing Date.
Voting Rights. So long as the number of shares of Common Stock issuable upon
conversion of the Debentures represents 25% or more of the votes that may be
cast by all voting securities, the holders of the outstanding Debentures shall
have the right to elect three of the six members of the Company's Board of
Directors. The holders of the Debentures shall also have voting rights with
respect to matters other than the election of directors equal to the number of
shares of Common Stock into which such Debentures are convertible.
Conversion. Each Debenture holder shall have the right, at any time prior to
the maturity of the Debentures, to convert the Debentures at the rate of $4.00
principal amount of Debentures per share of Common Stock, subject to
adjustments. The conversion price is subject to adjustment on the occurrence of
certain events, including, but not limited to, stock dividends, stock splits,
reclassifications or combinations, and the issuance of Common Stock (or other
securities convertible into Common Stock) at a per share price less the then
current conversion price. This anti-dilution adjustment permits holders of the
Debentures to maintain their proportional ownership of the Company in the event
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the Company issues Common Stock (or other securities convertible into Common
Stock) at a per share price of less than $4.00 by lowering the price at which
the holders of the Debentures can convert the Debentures into shares of Common
Stock, resulting in an increased number of shares of Common Stock received by
such holders upon conversion.
Prepayment. The Company may not prepay the Debentures.
Mandatory Payment. In the event of a liquidation of the Company, including by
reason of a merger or sale of assets, all principal of and unpaid interest on
the Debentures shall be immediately due and payable. Additionally, upon an
Event of Default as defined in the Purchase Agreement and described below, all
principal of and unpaid interest on the Debentures may become immediately due
and payable.
Events of Default and Acceleration. The Purchase Agreement specifies certain
events of default, including non-payment, failure to perform or observe certain
covenants contained in the Purchase Agreement, certain misrepresentations, and
upon voluntary or involuntary bankruptcy or the appointment of a receiver. Upon
an Event of Default, the holders of a majority of the aggregate principal amount
of outstanding Debentures or Senior Notes may declare the entire unpaid
principal and accrued interest immediately due and payable.
Subordination. The Debentures will represent unsecured obligations of the
Company, subordinated to all existing indebtedness of the Company to banks,
insurance companies and other financial institutions regularly engaged in the
business of lending money.
WARRANTS TO PURCHASE COMMON STOCK
In connection with the sale of the Senior Notes, the Company will also issue to
the Investors Warrants to purchase an aggregate of 2,500,000 shares of Common
Stock of the Company at an exercise price of $8.00 per share. The exercise
price of the Warrants will be subject to adjustment in the event that the
Company effects a split or reclassification of the Company's Common Stock, or in
the event the Company issues Common Stock at per share price less than the
exercise price. This anti-dilution adjustment permits holders of Warrants to
maintain their proportional ownership of the Company in the event the Company
issues Common Stock (or other securities convertible into Common Stock) at a per
share price of less than $8.00, by lowering the price at which the holders of
Warrants can exercise the Warrants, resulting in an increased number of shares
of Common Stock received by such holders upon exercise.
REGISTRATION RIGHTS AGREEMENTS
Upon the consummation of the transactions contemplated by the Purchase
Agreement, the Investors and the Company will enter into two Registration Rights
Agreements which grant the Investors the right to require the Company to
register for sale under the Securities Act of 1933, as amended (the "Securities
Act"), the shares of Common Stock received by them upon conversion of the
Debentures and upon exercise of the Warrants on no more than three occasions.
In addition, the Registration Rights Agreements provide that the Investors will
be able to include shares held by them in other registration statements filed by
the Company on behalf of itself or other stockholders. The Company will be
responsible for the expenses incurred by any selling stockholders in such
registrations, other than any underwriting discounts and commissions payable
with respect to the shares sold by the selling stockholders. The rights of the
Investors to include shares in registrations filed by the Company will expire at
such time as the securities become freely tradable without registration under
the Securities Act.
AGREEMENT AMONG INVESTORS
In connection with the Purchase Agreement, the Investors and Steven J. Baileys,
D.D.S., the Company's Chairman and Chief Executive Officer will enter into an
Agreement Among Investors pursuant to which the Investors and Dr. Baileys would
each grant to the other certain rights of first refusal and tag-along rights
with respect to the Debentures and any shares of Common Stock held by them. For
so long any of the Investors or Dr. Baileys holds any Debentures or shares of
Common Stock of Company, if any of the Investors or Dr. Baileys desires to
transfer any of the Debentures or shares of Common Stock (subject to certain
specified exceptions), they must first give written notice of the proposed
transfer to the other parties, setting forth the terms and conditions of the
proposed transfer. The other parties would then have ten business days
following receipt of such offer in which to elect, at its option, to either (x)
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purchase such securities on the same terms as the proposed transfer, or (y) sell
to the proposed transferee, as part of the proposed sale, a number of Debentures
or shares of Common Stock, as the case may be, determined by multiplying the
total number of Debentures or shares of Common Stock, as the case may be, to be
transferred by a fraction, the numerator of which is the number of Debentures or
shares of Common Stock, as the case may be, then held by such party, and the
denominator of which is the total number of Debentures or shares of Common
Stock, as the case may be, then held by the Investors and Dr. Baileys.
The Agreement Among Investors will also provide that, so long as there are
outstanding Debentures convertible into shares of Common Stock of the Company
representing 25% or more of the total voting power of the Company's securities,
the Investors and Dr. Baileys will agree to take all actions within their
respective powers as stockholders to cause the Board of Directors to consist of
six members unless an increase or decrease in the size of the Board is approved
by the holders of at least 60% of the outstanding Debentures.
STOCKHOLDER AGREEMENTS
In connection with the Purchase Agreement, the Investors and Dr. Baileys entered
into a Stockholder Agreement, which provides for certain voting and other
agreements with respect to the shares of the Company's Common Stock held by Dr.
Baileys and by the Baileys Family Trust, of which Dr. Baileys is trustee.
Specifically, Dr. Baileys agreed to take all actions within his power as a
stockholder to vote all of his shares of Common Stock and shares of Common Stock
held by the Baileys Family Trust which represent approximately 28.3% of the
outstanding shares of Common Stock of the Company (a) in favor of the Purchase
Agreement and the transactions contemplated thereby, (b) against any merger
agreement, merger, consolidation, recapitalization or other takeover proposal,
and (c) against any amendment to the Company's Certificate of Incorporation
which would impede, frustrate or otherwise prevent or nullify the Purchase
Agreement or the transactions contemplated thereby. Additionally, Dr. Baileys
agreed not to sell, transfer, pledge or otherwise dispose of any of the shares
owned by him or by the Baileys Family Trust and not to solicit any takeover
proposals or take any actions which may reasonably lead to a takeover proposal.
CONDUCT OF BUSINESS PENDING THE CLOSING
The Company has agreed that from the date of the Purchase Agreement until the
Closing, unless the holders of Debentures and Senior Notes representing at least
sixty percent (60%) of the aggregate principal balance of all the Debentures and
Senior Notes outstanding otherwise agree in writing, the Company will carry on
its business in the ordinary course consistent with past practice. The Purchase
Agreement imposes certain additional restrictions on the ability of the Company
to amend its charter documents, to incur indebtedness, pay dividends on, redeem
or repurchase capital stock of the Company, make investments, incur liens on our
assets, enter into a merger or sell assets other than in the ordinary course of
business without the consent of the Investors.
CERTAIN CONDITIONS TO CLOSING
Consummation of the transactions contemplated by the Purchase Agreement is
subject to the approval of the Company's stockholders and certain other
conditions, unless waived by the party benefiting therefrom. Closing conditions
include (i) the continuing accuracy as of the closing date of the
representations and warranties of each respective party set forth in the
Purchase Agreement; (ii) performance of all the obligations in the Purchase
Agreement required to be performed as of the Closing Date; (iii) the expiration
or termination of all applicable waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (the "HSR Act") if determined to be
applicable; (iv) the absence of any Event of Default as of the Closing Date; (v)
the obtaining of certain governmental and third party consents as necessary to
effect the Closing; and (vi) the Board of Directors shall consist of six
members, three of which shall be designated in writing by the Investors.
As long as the Purchase Agreement with the Investors is in effect, SafeGuard may
not solicit offers for, continue discussions regarding, or enter into any
agreements with respect to, any transaction involving a business combination
involving the Company or the acquisition of 15% of the voting power or a
substantial portion of its assets or furnish nonpublic information concerning it
for such matter. However, the Company may consider such offers and continue
such discussions, if the failure to consider such offer which is deemed to be a
superior proposal would present a reasonable probability of a violation of the
Board of Directors' fiduciary duties under applicable law. If so, the Company
may negotiate in good faith to consider and pursue such unsolicited offer or
inquiry. In addition, if the Company terminates the Agreement with the
Investors to accept or recommend a superior proposal, it will become obligated
to pay the Investors a termination fee of $2.75 million and to reimburse the
Investors' reasonable costs and expenses in an amount not to exceed $250,000.
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REGULATORY APPROVAL
As described briefly above, regulatory approval of the transactions contemplated
by the Purchase Agreement will be required. The Company, through its
subsidiaries, is regulated by the Department of Corporations and Departments of
Insurance in twenty states and the District of Columbia. Because this
transaction involves a potential change of control in the Company, it is
necessary to file with most of these state agencies an application for approval.
While the process varies from state to state, typically the submission involves
an "acquisition statement" on Form A that will require disclosure of detailed
information about the Investors. Those submissions are then reviewed by various
government officials for approval consideration. While the Company does not
anticipate receiving any objections to this transaction from state agencies, the
review and approval process is lengthy. The Company anticipates such process
may take until approximately December 31, 1999.
To expedite this process, the Company held and participated in pre-filing
conferences and discussed the transactions contemplated by the Purchase
Agreement in concept with most of these regulatory agencies. The Company has
filed all required regulatory submissions. The Company has significant
experience in dealing with these regulatory agencies and has already obtained
expedited approval in eleven of the states and is in the process of discussing
expedited approval alternatives with a number of the remaining state agencies.
CERTAIN AFFIRMATIVE AND NEGATIVE COVENANTS
The Purchase Agreement contains a number of significant covenants. For so long
as there remains outstanding any Senior Notes or Debentures, the Company has
agreed with the Investors, among other things, (i) to maintain the corporate
existence of the Company, (ii) to provide the Investors with periodic financial
and budgeting data, (iii) to certain restrictions on the ability of the Company
to incur additional indebtedness and incur liens on the Company's assets, and
(iv) to certain limitations on making capital expenditures and certain
restricted payments (including dividends and repurchases of stock).
CERTAIN EFFECTS OF THE TRANSACTION - CHANGE OF CONTROL
In the event the sale and issuance of Debentures is consummated, the Investors
will have beneficial ownership of approximately 51% of the outstanding voting
securities of the Company. As a result, the Investors will be able to exercise
a high degree of control over the affairs and management of the Company. The
Investors' voting control of the Company, and negative covenants in the Purchase
Agreement, will permit them to approve or block most proposals submitted to a
vote of the Company's stockholders under Delaware law and the Company's Bylaws,
including proposals pertaining to mergers or recapitalizations involving the
Company, which may adversely affect the ability of other stockholders to
influence the affairs and direction of the Company. Upon consummation of the
transactions contemplated by the Purchase Agreement, the Investors will be
entitled to elect three out of six members of the Board of Directors, thereby
possessing considerable control over the management and affairs of the Company.
In addition, the Investors' rights of first refusal with respect to future
issuances of equity securities by the Company will enable the Investors to
maintain their percentage ownership of the Company's voting stock, and thus
maintain effective control of the Company.
The Board of Directors recognizes that consummation of the transactions
contemplated by the Purchase Agreement could have the effect of impeding an
attempt by a third party to acquire, merge with or otherwise gain control of the
Company. While the sale and issuance of the Debentures would not prohibit such
a transaction, the sale of more than 50% of the voting securities of the Company
to the Investors would make it more difficult to accomplish certain transactions
without the consent of the Investors, even where the transaction may ultimately
be favorable to the Company's stockholders. The Board of Directors believes,
however, that the economic benefits to the Company and its Stockholders of
consummating the transactions contemplated by the Purchase Agreement outweighs
any anti-takeover impacts of the proposed transactions.
ADDITIONAL ANTI-TAKEOVER CONSIDERATIONS
The Company's Certificate of Incorporation and Bylaws contain certain provisions
that may be deemed to have an anti-takeover effect. These anti-takeover
provisions may deter an attempt to obtain control of the Company and could
thereby deprive stockholders of possible opportunities to realize premiums for
their shares.
Notice of Stockholder Business and Nominations. Article II, Section 2.13 of the
Bylaws, as amended, requires that nominations of persons for election to the
Board of Directors and the proposal of business to be considered by the
stockholders may be made at the Annual Meeting of Stockholders: (a) pursuant to
the Company's Notice of Meeting, (b) by or at the discretion of the Board of
Directors, or (c) by any stockholder of the Company who was a stockholder of
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record at the time of giving of notice who is entitled to vote and complies with
the notice provisions of the Bylaws. Timely notice must be given. To be
timely, a stockholder's notice must be delivered to the Company not later than
the close of business on the 60th day and no earlier than the close of business
on the 90th day prior to the first anniversary of the preceding year's annual
meeting, except that in the event the date of the annual meeting is more than 30
days before or more than 60 days after such anniversary date, notice by the
stockholder to be timely, must be delivered no earlier than the close of
business on the ninetieth 90th day prior to such annual meeting and not later
than the close of business on the later of the sixtieth 60th day prior to such
annual meeting, or the tenth day following the day on which public announcement
of the date of such meeting is first made by the Company. The notice must
specify each person whom the stockholder proposes to nominate for election as a
director and all information required pursuant to Regulation 14a under the
Securities Exchange Act of 1934, as amended; a brief description of any business
desired to be brought before the meeting and such additional stockholder
information including, on whose behalf the nomination or proposal is made, the
name and address of each such stockholder as they appear on the Company's books
and records, and the class and number of shares of the Company which are
beneficially and of record owned by each such stockholder.
Vacancies, Additional Directorships And Removal Of Directors. Article III,
Sections 3.5 and 3.6 of the Bylaws, describe how vacancies on the Company's
Board of Directors are filled, how additional directorships are created, and how
directors may be removed from office. Article Fifth of the Company's Restated
Certificate of Incorporation provides that any Bylaws amendment increasing or
reducing the authorized number of directors or otherwise amending or altering
the classified nature of the Board of Directors, shall require an affirmative
vote of at least 75% of the directors, or the approval of at least 66 2/3% of
the outstanding stock of the Company entitled to vote. Newly created
directorships resulting from any increase in the number of directors and any
vacancies on the Board of Directors resulting from death, resignation or
removal, shall be filled solely by an affirmative vote of the majority of the
remaining directors then in office, regardless of their class, even though less
than a quorum of the Board of Directors. A director elected shall hold office
for the remainder of the full term. The purpose of these Bylaws sections is to
allow for the orderly election of new directors in the case of an increase in
the number of members of the Board of Directors, or as a result of the death,
resignation or removal of an existing director. This provision may arguably
have an anti-takeover effect by limiting the number of directors, which may be
added or appointed to the Board of Directors in that 75% of the directors must
be in concurrence with the selection, and not a simple majority.
Classified Board. Article III, Section 3.3 of the Bylaws, specifies that there
be a classified board, which provides that only a specified portion of the Board
of Directors is to be elected each year. Article Sixth of the Company's
Restated Certificate of Incorporation provides for a classified board stating
that the Board of Directors shall be divided equally into three (3) classes with
the members of each class being elected every third year. Article Fifth of the
Company's Restated Certificate of Incorporation provides that this Bylaws
Section may not be amended without an affirmative vote of at least 75% of the
directors, or the approval of at least 66 2/3% of the outstanding stock of the
Company entitled to vote. The purpose of this Bylaws Section is to create
sufficient flexibility in determining the number of directors, and the manner in
which such directors are elected. This provision may arguably have an
anti-takeover effect by limiting the number of directors that may be replaced at
any Annual Meeting of Stockholders.
Procedures Concerning Amendments to Bylaws. Article VIII, Section 8.5 of the
Bylaws, provides that the Bylaws of the Company may be adopted, repealed,
rescinded, altered or amended only in the manner set forth in the Company's
certificate of incorporation. Article Fifth of the Restated Certificate of
Incorporation provides that the Board of Directors may make, repeal, alter,
amend and rescind from time to time any or all of the Bylaws of the Company,
provided however, any Bylaws amendment adopted by the Board of Directors
increasing or reducing the authorized number of directors or otherwise amending
or altering the classified nature of the Board of Directors, shall require a
resolution adopted by an affirmative vote of not less than 75% of the directors.
Additionally, new bylaws may be adopted, or the Bylaws may be amended or
repealed by a vote of not less than 66 2/3% of the outstanding stock of the
Company entitled to vote thereon. Article Seventh of the Company's Restated
Certificate of Incorporation prohibits any stockholder action from being taken
except at an annual or special meeting of stockholders. No stockholder action
may be taken by written consent. The Board of Directors believes these
provisions provide the Board of Directors with an opportunity to consider the
merits of any proposed amendments to the Bylaws and to the extent necessary or
desirable, provide an opportunity to inform all stockholders about the proposed
amendments. These provisions may also discourage potential acquirers of the
Company from attempting to amend the Company's Bylaws to facilitate an
acquisition.
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Potential Anti-Takeover Effects of Authorized and Unissued Shares of Preferred
Stock. Under the Company's Certificate of Incorporation, the Board of Directors
has the authority to provide by resolution for the issuance of shares of one or
more series of preferred stock, and to establish the terms and conditions of
each series of preferred stock. The Company believes that the availability of
preferred stock will provide the Company with increased flexibility to
facilitate possible future financings and acquisitions and to meet other
corporate needs that might arise. The authorized shares of preferred stock will
be available for issuance without the expense and delay of stockholder actions,
unless stockholder action is required by applicable law or the rules of Nasdaq
or any other stock exchange on which any class of stock of the Company may then
be quoted or listed. However, the Company may determine at that time to forego
any stockholder vote required by Nasdaq or another stock exchange organization
and allow the Company's stock to be removed from trading on Nasdaq or from
another stock exchange. The Board of Directors has the power to approve the
issuance of a series of preferred stock with terms that could either impede or
facilitate the completion of a merger, tender offer or other takeover attempt.
For example, the issuance of new shares might impede a business combination if
the terms of those shares include voting rights to enable the holder to block
business combinations. In addition, the issuance of new shares might facilitate
a business combination if those shares have general voting rights sufficient to
cause an applicable percentage vote requirement to be satisfied. The Board of
Directors will make any determination regarding issuance of additional shares
based on its judgment as to the best interests of its stockholders, customers,
employees or other constituencies.
Stockholder Rights Plan. In March 1996, the Board unanimously adopted a new
Stockholder Rights Plan (the "Rights Plan") and declared a dividend distribution
of one Right to purchase shares of the Company's Series A Junior Participating
Preferred Stock under certain circumstances for each outstanding share of the
Company's Common Stock. The Rights Plan is designed to provide the Board with
the ability to take what the Board believes are the most effective steps to
protect and maximize the value of the Stockholders' investment in the Company.
It is designed to encourage potential acquirors to negotiate directly with the
Board, which the Company believes is in the best position to negotiate on behalf
of all Stockholders, evaluate the adequacy of any potential offer, and protect
Stockholders against potential abuses during the takeover process such as a
partial and two-tiered tender offers and creeping stock accumulation programs,
which do not treat all Stockholders fairly and equally. The Rights do not
affect any takeover proposal which the Board believes is in the best interests
of the Company's Stockholders.
The Rights Plan is not intended to prevent a takeover on terms that are fair and
equitable to all Stockholders, nor is it intended as a deterrent to a
Stockholder's initiation of a proxy contest. Under the terms of the Rights
Plan, the Board has the power to redeem the Rights to permit an acquisition that
it determines, in the exercise of its fiduciary duties, adequately reflects the
value of the Company and is in the best interests of all Stockholders.
Additionally, the Board has the power to amend the Rights Plan so as not to
apply to a particular transaction. With respect to the transactions
contemplated by the Purchase Agreement set forth in this Proposal 2, the Board
has amended the Rights Plan so that it will not apply.
Additionally, Section 203 of the Delaware General Corporation Law restricts
certain transactions between a Delaware corporation and a holder of 15% or more
of the corporation's outstanding voting securities, together with affiliates or
associates thereof. For a period of three years following the date that a
stockholder became a holder of 15% or more of the Company's outstanding voting
securities, Section 203 prohibits the following types of transactions between
the Company and the 15% stockholders, unless certain conditions described below
are met: (i) mergers or consolidations, (ii) sales, leases, exchanges or other
transfers of 10% or more of the aggregate assets of the Company, (iii) issuances
or transfers by the Company of any securities of the Company which would have
the effect of increasing the 15% stockholder's proportionate share of the
securities of any class or series of the Company, (iv) receipt by the 15%
stockholder of the benefit of loans, advances, guarantees, pledges or other
financial benefits provided by the Company, and (v) any other transaction which
has the effect of increasing the proportionate share of the stock of any class
or series of the Company which is owned by the 15% stockholder. The three-year
ban does not apply if either the proposed transaction or the transaction by
which the 15% stockholder became a 15% stockholder is approved by the Board of
Directors prior to the date such stockholder became a 15% stockholder.
REASONS FOR THE TRANSACTION; BOARD RECOMMENDATION
Prior to entering into the Purchase Agreement, the Board of Directors carefully
considered the terms and conditions of the proposed Purchase Agreement and the
other agreements and transactions contemplated thereby. In reaching such
determination, the Board of Directors considered a number of factors, which
taken together supported such determination, including without limitation (a)
its knowledge of the Company's business, operations, properties, financial
condition and operating results, as well as the Company's prospects and
strategic objectives, which provided the background and context for its
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deliberations and determinations; (b) advice of the Company's management that
the Company is in urgent need of additional working capital; (c) the
presentation by Cruttenden Roth Incorporated ("Cruttenden") and its opinion that
the transaction was fair, from a financial point of view, to the Company and the
stockholders; (d) the relationship of the conversion price of the Debentures
into shares of the Company's Common Stock to the historical and current market
prices for the Company's Common Stock; and (e) the terms of the Purchase
Agreement, as reviewed by the Board of Directors.
While the Board believes that the proposed investment by the Investors as
described herein is fair to, and in the best interests of the Company and its
stockholders, its approval might have certain adverse effects, which
stockholders should consider. These effects include the Investors' rights to
significant representation on the Company's Board of Directors, the Investors'
special consent rights with respect to certain corporate transactions, and the
likelihood that the size of the Investors' investment and the attendant rights
they will receive (notwithstanding related restrictions) might discourage other
persons from offering to acquire all or a significant interest in the Company
and may make more difficult a change in control of the Company (other than
transactions in which the Investors acquire a greater interest in the Company).
At a meeting held on June 23, 1999, the Board unanimously approved the terms of
the Investors' investment and the Debenture and Note Purchase Agreement.
Accordingly, the Board unanimously recommends that stockholders vote FOR
approval of the Purchase Agreement.
OPINION OF FINANCIAL ADVISOR
The Company engaged Cruttenden to render an opinion as to the fairness from a
financial point of view to Company's stockholders of the proposed investment in
the Company to be made by the Investors. Cruttenden was selected by the Board
of Directors based on Cruttenden's qualifications and expertise. Cruttenden
rendered its written opinion on April 8, 1999 to the Board of Directors that, as
of April 8, 1999, based on the qualifications and limitations set forth in its
opinion, the proposed investment is fair to the Company's stockholders from a
financial point of view. No limitations were placed on Cruttenden by the Board
of Directors with respect to the investigation made or the procedures followed
in preparing and rendering its fairness opinion.
The full text of the opinion of Cruttenden is attached as Exhibit 1 to this
Proxy Statement and is incorporated herein by reference. Stockholders are urged
to read the opinion in its entirety for the assumptions made, procedures
followed, other matters considered and limits of the review by Cruttenden. The
summary of the opinion of Cruttenden set forth in this Proxy Statement is
qualified in its entirety by references to the full text of Cruttenden's
opinion. Cruttenden's opinion was prepared for the Board of Directors and is
directed only to the fairness, from a financial point of view, to the Company's
Stockholders of the proposed investment to be received by the Company under the
Purchase Agreement and does not constitute a recommendation to any Stockholder
as to how to vote at the Annual Meeting.
In its review of the proposed investment, and in arriving at its opinion,
Cruttenden, among other things, reviewed and analyzed:
- the proposed terms of the investment as set forth in the Purchase
Agreement;
- selected historical financial and operating information on the Company
contained in its public filings;
- selected projected financial and operating information on the Company
furnished to Cruttenden by the Company;
- interviews with the Company's senior officers regarding the current
financial condition and alternatives available to the Company;
- trading history of the Company's Common Stock for the recent previous
several years to the present and in comparison with the trading
history of other similarly sized companies that Cruttenden deemed
relevant;
- a comparison of the historical and present financial performance and
valuation of the Company in comparison with other similarly sized
companies that Cruttenden deemed relevant;
- an evaluation of the discounted cash flow value of the Company based
on projected financial data furnished to Cruttenden by the Company;
and
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- a comparison of the implied valuation of the Company under the
proposed investment with the implied valuation of certain other
transactions that Cruttenden deemed relevant.
Cruttenden did not assume responsibility for independent verification of any of
the information concerning the Company in connection with its review of the
proposed investment and, for purposes of its opinion, Cruttenden assumed and
relied upon the accuracy and completeness of such information. Cruttenden
further relied upon the assurances of management of the Company that they were
not aware of any facts that would make such information inaccurate or
misleading. Cruttenden relied on the Company as to all legal and financial
reporting matters with respect to the Company and the proposed investment. With
respect to the financial projections of the Company, Cruttenden assumed that
such projections have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the Company. Cruttenden did not
make or obtain any evaluation or appraisal of the assets or liabilities of the
Company. Cruttenden's opinion was based upon market, economic and other
conditions as they existed and could be evaluated as of the date of the opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The summary
of the Cruttenden analyses set forth below does not purport to be a complete
description of the presentation by Cruttenden to the Board of Directors. In
arriving at its opinion, Cruttenden did not attribute any particular weight to
any analysis or factor considered by it, but rather made qualitative judgments
as to the significance and relevance of each analysis and factor. Accordingly,
Cruttenden believes that its analyses and the summary set forth below must be
considered as a whole and that selecting portions of its analyses without
considering all analyses or of the following summary, without considering all
factors and analyses, could create an incomplete view of the processes
underlying the analyses set forth in the Cruttenden presentation to the Board of
Directors and its opinion. In performing its analyses, Cruttenden made
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of the
Company. The analyses performed by Cruttenden and summarized below are not
necessarily indicative of actual values or actual future results that may be
significantly more or less favorable than suggested by those analyses.
Additionally, analyses relating to the values of businesses do not purport to be
appraisals or to reflect the prices at which businesses actually may be
acquired.
The following is a brief summary of analyses performed by Cruttenden in
connection with providing its written opinion to the Board of Directors on April
8, 1999.
Discounted Cash Flow Analysis: Cruttenden performed a discounted cash flow
analysis of the Company using projected financial performance for the years 1999
through 2003 prepared by the Company. The analysis aggregated (1) the present
value of the projected after-tax EBITDA through 2003 and (2) the present value
of a range of terminal values for the year 2003. A terminal value is
hypothetical value of the enterprise in its entirety at some future date. The
terminal values for the Company were determined by applying multiples ranging
from six to eight times the Company's projected EBITDA in 2003. The Company's
after-tax EBITDA stream and terminal values were discounted to present values
using discount rates ranging from 15% to 25%. The values derived from the
discounted cash flow analysis were at or below the implied value of the Company
in the proposed investment.
Analysis of Publicly Traded Comparable Companies: Cruttenden compared selected
historical financial information of the Company to that of the most directly
comparable publicly traded company, CompDent Corporation ("CompDent"). The
comparison highlighted several ratios using the companies' enterprise value
which is the value of the total shares outstanding times the recent share price
plus the companies' debt outstanding less cash on the balance sheet. The ratios
measured the companies' enterprise value to its revenues, EBIT, EBITDA and
membership for the financial reporting period ended just prior to the date of
the analysis. Given that the Company has historically operated at a lower
profit margin than CompDent, the ratios using the implied value of the proposed
investment were favorable for the Company when based on profitability such as
EBIT and EBITDA, but not when based on revenue or membership.
Precedent Transaction Analysis: Cruttenden compared the valuation obtained by
the Company in the transaction contemplated by the Purchase Agreement with the
valuations obtained by companies in selected merger and acquisition transactions
in the dental insurance industry. These transactions involved the acquisition
of United Dental Care, Inc. ("United Dental") and the proposed acquisition of
CompDent. The comparison highlighted several ratios using the companies'
enterprise value which is the equity of value plus the companies' debt
outstanding less cash on the balance sheet. The ratios measured the equity
value and enterprise value to the companies' revenues, EBIT, EBITDA and
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membership for the reporting period ended just prior to the date of the
analysis. Just prior to the acquisition of United Dental it reported a low
profitability near breakeven. The ratios based on profitability for United
Dental, therefore, were not useful in the analysis. Given that the Company has
historically operated at a lower profit margin than CompDent, the ratios using
the implied value of the proposed investment were favorable for the Company when
based on profitability such as EBIT and EBITDA but not when based on revenue or
membership.
The foregoing description of Cruttenden's opinion is qualified in its entirety
by reference to the full text of such opinion that is attached as Exhibit 1 to
this Proxy Statement.
Cruttenden, as part of its investment banking services, is regularly engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions, strategic transactions, negotiated underwritings, private
placements and valuations for corporate and other purposes.
The Company has agreed to pay Cruttenden a fairness opinion fee of $150,000 in
connection with the delivery of its fairness opinion. The Company has also has
agreed to reimburse Cruttenden for its reasonable out-of-pocket expenses up to
$3,000 and to indemnify Cruttenden, including against liabilities under the
federal securities laws or relating to or arising out of Cruttenden's
engagement.
VOTE REQUIRED; BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the shares of Common Stock of the Company
present or represented and entitled to vote on this Proposal at the Annual
Meeting is required to authorize the issuance to the Investors of the securities
described in the Purchase Agreement. The Board of Directors recommends that you
vote FOR the approval of the Purchase Agreement and the transactions
contemplated thereby. Shares represented by the proxies will be voted FOR the
proposal unless a vote against the proposal or an abstention is specifically
indicated on the proxy card.
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PROPOSAL NO. 3
APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION
PROPOSED AMENDMENT
In connection with the transactions contemplated by the Purchase Agreement, and
in order to provide for the voting rights to be granted to the holders of
Debentures pursuant thereto, the Company's Board of Directors has adopted a
resolution to amend Article Twelfth of the Company's Certificate of
Incorporation to grant to the holders of the Debentures the power to vote in
respect of certain corporate affairs and management of the Company. The
amendment specifies that, so long as the number of shares of Common Stock
issuable upon conversion of the Debentures represents 25% or more of the votes
that may be cast by all voting securities, the holders of the outstanding
Debentures shall have the right to elect 50% of the members of the Board of
Directors. The holders of the Debentures shall, in addition, have voting rights
with respect to matters other than the election of members of the Board of
Directors equal to the number of shares of Common Stock into which such
Debentures are convertible.
The Company proposes to amend its Certificate of Incorporation, as described
above, in order to effect certain aspects of the transactions contemplated by
the Purchase Agreement as agreed to with the Investors. The proposed amendment
is a condition to the Investors' obligations to purchase Securities pursuant to
the Purchase Agreement. The amendment will not become effective unless the
transactions contemplated by the Purchase Agreement are contemplated. See
"Certain Effects of the Transaction - Change of Control" for a discussion of
certain anti-takeover effects of the foregoing which stockholders should
consider.
If Proposal 2 is approved, but Proposal 3 is not approved, the Company will be
unable to consummate the transactions contemplated by Proposal 2. Likewise, if
Proposal 3 is approved but Proposal 2 is not approved, the transaction which
requires amendment to the Company's Restated Certificate of Incorporation will
not have been approved, so the Board of Directors will likely not implement the
amendment.
VOTE REQUIRED; BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the outstanding shares of Common Stock of
the Company on the Record Date is required to authorize an amendment to the
Company's Certificate of Incorporation. The Board of Directors recommends that
you vote FOR the approval of the amendment to the Company's Certificate of
Incorporation. Shares represented by the proxies will be voted FOR the proposal
unless a vote against the proposal or an abstention is specifically indicated on
the proxy card.
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PROPOSAL NO. 4
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Audit Committee of the Board of Directors has selected the independent
accounting firm of Deloitte & Touche LLP, to audit the financial statements of
the Company for the fiscal year ending December 31, 1999, and recommends that
stockholders vote for ratification of such appointment. The Board of Directors
believes that the Audit Committee appropriately represents the stockholders'
interest in this matter. In the event of a negative vote on such ratification,
the Audit Committee will reconsider its selection.
A representative of Deloitte & Touche LLP will be present at the Annual Meeting
and will have the opportunity to make a statement if he or she so desires and
will be available to respond to appropriate questions.
In connection with its annual audit of the Company's financial statements for
the fiscal years ended December 31, 1997 and 1998, there have been no
disagreements with Deloitte & Touche LLP on any matters of accounting principles
or practices, financial statement disclosure, or auditing scope and procedures
which, if not resolved to the satisfaction of Deloitte & Touche LLP, would have
caused Deloitte & Touche LLP to make reference thereto in their reports on the
financial statements for such years. The opinion of Deloitte & Touche LLP for
the fiscal years ended December 31, 1997 and 1998, did not contain an adverse
opinion or disclaimer of opinion and was not qualified or modified in any way.
ADDITIONAL INFORMATION
The Company files annual, quarterly and special reports, proxy statements and
other information with the SEC. The Company's SEC filings are available to the
public over the Internet at the SEC's web site at http://www.sec.gov. You may
also read and copy any document we file with the SEC at its public reference
facilities at 450 Fifth Street, N.W., Washington, D.C. 20549, 7 World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You can also obtain
copies of the documents at prescribed rates by writing to the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
public reference facilities. The Company's SEC filings are also available at
the office of the Nasdaq National Market. For further information on obtaining
copies of our public filings at the Nasdaq National Market, you should call
(202) 496-2500.
INCORPORATION BY REFERENCE
The Company incorporates by reference into this Proxy Statement the information
the Company files with the SEC, which means that the Company can disclose
important information by referring to those documents. The information
incorporated by reference is an important part of this Proxy Statement and
information that the Company files subsequently with the SEC will automatically
update this Proxy Statement. The Company incorporates by reference the
documents listed below and any filings the Company makes with the SEC under
Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act") after the initial filing of this Proxy Statement and prior to
the Annual Meeting.
- Annual Report on Form 10-K for the year ended December 31, 1998; and
- Quarterly Report on Form 10-Q for the quarters ended March 31, 1999
and June 30, 1999.
- Current Reports on Form 8-K dated June 30, 1999 and October 6, 1999.
YOU MAY REQUEST A COPY OF THESE FILINGS (OTHER THAN AN EXHIBIT TO A FILING
UNLESS THAT EXHIBIT IS SPECIFICALLY INCORPORATED BY REFERENCE INTO THAT FILING)
AT NO COST, BY WRITING TO OR TELEPHONING US AT THE FOLLOWING ADDRESS:
Corporate Secretary
SafeGuard Health Enterprises, Inc.
95 Enterprise
Aliso Viejo, California 92656
Telephone: (949) 425-4300
Facsimile: (949) 425-4586
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OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors of the Company
knows of no other matters that may come before the Annual Meeting other than
those referred to in the Notice of Annual Meeting of Stockholders. If any other
matters shall properly come before the Annual Meeting, the enclosed proxy card
confers discretionary authority on the persons named in the enclosed proxy card
to vote as they deem appropriate on such matters. It is the intention of the
persons named in the enclosed proxy card to vote the shares they represent as
the Board of Directors may recommend.
ALL STOCKHOLDERS ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING
PROXY IN THE ENCLOSED ENVELOPE.
BY ORDER OF THE BOARD OF DIRECTORS,
RONALD I. BRENDZEL
Corporate Secretary
October 22, 1999
Aliso Viejo, California
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EXHIBIT 1
April 8, 1999
Board of Directors
SafeGuard Health Enterprises, Inc.
95 Enterprise
Aliso Viejo, CA, 92656
Members of the Board:
We have been requested by the Board of Directors of SafeGuard Health
Enterprises, Inc. (the "Company") to render our opinion with respect to the
fairness, from a financial point of view, to the shareholders of the Company, of
the proposed investment (the "Investment") to be made by an investor group (the
"Investors") in the Company. We have not been requested to opine as to, and our
opinion does not in any manner address, the Company's underlying business
decision to proceed with or effect the Investment.
We understand that the Investors have proposed an Investment in the Company in a
letter dated March 24, 1999 whereby the Investors would invest $40 million into
the Company in exchange for two securities (i) 8% Convertible Subordinated
Debentures (the "Convertible Debentures") and (ii) 8% Senior Notes with Warrants
(the "Senior Notes") as described in the attached exhibits A and B with the
proceeds committed to repay the Company's outstanding senior debt obligations
and other corporate uses. Pursuant to the proposed terms of the Investment, the
Company would issue Convertible Debentures with a conversion price of $4 per
share, that, upon full conversion into the Company's Common Stock, would total
more than a majority of the Company's Common Stock currently outstanding.
Furthermore, pursuant to the proposed terms of the Investment, the Investors
would be granted the rights to elect 50% of the members of the Company's Board
of Directors. The Investment, therefore, has been determined to constitute a
potential change of control of the Company.
In addition, the Company's issuance of the Senior Notes involves the issuance of
2.5 million Warrants with an exercise price of $8 per share which, upon
issuance, would constitute a substantial additional portion of the Company's
Stock outstanding.
In arriving at our opinion, we reviewed and analyzed: (1) the proposed terms of
the Investment, (2) selected historical financial and operating information on
the Company contained in its public filings, (3) selected projected financial
and operating information on the Company furnished to us by the Company, (4)
interviews with the Company's senior officers regarding the current financial
situation and alternatives available to the Company, (5) trading history of the
Company's common stock for the most recent several years to the present and in
comparison of the trading history of other companies that we deemed relevant,
(6) a comparison of the historical and present financial performance and
valuation of the Company in comparison with other companies that we deemed
relevant, (7) an evaluation of the discounted cash flow value of the Company
based on projected financial data furnished to us by the Company, (8) a
comparison of the implied valuation of the Company under the proposed Investment
with the implied valuation of certain other transactions that we deemed
relevant, and (9) the potential pro-forma financial effects of the Investment
and the resulting ability of the Company's independent accountants to render an
unqualified opinion associated with its financial statements for the period
ended December 31, 1998.
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Board of Directors
SafeGuard Health Enterprises, Inc.
April 8, 1999
Page 2
In arriving at our opinion, we have assumed and relied upon the accuracy and
completeness of the financial and other information used by us without assuming
any responsibility for independent verification of such information and have
further relied upon the assurances of management of the Company that they are
not aware of any facts that would make such information inaccurate or
misleading. With respect to the financial projections of the Company, we have
assumed that such projections have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
management team. We have not made or obtained any evaluations or appraisals of
the assets or liabilities of the Company. Our opinion necessarily is based upon
market, economic and other conditions as they exist on, and can be evaluated as
of, the date of this letter.
Based upon and subject to the foregoing, we are of the opinion as of the date
hereof that, from a financial point of view, the Investment is fair to the
Company and its shareholders. Cruttenden Roth, Inc. will receive a fee in
connection with providing this fairness opinion that is contingent upon the
closing of the Investment. In addition, the Company has agreed to indemnify us
for certain liabilities that may arise out of the rendering of this opinion. In
the ordinary course of our business, we serve as a market maker in the equity
securities of the Company and may trade for our own account and for the accounts
of our customers and, accordingly, may at any time hold a long or short position
in such securities.
This opinion is for the use and benefit of the Board of Directors of the Company
and is rendered to the Board of Directors in connection with its consideration
of the Investment. This opinion is not intended to be and does not constitute a
recommendation to any shareholder of the Company as to how such shareholder
should vote with respect to the Investment.
Very truly yours,
Dennis McCarthy
Managing Director Corporate Finance
Cruttenden Roth Incorporated
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