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:
[ ] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission only (as permitted by Rule
14a-6(e)(2))
[ X ] 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)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ X ] No fee required.
[ ] 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:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
PROXY
SAFEGUARD HEALTH ENTERPRISES, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE
SPECIAL MEETING OF THE STOCKHOLDERS TO BE HELD ON WEDNESDAY, OCTOBER 25, 2000
The undersigned hereby nominates, constitutes and appoints James E. Buncher
and/or Ronald I. Brendzel, and each of them individually, the attorney, agent
and proxy of the undersigned, with full power of substitution, to represent and
vote all shares of Common Stock of SAFEGUARD HEALTH ENTERPRISES, INC. (the
"Company") which the undersigned is entitled to represent and vote at the
Special Meeting of Stockholders of the Company to be held at the executive
offices of the Company at 95 Enterprise, Aliso Viejo, California, 92656-2601, on
October 25, 2000, at 4:00 p.m. Pacific Daylight Time, and at any and all
adjournments thereof, as fully as if the undersigned were present and voting at
the meeting, as follows:
THE UNDERSIGNED HEREBY REVOKES ANY PROXY OR PROXIES HERETOFORE GIVEN. THIS
PROXY MAY BE REVOKED AT ANY TIME BEFORE IT IS EXERCISED BY FOLLOWING THE
PROCEDURES STATED IN THE PROXY STATEMENT FOR THE SPECIAL MEETING.
1. The election of the following nominees to the Board of Directors: Jack R.
Anderson, Steven J. Baileys, Ronald I. Brendzel, James E. Buncher, Leslie
B. Daniels, and Dennis L. Gates.
[ ] FOR [ ] WITHHOLD AUTHORITY TO VOTE FOR ALL
(EXCEPT AS LISTED TO THE NOMINEES LISTED
CONTRARY BELOW)
Instruction: to withhold authority to vote for any individual nominee, mark
the FOR box and write the name of each such nominee in the space provided
below:
2. The approval of an amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of the Company's
Common Stock to 40 million shares;
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. The approval of an amendment to the Company's Restated Certificate of
Incorporation to eliminate the classification of the Board of Directors
into three (3) classes;
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. The approval of an increase of the amount of Common Stock issuable under
the SafeGuard Health Enterprises, Inc. Employee Stock Option Plan to 3.0
million shares;
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. The proxies are authorized to vote in their discretion upon such other
matters as may properly come before the Special Meeting and any and all
adjournments thereof.
<PAGE>
IMPORTANT-PLEASE COMPLETE, SIGN, DATE AND RETURN PROMPTLY.
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE
VOTED FOR THE SIX (6) NOMINEES FOR THE BOARD OF DIRECTORS LISTED IN PROPOSAL 1
AND FOR THE APPROVAL OF PROPOSALS 2, 3 AND 4. IF THE EXECUTED PROXY DOES NOT
WITHHOLD AUTHORITY TO VOTE FOR THE ELECTION OF A NOMINEE FOR DIRECTOR LISTED IN
PROPOSAL 1, THIS PROXY WILL BE DEEMED TO GRANT AUTHORITY TO VOTE FOR THE
ELECTION OF ALL SUCH NOMINEES AND WILL BE SO VOTED. THE PROXIES NAMED HEREIN
ARE EACH AUTHORIZED TO VOTE IN THEIR DISCRETION UPON SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE SPECIAL MEETING AND ANY AND ALL ADJOURNMENTS THEREOF.
Date ______________, 2000
__________________________________
__________________________________
(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. When joint tenants
own shares, both should sign. If a corporation, please sign
in full corporate name by an authorized officer. If a
partnership, please sign in full partnership name by an
authorized partner or other person.
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 92656-2601
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON WEDNESDAY, OCTOBER 25, 2000
TO THE STOCKHOLDERS OF SAFEGUARD HEALTH ENTERPRISES, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of the Stockholders of SafeGuard
Health Enterprises, Inc. (the "Company") will be held at its executive offices
located at 95 Enterprise, Aliso Viejo, California 92656-2601 on October 25,
2000, at 4:00 p.m., Pacific Daylight Time, for the following purposes:
1. To elect six (6) directors;
2. To vote on a proposal to amend the Company's Restated Certificate of
Incorporation to increase its authorized shares of Common Stock to 40
million shares;
3. To vote on a proposal to amend the Company's Restated Certificate of
Incorporation to eliminate the classification of its Board of
Directors;
4. To vote on a proposal to increase the total number of shares of Common
Stock issuable under the Company's Employee Stock Option Plan to 3
million shares; and
5. To transact such other business as may properly come before the
Special Meeting and any and all adjournments thereof.
Only stockholders of record at the close of business on September 1, 2000, are
entitled to notice of and to vote at the Special Meeting or any and all
adjournments thereof. A list of stockholders eligible to vote at the Special
Meeting will be available for inspection at the Special Meeting and during
business hours from September 22, 2000, to the date of the Special Meeting at
the Company's executive offices located at 95 Enterprise, Aliso Viejo,
California 92656-2601. The Company's Bylaws provide that no other business may
be conducted at the Special Meeting except for voting on the proposals described
above.
By order of the Board of Directors,
JAMES E. BUNCHER
President and Chief Executive Officer
September 15, 2000
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING,
YOU SHOULD COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY. A RETURN
ENVELOPE THAT REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES HAS BEEN
PROVIDED FOR YOUR USE. RETURNING THE ENCLOSED PROXY WILL NOT PREVENT YOU FROM
VOTING IN PERSON IF YOU CHOOSE TO ATTEND THE SPECIAL MEETING.
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
95 ENTERPRISE
ALISO VIEJO, CALIFORNIA 92656-2601
PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
To Be Held on Wednesday, October 25, 2000
at 4:00 p.m. PDT
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 a Special Meeting of
Stockholders, which will be held on October 25, 2000 at 4:00 p.m., Pacific
Daylight Time, at the Company's principal executive offices, located at 95
Enterprise, Aliso Viejo, California 92656-2601, and any and all adjournments
thereof (the "Special Meeting"). The purpose of the Special Meeting and the
matters to be voted upon are set forth in the accompanying Notice of Special
Meeting of Stockholders. This Proxy Statement, Notice of Special Meeting of
Stockholders and the enclosed form of proxy are being mailed to all stockholders
of the Company on or about September 15, 2000.
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
September 1, 2000 (the "Record Date"), are entitled to notice of and to vote at
the Special 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 Special Meeting in person or represented by proxy will constitute
a quorum for the transaction of business at the Special Meeting. Each
stockholder is entitled to one (1) vote for each share of Common Stock held of
record as of the Record Date. Abstentions and broker non-votes are each
included in the number of shares present for the purposes of determining whether
there is a quorum present at the Special 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 Special Meeting. Abstentions and broker
non-votes will have no effect in the election of directors. Accordingly, the
six (6) nominees for director receiving the highest number of affirmative votes
cast at the Special Meeting will be elected as directors.
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 to approve Proposal 2. Abstentions and broker non-votes
will have the same effect as votes against Proposal 2.
Pursuant to the Company's Restated Certificate of Incorporation, the affirmative
vote of at least sixty-six and two-thirds percent (66 2/3%) of all shares of the
Company's Common Stock outstanding on the Record Date is required to approve
Proposal 3. 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 Special 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.
<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 Special Meeting in accordance with
the instructions indicated on the proxies or, if no direction is indicated, FOR
the election of the six (6) nominees for director listed below; FOR approval of
the amendment to the Restated Certificate of Incorporation increasing the
authorized shares of Common Stock to 40 million; FOR approval of the amendment
to the Restated Certificate of Incorporation eliminating the classification of
the Board of Directors; and FOR approval of the amendment to the Employee Stock
Option Plan increasing the number of shares that may be issued pursuant to stock
options granted thereunder to 3 million. Any stockholder who has given a proxy
may revoke it at any time before it is exercised at the Special 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, 92656-2601, 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 Special
Meeting and voting in person (although attendance at the Special 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 therefore are voted in favor of
approval of the proposals to be voted upon at the Special Meeting, the Board of
Directors expects to adjourn the Special Meeting in order to permit additional
time for soliciting and obtaining additional proxies or votes, and at any
subsequent reconvening of the Special Meeting, all proxies will be voted in the
same manner as such proxies would have been voted at the original Special
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.
PROPOSAL NUMBER 1
ELECTION OF DIRECTORS
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INTRODUCTION
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
shall be divided into three (3) classes, with one (1) class of directors elected
at each annual meeting of stockholders for a three (3) 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 within 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
2
<PAGE>
nominees. In such event, the persons named in the enclosed form of Proxy may,
in their discretion, cumulate votes pursuant to the proxies for any one (1) or
more nominees.
The Board of Directors has nominated for election as directors the six (6)
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 or if
Proposal 3 is approved at the Special Meeting, the directors elected at the
Special Meeting will hold office until the next annual meeting and until their
respective successors are elected and qualified. The Company did not hold an
annual meeting in 1999 or 2000. The Company anticipates that it will hold its
next annual meeting of stockholders in May 2001.
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 of 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.
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 Special Meeting and
entitled to vote on the election of directors. Pursuant to the Company's
Bylaws, any stockholder entitled to vote for the election of directors at the
Special Meeting was entitled to nominate a person or persons for election as
directors only if written notice of the stockholder's intent to make such
nomination was 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 92656-2601, not later
than August 24, 2000. Each such notice was required to 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 Special
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 Company received
no stockholder notices of any such nominations. Accordingly, the Chairman of
the Special Meeting will not acknowledge the nomination of any person made by a
stockholder at the Special Meeting since such nomination would not be in
compliance with the foregoing procedure.
The following information sets forth biographical information, as of August 31,
2000, for the nominees for election as a director at the Special Meeting:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL POSITION DIRECTOR SINCE
--------------------------------------- --- ---------------------------------------------------------------- --------------
<S> <C> <C> <C>
Steven J. Baileys, DDS 46 Chairman of the Board of Directors 1982
James E. Buncher 63 President, Chief Executive Officer, and Director 2000
Ronald I. Brendzel, JD 51 Senior Vice President, General Counsel, Secretary, and Director 1989
Dennis L. Gates, CPA 44 Senior Vice President, Chief Financial Officer, and Director 2000
Jack R. Anderson 75 Director (1) 2000
Leslie B. Daniels 53 Director (1) 2000
----------------------------
<FN>
(1) Member of Compensation and Stock Option Committee, and Audit Committee.
</TABLE>
3
<PAGE>
INFORMATION ABOUT THE MEMBERS OF THE BOARD OF DIRECTORS
Mr. Gates became a director of the Company on March 1, 2000, by being appointed
to the Board to fill a then existing vacancy on the Board. Mr. Anderson, Mr.
Buncher and Mr. Daniels became directors of the Company on March 1, 2000, in
connection with the Recapitalization Agreement described below under "Certain
Transactions." One (1) board position is currently vacant and the person to be
appointed to that position will be the designee of the holders of the Series B,
C and D Preferred Stock when issued pursuant to the Recapitalization Agreement.
Officers of the Company are elected annually and serve at the pleasure of the
Board of Directors, subject to all rights, if any, under certain contracts of
employment.
Dr. Baileys has been Chairman of the Board of Directors since September 1995 and
a director since 1982. He served as President of the Company from 1981 until
March 1997; as Chief Executive Officer from May 1995 to February 2000; and,
effective June 2000, is currently a consultant to the Company. He was Chief
Operating Officer from 1981 to May 1995. From 1975 until 1981, Dr. Baileys
served in a variety of executive and administrative capacities with the Company.
Dr. Baileys is licensed to practice dentistry in the state of California. He is
a member of the Southern California chapter of the Young Presidents'
Organization. Dr. Baileys is the brother-in-law of Mr. Brendzel.
Mr. Buncher has been President, Chief Executive Officer and a director of the
Company, since March 2000. Prior to that, he 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 President of
Health Plans Group of Value Health, Inc., a national specialty managed care
company, from September 1995 to September 1997. He served as Chairman,
President and Chief Executive Officer of Community Care Network, Inc., a Value
Health subsidiary, from August 1992 to September 1997, when Value Health was
acquired by a third party and Mr. Buncher resigned his positions with that
company. Mr. Buncher currently serves on the board of directors of Horizon
Health Corporation.
Mr. Brendzel has been Senior Vice President, General Counsel, Secretary and a
director of the Company since 1989. He was also Chief Financial Officer from
April 1988 to May 1996, Vice President-Corporate Development from August 1980
until April 1986, and held various executive and administrative positions 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 was a member of the
Knox-Keene Health Care Service Plan Advisory Committee, which assisted the
California Department of Corporations in regulating managed care health plans
from 1987 until 2000. 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.
Mr. Gates has been Senior Vice President and Chief Financial Officer since
November 1999, and has been a director of the Company since March 2000. From
June 1995 to February 1999, he served as Chief Financial Officer, then
Treasurer, of Sheridan Healthcare, Inc., a physician practice management
company. From June 1994 to May 1995, he served as Vice President-Finance of the
California Health Plan Division of FHP International, Inc. From November 1988
to June 1994, he served as Vice President-Finance, Secretary and Treasurer of
TakeCare, Inc., a health maintenance organization.
Mr. Anderson 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 Horizon Health Corporation and Genesis
Health Ventures, Inc.
Mr. Daniels was a founder of CAI Partners, an investment firm, in 1989 and has
been a principal of that entity since then. Mr. Daniels has 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 is currently a director of Pharmakinetics Laboratories,
Inc. He was a past Chairman of Zenith Laboratories, Inc. and has been a
director of Ivax Corp., CompreCare, Inc. and MIM Corp.
4
<PAGE>
SHARES REPRESENTED BY THE ACCOMPANYING PROXY CARD WILL BE VOTED "FOR" THE
ELECTION OF THE NOMINEES NAMED ABOVE EXCEPT TO THE EXTENT AUTHORITY TO VOTE FOR
ONE (1) OR MORE NOMINEES IS WITHHELD. AS INDICATED IN THE PROXY CARD,
STOCKHOLDERS MAY (I) VOTE FOR THE ENTIRE SLATE OF NOMINEES, (II) WITHHOLD
AUTHORITY TO VOTE FOR THE ENTIRE SLATE OF NOMINEES OR (III) BY WRITING THE NAME
OF ONE (1) OR MORE NOMINEES IN THE SPACE PROVIDED ON THE PROXY CARD, WITHHOLD
AUTHORITY TO VOTE FOR SUCH SPECIFIED NOMINEE OR NOMINEES.
THE BOARD OF DIRECTORS AND COMMITTEES
The Board of Directors conducted thirteen (13) meetings during fiscal year 1999
and seven (7) meetings as of the date of this Proxy Statement during 2000. All
of the persons who were directors of the Company during fiscal year 1999, and
who are currently directors of the Company, attended at least seventy-five
percent (75%) of the aggregate of: (i) the total number of meetings of the Board
of Directors during fiscal year 1999 and during fiscal year 2000, and (ii) the
total number of meetings held by the committee on which they served during
fiscal year 1999 and during fiscal year 2000, through the date of this Proxy
Statement.
Audit Committee. The Audit Committee is currently composed of Mr. Anderson and
Mr. Daniels, and is chaired by Mr. Daniels. All members of the Audit Committee
are non-employee directors of the Company. The Audit Committee met two (2)
times in fiscal year 1999 and two (2) times as of the date of this Proxy
Statement during 2000. 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.
Compensation and Stock Option Committee. The Company's Compensation and Stock
Option Committee is currently composed of Mr. Anderson and Mr. Daniels, and is
chaired by Mr. Anderson. All members of this committee are non-employee
directors of the Company. The Committee met two (2) times during fiscal year
1999 and five (5) times as of the date of this Proxy Statement during 2000. The
Committee is responsible for reviewing the performance of the officers of the
Company and establishing the annual compensation for all officers, including
salary, bonuses and perquisites, and is also responsible for making stock option
grants under the Company's Employee Stock Option Plan.
The Board of Directors does not currently have a nominating committee.
COMPENSATION OF DIRECTORS
Directors who were not otherwise employed by the Company were paid an annual fee
of $15,000 during fiscal year 1999. The Board of Directors has determined that
there will be no compensation paid to non-employee directors during calendar
year 2000 and thereafter, until that policy is changed in the future by the
Board, and that there will be no automatic stock option grant pursuant to the
Company's non-employee Automatic Option Grant program to non-employee Directors
during calendar year 2000 and thereafter, until that policy is changed in the
future by the Board. Directors are reimbursed for their out-of-pocket expenses
incurred in attending meetings of the Board of Directors.
CERTAIN TRANSACTIONS
On March 1, 2000, the Company entered into a Term Sheet Agreement (the
"Recapitalization Agreement") with CAI Partners and Company II, L.P., CAI
Capital Partners and Company II, L.P. (collectively "CAI"), Jack R. Anderson
("Anderson"), Silicon Valley Bank (the "Bank"), John Hancock Life Insurance
Company and other holders of senior notes of the Company (collectively,
"Hancock") and the Baileys Family Trust ("Baileys"), (collectively the
"Investors" and individually "Investor"). Pursuant to the Recapitalization
Agreement, CAI, Anderson and Baileys collectively loaned the Company an
aggregate of $8 million (the "Loan"). The Investors also agreed to purchase
from the Company, and the Company agreed to sell to the Investors, subject to
5
<PAGE>
certain conditions, Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock (the "Preferred Stock") and Series
A Convertible Notes, Series B Convertible Notes, Series C Convertible Notes and
Series D Convertible Notes (the "Convertible Notes") which Preferred Stock and
Convertible Notes will be initially convertible into an aggregate of 30 million
shares of Common Stock of the Company. The Preferred Stock and Convertible
Notes will be issued in consideration of cancellation of the Loan, and
cancellation of all the other existing indebtedness of the Company owed to the
Bank and Hancock, respectively, which is currently approximately $43 million in
the aggregate.
The Loan bears interest at the rate of ten percent (10%) per annum, payable
quarterly and at maturity. The maturity date of the Loan is April 30, 2001.
Upon issuance of the Preferred Stock pursuant to the Recapitalization Agreement,
the Loan will be converted into shares of Series A Preferred Stock (and, if
issued, Series A Convertible Notes).
Additionally, in the Recapitalization Agreement, the Bank and Hancock agreed to
subordinate their existing indebtedness to the Loan and to forebear, until April
30, 2001, any enforcement of that existing indebtedness of the Company.
Stockholder approval of the Recapitalization Agreement is not required.
Stockholder approval is only required to amend the Company's Restated
Certificate of Incorporation to increase the number of authorized shares which
is the matter being called to a vote of the stockholders under Proposal Number
2. If Proposal Number 2 is approved, the Convertible Notes will not be issued
and instead the shares of Preferred Stock into which the Convertible Notes would
have been convertible, will be issued.
The Recapitalization Agreement provided working capital to the Company by virtue
of the Loan and relieved the Company from any debt service obligations, both
principal and interest, under the indebtedness owed to the Bank and Hancock. In
addition, the Company was not in compliance with certain loan covenants
contained within the agreements with the Bank and Hancock, but the
Recapitalization Agreement avoided the institution of any collection or other
actions by such parties. Upon the issuance of the Preferred Stock pursuant to
the Recapitalization Agreement, the Loan and the indebtedness owed to the Bank
and Hancock will be completely converted to equity.
The issuance of the Preferred Stock pursuant to the Recapitalization Agreement
is conditioned upon receipt of regulatory approvals required for the change of
control in the ownership of the Company that will result from that transaction.
The Company has filed all applications required for such approvals. The Company
anticipates that such approvals will be obtained in 2000. However, such
approvals are subject to regulatory determinations and the Company can give no
assurances that such approvals will be obtained.
In the event that the amendment to the Restated Certificate of Incorporation
increasing the number of authorized shares of Common Stock is approved at the
Special Meeting before the regulatory approvals are obtained, then the
Convertible Notes contemplated by the Recapitalization Agreement will not be
issued and instead the shares of Preferred Stock into which the Convertible
Notes would have been convertible will be issued.
Series A Preferred Stock. The Series A Preferred Stock will consist of 64,000
shares (80,000 shares upon Conversion of the Series A Convertible Notes) and
will have the following rights, preferences and limitations:
- A liquidation preference of $100 per share. The liquidation preference
is senior to all other securities of the Company including the Series
B, C and D Preferred Stock described below and the Common Stock.
- The Series A Preferred Stock will not have specified or preferential
dividends but will be entitled to participate on an as-converted, pro
rata basis in any dividends paid on the Common Stock of the Company or
the Series B, C or D Preferred Stock.
- The Series A Preferred Stock will not be subject to mandatory
redemption at the election of the Investors but will be subject to
redemption at a redemption price of $100 per share by the Company at
any time on or after ten (10) years after the original date of
issuance.
- The Series A Preferred Stock will be convertible immediately at any
time into shares of Common Stock at a conversion price of $1.00 per
share. Each share of Series A Preferred Stock will be initially
convertible into 100 shares of Common Stock based on the $100 per
share liquidation preference. The
6
<PAGE>
conversion price and number of shares will be subject to customary
anti-dilution adjustments for stock splits, share dividends,
recapitalizations, stock issuances, etc., with the anti-dilution
adjustment for the issuance of shares at less than the conversion
price being determined on the "weighted average method."
- The Series A Preferred Stock, voting as a single class, will be
entitled to elect a majority, four (4) of the Board of Directors. On
all other matters, the holders of the Series A Preferred Stock will
vote together with the holders of the Common Stock and the Series B, C
and D Preferred Stock and will be entitled to cast one (1) vote for
each share of Common Stock into which the Series A Preferred Stock is
convertible. Notwithstanding the foregoing, in the event that CAI and
Anderson, acting collectively, at any time sell fifty percent (50%) or
more of their respective portions of the Loan or their respective
portions of the Series A Preferred Stock and Series A Convertible
Notes, then, with respect to the election of directors, the Series A,
B, C and D Preferred Stock will vote together as a single class to
elect five (5) directors to the Board of Directors.
- The approval of the Series A Preferred Stock, voting as a separate
class, will be required for the issuance of any securities having
liquidation or other rights senior or superior or equal in any respect
to the rights of the Series A Preferred Stock.
Series B, C and D Preferred Stock. The Series B Preferred Stock will consist of
64,000 shares (80,000 shares upon conversion of the Series B Convertible Notes.)
The Series C Preferred Stock will consist of 24,000 shares (30,000 shares upon
conversion of the Series C Convertible Note.) The Series D Preferred Stock will
consist of 88,000 shares (110,000 shares upon conversion of the Series D
Convertible Note.) The rights, preferences and limitations of the Series B, C
and D Convertible Preferred Stock will be identical to the Series A Convertible
Preferred Stock except as set forth below:
- The Series B Preferred Stock $100 per share liquidation preference
will be senior to the Series C Preferred Stock liquidation preference.
The Series C Preferred Stock $100 per share liquidation preference
will be senior to the Series D Preferred Stock $100 per share
liquidation preference. The Series B, C and D Preferred Stock
liquidation preferences will be inferior to the Series A Preferred
Stock liquidation preference but prior to any liquidation rights of
the Common Stock.
- The Series B, C and D Preferred Stock will not have specified or
preferential dividends but will be entitled to participate on an
as-converted, pro rata basis in any dividends paid on the Common Stock
of the Company or the Series A, B, C or D Preferred Stock as the case
may be.
- The Series B, C and D Preferred Stock will not be subject to mandatory
redemption at the election of the Investors but shall be subject to
redemption at a redemption price of $100 per share by the Company at
any time on or after ten (10) years after the original date of
issuance.
- The Series B, C and D Preferred Stock will be convertible immediately
at any time into shares of Common Stock at a conversion price of $1.00
per share. Each share of Series B, C and D Preferred Stock will be
initially convertible into 100 shares of Common Stock based on the
$100 per share liquidation preference. The conversion price and number
of shares will be subject to customary anti-dilution adjustments for
stock splits, share dividends, recapitalizations, stock issuances,
etc., with the anti-dilution adjustment for the issuance of shares at
less than the conversion price being determined on the "weighted
average method."
- The Series B, C and D Preferred Stock, voting together as a single
class, will be entitled to elect one (1) director to the Board of
Directors. On all other matters, the holders of the Series B, C and D
Preferred Stock will vote together with the holders of the Series A
Preferred Stock and the Common Stock and will be entitled to cast one
(1) vote for each share of Common Stock into which the Series B, C and
D Preferred Stock is convertible. Notwithstanding the foregoing, in
the event that CAI and Anderson at any time sell fifty percent (50%)
or more of their respective portions of the Loan or their respective
7
<PAGE>
portions of the Series A Preferred Stock and Series A Convertible
Notes, then, with respect to the election of directors, the Series A,
B, C and D Preferred Stock will vote together as a single class to
elect five (5) directors to the Board of Directors.
- The approval of the Series B, C and D Preferred Stock, voting as a
separate class, will be required for the issuance of any security of
the Company having liquidation or other rights senior and superior or
equal in any respect to the rights of the Series B, C and D Preferred
Stock.
Series A Convertible Notes. If issued, the Series A Convertible Notes will have
the following terms:
- The Series A Convertible Notes will be in the aggregate principal
amount of $1.6 million and bear interest at the rate of ten percent
(10%) per annum from the date of issuance, payable quarterly and at
maturity.
- The Series A Convertible Notes will be automatically converted into
shares of Series A Preferred Stock upon the approval by the
stockholders of the Company of an amendment to its Restated
Certificate of Incorporation increasing the number of authorized
shares of Common Stock (Proposal Number 2 described below) sufficient
for the issuance of Common Stock upon the conversion of all the shares
of Preferred Stock upon the automatic conversion of all the
Convertible Notes. The conversion price will be $100 per share of
Preferred Stock and subject to the same anti-dilution protection as
the Series A Preferred Stock. Initially the Series A Convertible Notes
will be convertible into an aggregate of 16,000 shares of Series A
Preferred Stock.
- The Series A Convertible Notes will not have voting rights.
- The Series A Convertible Notes and the payment thereof will be senior
and superior to the Series B, C and D Convertible Notes.
Series B, C and D Convertible Notes. The terms of the Series B, C and D
Convertible Notes will be identical to the Series A Convertible Notes except
that (i) the Series B, C and D Convertible Notes will be convertible into Series
B, C and D Preferred Stock, respectively and (ii) payment of the Series B
Convertible Note will be senior and superior to the Series C Convertible Note,
(iii) payment of the Series C Preferred Note will be senior and superior to
payment of the Series D Convertible Note. The Series B, C and D Convertible
Notes will have principal balances of $1.6 million, $600,000 and $2.2 million,
respectively. Initially the Series B, C and D Convertible Notes will be
convertible into an aggregate of 16,000 shares of Series B Preferred Stock,
6,000 shares of Series C Preferred Stock and 22,000 shares of Series D Preferred
Stock, respectively.
As part of the Recapitalization Agreement, the Company caused Messrs. Anderson,
Buncher and Daniels to be appointed to the Board of Directors. In addition, the
Investors agreed to vote all voting securities now or hereafter held by them to
approve an amendment to the Company's Restated Certificate of Incorporation to
increase the number of shares of Common Stock, as set forth in Proposal Number
2, to maintain the size of the Board of Directors at seven (7) and to take any
other actions necessary to effectuate the Recapitalization Agreement. The Bank
and Hancock do not currently own any shares of voting securities of the Company.
See "Security Ownership of Management" and "Principal Stockholders" for
information regarding the current stock ownership of the other Investors. After
the Preferred Stock is issued, the holders of the Series A Preferred Stock,
voting as a single class, will be entitled to elect a majority, four (4) of the
seven (7) members of the Board of Directors, and the holders of the Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, voting
together as a single class, will be entitled to elect one (1) director. The
holders of all shares of Common Stock, voting as a single class, will be
entitled to elect the remaining two (2) directors.
The above description of the transactions contemplated by the Recapitalization
Agreement are qualified by reference to the provisions of the Recapitalization
Agreement, filed as an exhibit to the Company's Current Report on Form 8-K,
filed with the Securities and Exchange Commission as of March 16, 2000, which is
hereby incorporated by reference herein as if set forth in full.
By an agreement dated as of June 28, 2000 (the "Bank Agreement"), the Bank
agreed to sell the Bank indebtedness to CAI, Mr. Anderson, Dr. Baileys, Mr.
Buncher, Mr. Brendzel, Mr. Gates and an unaffiliated third party for a total
8
<PAGE>
purchase price of $5,000,000. Such sale is to occur simultaneously with the
issuance of the Preferred Stock under the Recapitalization Agreement. As a
result of the Bank Agreement, such parties will acquire the Preferred Stock
(and, if applicable, Convertible Notes) that otherwise would have been issued to
the Bank pursuant to the Recapitalization Agreement.
INTEREST OF CERTAIN PERSONS/CHANGE OF CONTROL
As a result of the Recapitalization Agreement and the Bank Agreement, CAI,
Anderson, Baileys, Mr. Buncher, Mr. Brendzel and Mr. Gates will acquire shares
of Preferred Stock convertible into Common Stock of the Company. The Company
currently has 4,747,498 shares of Common Stock outstanding. The Preferred Stock
issuable pursuant to the Recapitalization Agreement will be convertible into 30
million shares of Common Stock of the Company, representing approximately 86.3%
of the then outstanding voting securities of the Company. The currently
outstanding Common Stock of the Company will represent approximately 13.7% of
the voting securities of the Company after the issuance of the Preferred Stock.
Messrs. Baileys, Anderson, Daniels, Buncher and Brendzel are currently
beneficial owners of outstanding shares of Common Stock of the Company. See
"Security Ownership of Management." After the issuance of the Preferred Stock
pursuant to the Recapitalization Agreement and the Bank Agreement, the following
parties will beneficially own the respective number and percentage of the
outstanding voting securities of the Company as shown below:
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF VOTING
PARTY OF VOTING SECURITIES SECURITIES
-------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
Hancock Noteholders 15,000,000 43.2
Leslie B. Daniels (Includes shares held by CAI entities) 9,821,922 28.3
Jack R. Anderson 3,067,615 8.8
Steven J. Baileys 2,711,267 7.8
James E. Buncher 225,000 *
Ronald I. Brendzel 211,573 *
Dennis L. Gates 100,000 *
<FN>
* Indicates less than one percent (1%).
</TABLE>
In addition, the CAI entities and Mr. Anderson will own approximately 85.5% of
the Series A Preferred Stock which will have the right to elect a majority, four
(4) of the seven (7) members of the Board of Directors, voting as a single
class.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the beneficial ownership of the outstanding
Common Stock of the Company as of August 31, 2000, by each director, each
executive officer named in the Summary Compensation Table below, and all current
directors and officers as a group. All shares are subject to the named person's
sole voting and investment power, except where otherwise indicated.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF TOTAL
OFFICER OR DIRECTOR BENEFICIALLY OWNED (1) SHARES OUTSTANDING
---------------------------------------------------------- ---------------------- -------------------
<S> <C> <C>
Jack R. Anderson (2) 283,000 6.0
Steven J. Baileys (3) 1,798,767 37.9
Ronald I. Brendzel (4) 154,906 3.2
James E. Buncher 25,000 *
John E. Cox (5) 10,000 *
Leslie B. Daniels 37,155 *
Dennis L. Gates 0 *
Herb J. Kaufman (6) 102 *
Kenneth E. Keating (7) 13,333 *
All current directors and officers as a group (11 persons) 2,312,161 48.7
<FN>
* Indicates less than one percent (1%).
_______________________________________________
9
<PAGE>
(1) Does not include securities issuable pursuant to the Recapitalization
Agreement. Includes options that are exercisable within 60 days of August
31, 2000. 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.
(2) Includes 100,000 shares owned by Mr. Anderson's spouse as separate property
as to which Mr. Anderson disclaims beneficial ownership.
(3) Includes 645,000 shares of Common Stock owned directly by Dr. Baileys,
700,767 shares of Common Stock owned by the Baileys Family Trust, 303,000
shares of Common Stock held in various trusts for relatives of Dr. Baileys,
for all of which Dr. Baileys is trustee and for which Dr. Baileys has sole
power to vote the securities, and 150,000 shares of Common Stock 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. Dr. Baileys disclaims beneficial ownership of any of the shares
in the trusts or the foundation referenced above.
(4) Includes options to purchase 43,333 shares of Common Stock.
(5) Mr. Cox left the Company in March 2000.
(6) Dr. Kaufman left the Company in June 2000.
(7) Represents options to purchase 13,333 shares of Common Stock.
</TABLE>
PRINCIPAL STOCKHOLDERS
The following table shows the number of shares of Common Stock beneficially
owned by all persons that, to the Company's knowledge, owned five percent (5%)
or more of the total outstanding Common Stock of the Company as of August 31,
2000, except as indicated otherwise. The named person has sole voting and
investment power with respect to all shares of Common Stock listed, except as
indicated otherwise. 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.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF TOTAL SHARES
STOCKHOLDER BENEFICIALLY OWNED (1) OUTSTANDING
----------------------------------- ---------------------- --------------------------
<S> <C> <C>
Steven J. Baileys (2) 1,798,767 37.9
Baileys Family Trust (3) 700,767 14.8
The Burton Partnership (4) 521,300 11.0
Jack R. Anderson (5) 283,000 6.0
Dimensional Fund Advisors, Inc. (6) 265,800 5.6
FMR Corp. (7) 256,500 5.4
<FN>
---------------------------
(1) Does not include securities issuable pursuant to the Recapitalization
Agreement. Includes options that are exercisable within 60 days of August
31, 2000. 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.
(2) The address of Steven J. Baileys, DDS, who is Chairman of the Board of
Directors and a consultant to the Company, is 95 Enterprise, Aliso Viejo,
California 92656-2601. The amount indicated includes 645,000 shares of
Common Stock owned directly by Dr. Baileys, 700,767 shares of Common Stock
owned by the Baileys Family Trust, 303,000 shares of Common Stock held in
various trusts for relatives of Dr. Baileys, for all of which Dr. Baileys
is trustee and for which Dr. Baileys has sole power to vote the securities,
and 150,000 shares of Common Stock 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. Dr. Baileys disclaims
beneficial ownership of any of the shares in the trusts or the foundation
referenced above.
(3) The address of the Baileys Family Trust, of which Steven J. Baileys, DDS is
Trustee, is P.O. Box 9109, Newport Beach, California 92658. The shares
indicated do not include 645,000 shares of Common Stock owned directly by
Dr. Baileys, 303,000 shares of Common Stock held in various trusts for
relatives of Dr. Baileys, or 150,000 shares of Common Stock held by the
Alvin and Geraldine Baileys Foundation.
(4) The address of The Burton Partnership is P.O. Box 4643, Jackson, Wyoming
83001.
(5) The address of Jack R. Anderson is 16475 Dallas Parkway, Suite 735,
Addison, Texas 75001. The shares indicated includes 100,000 shares owned by
Mr. Anderson's spouse as separate property as to which Mr. Anderson
disclaims beneficial ownership.
(6) The address of Dimensional Fund Advisors, Inc. ("Dimensional") is 1299
Ocean Avenue, 11th Floor, Santa Monica, California 90401. Dimensional
serves as an investment advisor or manager to certain investment companies,
trusts and accounts, which are the owners of the shares of Common Stock
indicated in the table above. In its role as investment advisor or manager,
Dimensional possesses voting and/or investment power over the shares of
Common Stock indicated above. Dimensional disclaims beneficial ownership of
such shares of Common Stock.
(7) The address of FMR Corp. ("Fidelity") is 82 Devonshire Street, Boston,
Massachusetts 02109. Fidelity acts as investment advisor to Fidelity
Low-Priced Stock Fund (the "Fund"), which owns the shares of Common Stock
indicated above. Fidelity does not have the power to vote or direct the
voting of the shares of Common Stock indicated above, which power resides
with the Board of Trustees of the Fund. Fidelity carries out the voting of
the shares of Common Stock indicated above under written guidelines
established by the Board of Trustees of the Fund. Edward C. Johnson 3rd,
chairman of Fidelity, Fidelity, and the Fund each has sole power to dispose
of the shares indicated above.
</TABLE>
10
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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
(10%) of the Company's 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. Executive officers, directors
and greater than ten percent (10%) beneficial owners are required by Securities
and Exchange Commission regulations to furnish the Company with copies of all
Section 16(a) forms they 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 1999 fiscal year, all of these reports were
timely filed.
COMPENSATION OF EXECUTIVE OFFICERS
The following table discloses compensation paid to the Company's Chief Executive
Officer as of December 31, 1999, the other four (4) most highly-paid executive
officers as of December 31, 1999, who received total compensation in excess of
$100,000 during the year ended December 31, 1999, and the current Chief
Executive Officer and Chief Financial Officer, who joined the Company as of
March 1, 2000 and November 1, 1999, respectively, (the "Named Executive
Officers"). The compensation disclosed is for the three (3) years ended
December 31, 1999.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
------------------ ALL
ANNUAL SECURITIES OTHER
COMPENSATION (1) UNDERLYING OPTIONS COMPENSATION
-------------- ------------------ -------------
Name Principal Position YEAR SALARY
---------------------- ------------------------- ---- --------
<S> <C> <C> <C> <C> <C>
James E. Buncher President and Chief 1999 $ -- -- $ --
Executive Officer (2) 1998 -- -- --
1997 -- -- --
Steven J. Baileys, DDS Chairman of the Board of 1999 400,000 -- 1,260
Directors and Chief 1998 400,000 70,000 1,260
Executive Officer (3) 1997 400,000 50,000 1,260
John E. Cox President and Chief 1999 275,000 -- --
Operating Officer (4) 1998 275,000 25,000 --
1997 258,221 25,000 --
Ronald I. Brendzel, JD Senior Vice President, 1999 185,000 -- 900
General Counsel and 1998 185,000 5,000 900
Secretary 1997 185,000 5,000 900
Dennis L. Gates, CPA Senior Vice President 1999 34,833 50,000 --
and Chief Financial 1998 -- -- --
Officer (5) 1997 -- -- --
Herb J. Kaufman, DDS Senior Vice President 1999 170,000 -- 249
and Chief Dental 1998 165,530 7,500 249
Officer (6) 1997 153,187 25,000 249
Kenneth E. Keating Vice President-Sales and 1999 150,000 -- --
Marketing (7) 1998 150,000 5,000 --
1997 150,000 2,500 --
<FN>
-----------------------
(1) No bonuses were paid to the Named Executive Officers with respect to the
1997, 1998, and 1999 fiscal years.
(2) Mr. Buncher joined the Company in March 2000. His current annual salary is
$225,000.
(3) Dr. Baileys resigned his position as Chief Executive Officer in March 2000.
He remains Chairman of the Board of Directors and a consultant to the
Company.
(4) Mr. Cox left the Company in March 2000.
(5) Mr. Gates joined the Company in November 1999. His current annual salary is
$200,000.
(6) Dr. Kaufman joined the Company in January 1997 and left the Company in June
2000.
(7) Mr. Keating became Vice President-Sales and Marketing in February 2000.
Prior thereto he was Western Regional Vice President. His current annual
salary is $180,000.
</TABLE>
11
<PAGE>
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
The Company has employment agreements with Messrs. Buncher, Gates, Brendzel, and
Keating. The employment agreements expire on June 30, 2002, and provide for
current annual salaries of $225,000, $200,000, $185,000, and $180,000,
respectively, in addition to potential performance bonuses which provide for
bonus as described in the Report of Compensation and Stock Option Committee on
Executive Compensation. The Company may terminate any of the agreements for
cause and shall have no further compensation responsibility to the employee in
such event, or without cause by paying the employee an amount as described
below. Each executive may terminate his employment agreement for any reason.
In the event that more than fifty percent (50%) of the Company's outstanding
Common Stock is purchased by an entity that is not an existing stockholder
(other than pursuant to the Recapitalization Agreement) and there is a
substantial diminution of the employee's authority or job responsibilities, then
each executive, at his option, may terminate his employment agreement. In such
event, or if the Company terminates the employment agreement without cause, the
Company would be obligated to pay the executive an amount equal to the
employee's current annual salary and bonus, or the amount due through the end of
the employment agreement, whichever is less, but in no event would the amount
paid be less than six (6) months of the employee's compensation rate then in
effect.
On June 1, 2000, Dr. Baileys' employment with the Company terminated and he
became a consultant to the Company at an annual compensation rate of $200,000
for a two (2) year period through May 31, 2002. In connection therewith, Dr.
Baileys also received non-statutory options to purchase 200,000 shares of the
Company's Common Stock at an exercise price of $1.00 per share, which options
vest at the expiration of his consulting agreement and must be exercised not
later than one (1) year thereafter or one (1) year after he ceases to be a
Director of the Company, whichever occurs last. Mr. Cox, who previously had an
employment agreement with the Company, entered into a separate employment
termination agreement in March 2000, and all compensation payments to Mr. Cox
ended as of May 31, 2000. In June 2000, Dr. Kaufman's employment with the
Company terminated and he entered into a separate employment termination
agreement at which time he received a lump sum employment termination payment of
$100,000.
STOCK OPTIONS
Stock options granted to the Named Executive Officers during the year ended
December 31, 1999, were as follows.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL STOCK OPTION GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------------ VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SHARES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM
OPTIONS EMPLOYEES Price Per Expiration --------------------
NAME GRANTED IN 1999 SHARE DATE 5% 10%
------------------ ---------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
James E. Buncher -- -- $ -- -- $ -- $ --
Steven J. Baileys -- -- -- -- -- --
John E. Cox -- -- -- -- -- --
Ronald I. Brendzel -- -- -- -- -- --
Dennis L. Gates 50,000 90.9 3.75 Oct 2009 117,918 298,827
Herb J. Kaufman -- -- -- -- -- --
Kenneth E. Keating -- -- -- -- -- --
</TABLE>
12
<PAGE>
OPTION EXERCISES AND HOLDINGS
There were no stock options exercised by any of the named Executive Officers
during the year ended December 31, 1999. Stock options held by the Named
Executive Officers at December 31, 1999 are shown in the following table. None
of the stock options held by the Named Executive Officers had an exercise price
that was less than the market price of the Common Stock as of December 31, 1999.
There were no stock appreciation rights outstanding as of December 31, 1999.
<TABLE>
<CAPTION>
OPTION VALUES AT 1999 FISCAL YEAR END
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
-------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------------------- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
James E. Buncher -- -- $ -- $ --
Steven J. Baileys (1) 256,667 63,333 -- --
John E. Cox (2) 100,000 25,000 -- --
Ronald I. Brendzel 40,000 5,000 -- --
Dennis L. Gates 0 50,000 -- --
Herb J. Kaufman (3) 19,167 13,333 -- --
Kenneth E. Keating 10,833 4,167 -- --
All current executive officers as a 61,500 66,000 -- --
group (8 persons)
All current directors who are not 256,667 63,333 -- --
executive officers as a group
(1 person)
All employees, who are not executive 21,667 15,633 -- --
officers as a group (20 persons)
-----------------------
<FN>
(1) Dr. Baileys' options as set forth in this table expired on June 30, 2000.
Dr. Baileys was granted non-statutory options to purchase 200,000 shares of
the Company's Common Stock, effective June 1, 2000, at an exercise price of
$1.00 per share, which options expire one (1) year after the expiration of
his consulting contract with the Company or one (1) year after he ceases to
be a Director of the Company, whichever occurs last, unless otherwise
exercised.
(2) Mr. Cox left the Company in March 2000 and the options set forth in this
table expired as of June 30, 2000.
(3) Dr. Kaufman left the Company in June 2000 and the options set forth in this
table expired as of July 5, 2000.
</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") currently consists of two (2) 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. During fiscal year 1999 and until March 1,
2000, the Committee consisted of William E. McKenna, Chairman, Michael M. Mann,
Ph.D., George H. Stevens, and Bradford M. Boyd, DDS. Effective March 1, 2000,
the Committee consisted of Jack R. Anderson, Chairman and Leslie B. Daniels.
The information contained herein relates to the period from March 1, 2000 to the
date of this Proxy Statement, except as otherwise indicated.
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
13
<PAGE>
by other companies of similar size and scope of operations, including other
publicly and privately-held managed dental health care organizations.
To achieve the goals described herein, the Committee has developed an executive
compensation program consisting of three (3) 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)
defined annual bonus awards payable in cash and tied to the Company's
achievement of financial targets and an individual's performance goals and
objectives, and (iii) long-term stock based incentive awards designed to
strengthen the mutuality of interests between the Executive Officers and other
key employees and the Company's stockholders. The Committee makes option grants
to Executive Officers and other key employees of the Company under the Employee
Stock Option Plan.
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.
During 1998, the Committee determined that the salary of the CEO and the four
(4) other most highly compensated individuals would remain unchanged for 1999.
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.
The Committee also believes that the Company's use of the Employee Stock Option
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 1999 and through the date of this Proxy Statement. 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 authorized the payment of bonus compensation based
upon the achievement of specified Company financial targets along with an
assessment by the CEO of an individual's contributions to the Company. Bonuses
are based upon the overall achievement in increasing the Company's revenue, its
level of profitability and specific goals and objectives tied to an individual's
job responsibilities with the Company, and provides for additional compensation
based upon an amount designed to yield a bonus of between thirty percent (30%)
to sixty percent (60%) of an Executive Officer's base annual salary
compensation. In 1999, the Committee did not authorize any bonus to be paid to
any Executive Officer. For fiscal year 2000, the Committee has authorized the
payment of bonuses to Executive Officers tied to the overall financial
performance of the Company and to an individual's job performance. As a general
matter, the Committee endorses the philosophy that executive compensation should
reflect the Company's performance and as such, has adopted a bonus plan that is
in part directly tied to the overall achievement of certain financial
performance goals by the Company along with the performance of an individual as
to specified job goals and objectives.
Equity Based Compensation.
The Executive Officers have, from time to time, received option grants under the
Employee Stock Option Plan of the Company. 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, job responsibilities, and may also be based in part upon
Company performance factors such as cash flow, 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 1999, the Committee granted stock options to one (1) Executive
Officer as set forth herein, and during 2000 to various executive officers as
set forth herein.
14
<PAGE>
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. 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 and
its level of profitability. In 1999, the Company did not pay the CEO a bonus.
Dr. Baileys' salary in 1999 was determined based on an analysis of salaries paid
by peer companies and on Dr. Baileys' knowledge, experience and individual
performance. In connection with the Recapitalization Agreement, Dr. Baileys
resigned as Chief Executive Officer of the Company effective March 1, 2000, and
effective June 1, 2000, became a consultant to the Company.
As of March 1, 2000, the Board of Directors appointed James E. Buncher,
President and Chief Executive Officer of the Company. Mr. Buncher's base cash
compensation was established at $225,000 annually based upon his knowledge and
experience in the health care industry. A bonus plan was also established for
Mr. Buncher for calendar year 2000 that is based upon the overall achievement of
increasing the Company's profitability and improvement in its cash flow.
The Compensation and Stock Option Committee comprised of the following members
of the Board of Directors of the Company have furnished the Report as of
December 31, 1999:
William E. McKenna, Chairman
Michael M. Mann, Ph.D.
George H. Stevens
Bradford M. Boyd, DDS.
The Compensation and Stock Option Committee comprised of the following members
of the Board of Directors of the Company have furnished the Report for the
period from March 1, 2000 to the date of this Proxy Statement:
Jack R. Anderson, Chairman
Leslie B. Daniels.
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 (5) year period from January 1, 1994 through December 31, 1999.
[GRAPHIC OMITED]
1993 1994 1995 1996 1997 1998
---- ----- ----- ----- ----- -----
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
15
<PAGE>
The graph set forth on the preceding page 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.
PROPOSAL NUMBER 2
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
--------------------------
INTRODUCTION
The Board of Directors believes that it is in the best interests of the Company
and its stockholders to amend the Restated Certificate of Incorporation to
increase the number of authorized shares of Common Stock from 30 million shares
to 40 million shares.
If the stockholders approve Proposal Number 2, the first paragraph of Article
Fourth of the Company's Restated Certificate of Incorporation will be amended to
read as follows:
"The total number of shares of stock which the corporation shall
have authority to issue is Forty-one Million (41,000,000), of
which Forty Million (40,000,000) shares are Common Stock and One
Million (1,000,000) shares are Preferred Stock, and the par value
of each such share is one cent ($.01), amounting in the aggregate
to Four Hundred Ten Thousand Dollars ($410,000)."
PRINCIPAL REASONS FOR THE PROPOSED AMENDMENT
Currently, the Company's Restated Certificate of Incorporation authorizes a
total of 30 million shares of Common Stock to be issued by the Company. If all
the shares of Preferred Stock contemplated by the Recapitalization Agreement,
including the shares issuable upon conversion of the Convertible Notes, were
issued, the Company would have insufficient shares of authorized Common Stock
for issuance upon conversion of the Preferred Stock. The currently outstanding
shares of Common Stock and the shares of Common Stock necessary to be reserved
for issuance upon conversion of the Preferred Stock collectively total
34,747,498 shares. In addition, if Proposal 4 is approved, a total of 2,045,300
shares of Common Stock must also be reserved for issuance upon exercise of stock
options under the Company's employee stock option plan. If Proposal Number 4 is
approved and if the proposed amendment is approved, there will be a balance of
3,207,202 shares of Common Stock available for issuance by the Board of
Directors in the future. In addition, the Company will have 700,000 shares of
Preferred Stock available for issuance by the Board of Directors in the future
after the issuance of the 300,000 shares of Preferred Stock contemplated by the
Recapitalization Agreement.
The purpose of the proposed amendment is to increase the authorized number of
shares of Common Stock so that such requirements can be satisfied and to avoid
the necessity of issuing any Convertible Notes under the Recapitalization
Agreement.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
PROPOSED AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE
AUTHORIZED NUMBER OF SHARES OF COMMON STOCK TO 40 MILLION. THE AFFIRMATIVE
"FOR" VOTE OF THE HOLDERS OF A MAJORITY OF THE SHARES OF THE COMPANY'S COMMON
STOCK OUTSTANDING ON THE RECORD DATE IS REQUIRED FOR APPROVAL OF THE PROPOSED
AMENDMENT. SHARES OF COMMON STOCK REPRESENTED AT THE SPECIAL MEETING BY SIGNED
BUT UNMARKED PROXIES WILL BE VOTED "FOR" THE AMENDMENT.
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<PAGE>
PROPOSAL NUMBER 3
TO ELIMINATE THE CLASSIFICATION OF THE BOARD OF DIRECTORS
--------------------------
INTRODUCTION
The Board of Directors believes that it is in the best interests of the Company
and its stockholders to amend the Company's Restated Certificate of
Incorporation to eliminate the classification of the Board of Directors into
three (3) classes, such that all members of the Board of Directors will
constitute a single class.
Since Section 2115 of the California General Corporation law is currently
applicable to the Company, the Board of Directors is currently organized as a
single class. However, if Section 2115 ceases to be applicable to the Company,
then the provisions of the Restated Certificate of Incorporation would require
classification of the Board of Directors into three (3) classes each with three
(3) year terms.
If the stockholders approve Proposal Number 3, the second paragraph (subsection
(b)) of Article Sixth of the Company's Restated Certificate of Incorporation,
which currently reads as follows, will, except for the phrase "each director
shall serve until his successor is duly elected and qualified or until his
death," be deleted in its entirety:
"(b) The Board of Directors shall be and is divided into three (3) classes:
Class I, Class II and Class III, which shall be as nearly equal in
number as possible. Each director shall serve for a term ending on the
date of the third annual meeting of stockholders following the annual
meeting at which the director was elected; provided, however, that
each initial director in Class I shall hold office until the annual
meeting of stockholders in 1988; each initial director in Class II
shall hold office until the annual meeting of stockholders in 1989;
and each initial director in Class III shall hold office until the
annual meeting of stockholders in 1990. Notwithstanding the foregoing
provisions of this Article, each director shall serve until his
successor is duly elected and qualified or until his death,
resignation or removal."
In addition, if the stockholders approve Proposal Number 3, the phrases "of the
class of which he is a member" and "among the three (3) classes of directors so
as to maintain such classes as nearly equal as possible" will be deleted from
the third paragraph (subsection (c)) of Article Sixth of the Company's Restated
Certificate of Incorporation, which currently reads as follows:
"(c) In the event of any increase or decrease in the authorized number of
directors, (i) each director then serving as such shall nevertheless
continue as a director of the class of which he is a member until the
expiration of his current term, or his earlier resignation, removal
from office or death, and (ii) the newly created or eliminated
directorship resulting from such increase or decrease shall be
apportioned by the Board of Directors among the three (3) classes of
directors so as to maintain such classes as nearly equal as possible."
PRINCIPAL REASONS FOR THE PROPOSED AMENDMENT
The Company's Restated Certificate of Incorporation and Bylaws currently provide
for the classification of the Board of Directors into three (3) classes, such
that the members of each class are elected at the third annual meeting following
the annual meeting at which the members of that class were elected. After the
issuance of the Preferred Stock, pursuant to the Recapitalization Agreement
described above, the Series A Preferred Stock, voting as a single class, will be
entitled to elect a majority, four (4) directors, of the Board of Directors.
The Series B, C and D Preferred Stock, voting together as a single class, will
be entitled to elect one (1) director to the Board of Directors. The holders of
all shares of Common Stock, voting as a single class, will be entitled to elect
the remaining two (2) directors. Thus, with a classified Board and the voting
rights implemented under the Recapitalization Agreement, the holders of the
Company's Common Stock would not be entitled to elect directors every year, and
instead would only be entitled to elect one (1) director in two (2) out of every
three (3) years, or two (2) directors every three (3) years. The elimination of
the classification of the Board of Directors into three (3) classes ensures that
holders of the Company's Common Stock will have the opportunity to participate
in the election of directors every year.
17
<PAGE>
BOARD RECOMMENDATION AND VOTE REQUIRED
THE BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE PROPOSED
AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION TO ELIMINATE THE
CLASSIFICATION OF THE BOARD OF DIRECTORS. THE AFFIRMATIVE "FOR" VOTE OF THE
HOLDERS OF SIXTY-SIX AND TWO-THIRDS (66 2/3RDS) OF THE SHARES OF THE COMPANY'S
COMMON STOCK OUTSTANDING ON THE RECORD DATE IS REQUIRED FOR APPROVAL OF THE
PROPOSED AMENDMENT. SHARES OF COMMON STOCK REPRESENTED AT THE SPECIAL MEETING
BY SIGNED BUT UNMARKED PROXIES WILL BE VOTED "FOR" THE AMENDMENT.
PROPOSAL NUMBER 4
TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK UNDER THE SAFEGUARD HEALTH
ENTERPRISES, INC. EMPLOYEE STOCK OPTION PLAN
--------------------------
INTRODUCTION
The Board of Directors believes that it is in the best interests of the Company
and its stockholders to increase the number of shares of Common Stock issuable
pursuant to stock options granted under the SafeGuard Health Enterprises, Inc.
Employee Stock Option Plan (the "Plan") from 1.7 million shares to 3 million
shares.
PRINCIPAL REASONS FOR THE PROPOSED INCREASE
The 1.3 million share increase will enable the Company to continue to provide
equity incentives to key employees, including officers and directors, who
provide valuable services to the Company and thereby allow such individuals to
share in the success of the Company. The Plan was originally adopted by the
Board of Directors and stockholders in April 1984, and amended in 1993 and 1997.
The number of shares of Common Stock reserved for issuance under the Plan was
originally fixed at 750,000 shares, was increased to 1.2 million in 1993, and
was increased to 1.7 million in 1997.
As of August 31, 2000, options for 2,598,708 shares of Common Stock had been
granted under the Plan of which options for 553,408 shares have been exercised
and options for 2,045,300 shares were outstanding with a weighted exercise price
of $1.62 per share. Of the outstanding options, all of the option granted to
the Named Executive Officers in the table set forth below, with the exception of
those options granted to Dr. Baileys, are contingent and would cease to exist if
Proposal Number 4 is not approved by the Company's stockholders. All of the
outstanding options have an exercise price in excess of the current market price
of the Common Stock. The total of 3 million shares represents in the aggregate
less than ten percent (10%) of the total number of shares of Common Stock to be
outstanding upon the completion of the Company's recapitalization, which
compares favorably to thirty-six percent (36%) which the 1.7 million shares
represents of the total number of shares of Common Stock currently outstanding.
The Compensation and Stock Option Committee (the "Committee") of the Board of
Directors administers the Plan. The terms and provisions of the Plan are
summarized below. This summary, however, does not purport to be a complete
description of the Plan. Any stockholder upon written request to the Secretary
of the Company at 95 Enterprise, Aliso Viejo, California 92656-2601, may obtain
copies of the actual Plan document.
INTEREST OF CERTAIN PERSONS
Messrs. Buncher, Brendzel, Gates, Keating, Anderson and Daniels are eligible to
receive stock options granted under the Plan at the discretion of the
Compensation and Stock Option Committee of the Board of Directors. Although
grants under the Automatic Option Grant Program for Non-Employee Directors has
been suspended by the Board, in the event the Board of Directors reinstitutes
such grants, Mr. Anderson and Mr. Daniels would be eligible for such options as
non-employee directors. Options for a total of 1,215,000 shares at an exercise
18
<PAGE>
price of $1.00 per share have been granted on a contingent basis to Messrs.
Buncher, Brendzel, Gates and Keating, subject to approval of Proposal Number 4
by the Company's stockholders.
DESCRIPTION OF THE SAFEGUARD HEALTH ENTERPRISES, INC., EMPLOYEE STOCK OPTION
PLAN
The Plan is divided into two (2) separate components:
(i) the Discretionary Option Grant Program pursuant to which employees,
including directors and officers, may, at the discretion of the Committee
administering the Plan, be granted options to purchase shares of the
Company's Common Stock at an exercise price at least equal to the fair
market value of the option shares on the grant date; and
(ii) the Automatic Option Grant Program pursuant to which option grants may
be made at periodic intervals to non-employee Board members to purchase
shares of the Company's Common Stock at an exercise price at least equal to
the fair market value of the option shares on the grant date.
The options granted under the Discretionary Option Grant Program may be either
incentive stock options ("Incentive Options") designed to qualify for favorable
tax treatment under Section 422 of the Internal Revenue Code or non-statutory
options, which are not entitled to such treatment. Grants under the Automatic
Option Grant Program, if any, are non-statutory options.
Issuable Shares
Assuming stockholder approval of Proposal Number 4, a total of 3 million shares
of the Company's Common Stock will be authorized for issuance over the term of
the Plan, subject to periodic adjustment in the event of certain changes to the
Company's capital structure. Such shares may be made available from newly
issued shares of the Company's Common Stock, or from shares repurchased by the
Company, including shares purchased on the open market.
If Proposal Number 4 is approved, there will be 2,446,592 shares available for
issuance upon the exercise of options to be granted under the Plan and there
will be outstanding options for 2,045,300 shares. As such, there will 401,292
shares available for options to be granted under the Plan in the future.
However, options for 1,215,000 shares granted to the Named Executive Officers
indicated in the table below, are subject to stockholder approval of the
proposed 1.3 million share increase. If Proposal Number 4 is not approved,
options for 1,215,000 shares granted to the Named Executive Officers indicated
in the table below will terminate and not be outstanding. The options granted
to Dr. Baileys are not contingent upon stockholder approval of Proposal Number
4. In that event, there would be 1.7 million shares authorized for options
granted under the Plan, options for 803,000 shares outstanding and 276,892
shares available for options to be granted under the Plan.
During 2000, the following Named Executive Officers were granted options at an
exercise price of $1.00 per share:
<TABLE>
<CAPTION>
NAME NUMBER OF OPTIONS GRANTED (1) GRANT DATE VESTING DATE
------------------ ----------------------------- -------------- ------------------------------------
<S> <C> <C> <C>
James E. Buncher 400,000 March 1, 2000 1/3 on 3/1/01, 3/1/02, and 3/1/03
" 100,000 March 1, 2000 All 3/1/01
" 100,000 March 1, 2000 All 3/1/02
Dennis L. Gates 150,000 March 1, 2000 1/3 on 3/1/01, 3/1/02, and 3/1/03
" 100,000 March 1, 2000 All 3/1/01
" 100,000 March 1, 2000 All 3/1/02
" 25,000 March 18, 2000 1/3 on 3/18/01, 3/18/02, and 3/18/03
Steven J. Baileys 200,000 June 1, 2000 All 6/1/02
Ronald I. Brendzel 100,000 March 1, 2000 1/3 on 3/1/01, 3/1/02, and 3/1/03
" 20,000 March 18, 2000 1/3 on 3/18/01, 3/18/02, and 3/18/03
Kenneth E. Keating 100,000 March 1, 2000 1/3 on 3/1/01, 3/1/02, and 3/1/03
" 20,000 March 18, 2000 1/3 on 3/18/01, 3/18/02, and 3/18/03
<FN>
-----------------------------
(1) All options set forth herein are subject to stockholder approval of
Proposal Number 4 with the exception of the options granted to Dr. Baileys.
</TABLE>
19
<PAGE>
The shares of the Company's Common Stock subject to any outstanding options that
expire or terminate prior to exercise, including options canceled in accordance
with the cancellation/regrant provisions described in the "Cancellation/Regrant"
section below, may become the subject of subsequent grants under the Plan. This
provision however, does not apply to the options set forth in the above table
that are subject to stockholder approval.
Administration
The Committee administers the Discretionary Option Grant Program. The Committee
is currently comprised of two (2) or more directors who are appointed by the
Board of Directors and qualify as "Non-employee Directors" within the meaning of
Rule 16b-3 promulgated pursuant to Section 16 of the Securities and Exchange Act
of 1934, as amended.
The Committee has, within the scope of its jurisdiction under the Plan, complete
discretion to determine which eligible individuals are to receive option grants,
the number of shares subject to each such grant, the status of any granted
option as either an Incentive Option or a non-statutory option, the vesting
schedule, if any, to be in effect for the option grant, and the maximum term for
which any granted option is to remain outstanding.
Eligibility
Options may be granted to individuals who are officers and other key employees
of the Company or any of its present or future subsidiaries (as defined in
Section 424(f) of the Internal Revenue Code). Non-employee members of the Board
are also eligible to participate in the Automatic Option Grant Program. As of
August 31, 2000, approximately two hundred (200) individuals, including eleven
(11) executive officers and directors, were eligible to participate in the Plan,
and two (2) non-employee Board members who were eligible to receive option
grants under the Automatic Option Grant Program.
Option Terms
The option exercise price must be at least one hundred percent (100%) of the
fair market value of the option shares on the grant date, and no option may have
a maximum term in excess of ten (10) years. In consideration of the option
grant, the optionee must execute a written stock option agreement agreeing,
among other things, to remain in the Company's employ for at least one (1) year
from the date the option is granted in order to exercise any applicable portion
of the options granted. The option may not be exercised during the one (1) year
period following the grant date. Thereafter, the option will become exercisable
at such times and in such installments, which may be cumulative, as the
Committee establishes as part of the terms of that option grant. The Committee
has the discretionary authority to accelerate, in whole or in part, the time or
times at which an option becomes exercisable and may exercise that discretion at
any time while the option remains outstanding prior to the optionee's
termination of employment.
Options may be exercised in installments in such amounts (which need not be
equal) and at such times as are specified in the option agreement. To exercise
an option, the holder thereof must deliver to the Company a written notice of
exercise, together with full payment of the exercise price of the shares as to
which the option is being exercised. The option price is generally payable in
cash and/or in shares of the Company's Common Stock and may also be paid through
a same-day sale program, pursuant to which the purchased shares are immediately
sold and a portion of the sale proceeds are applied to the payment to the
Company of the exercise price.
No option may be assigned or transferred by the optionee except upon death and,
during the lifetime of the optionee, only he may exercise the option. No
optionee will have any stockholder rights with respect to the option shares
until that individual has exercised the option and paid the option price in full
for the purchased shares.
In general, an option may not be exercised more than ninety (90) days or six (6)
months after the date the optionee's employment terminates by reason of death or
disability, respectively, or more than thirty (30) days after the date the
optionee's employment or Board membership terminates, as applicable, for any
reason. Options granted to individuals whose employment is terminated for cause
will expire immediately on the termination date. The Committee has the
authority to extend the period of time for which one (1) or more options may
remain outstanding after the optionee's termination of employment from the
20
<PAGE>
limited periods specified above to such longer period as the Committee, in its
discretion, may deem appropriate under the circumstances. However, in no event
may the period of exercise for an outstanding option be extended beyond the
specified expiration date of the option term.
Valuation
For purposes of establishing the option exercise price and for all other
valuation purposes under the Plan, the fair market value per share of the
Company's Common Stock on any relevant date, shall be not less than the closing
sale price per share on such date, as quoted on the Over the Counter Electronic
Bulletin Board, or such stock exchange on which the Company's Common Stock may
be listed. If there is no reported sale price for such date, then the closing
sale price for the last previous date for which such quotation exists will be
determinative of fair market value.
Acceleration of Options
The Committee has the discretionary authority to provide, either at the time of
the option grant or at any time while the option remains outstanding, that the
option will automatically accelerate and become immediately exercisable for all
of the shares of Common Stock at the time subject to that option should there
occur any "Change of Control" of the Company. The Committee may also provide
that following the consummation of such Change of Control, each outstanding
option under the Plan will terminate and cease to be exercisable, except to the
extent assumed by the successor entity.
A Change of Control will be deemed to occur upon:
(i) the merger or consolidation of the Company into another corporation,
or
(ii) the sale or other disposition of all or substantially all of the
Company's assets, or
(iii)the sale of eighty percent (80%) or more of the Company's outstanding
voting stock except to the Investors that are parties to the
Recapitalization Agreement entered into by the Company as of March 1,
2000, or
(iv) the dissolution or liquidation of the Company; and;
(i) there has been a material change in the responsibility of the
Optionee, or
(ii) the optionee has been terminated for other than good cause as that
term may be defined from time to time in various employment
agreements.
The acceleration of options under the Plan upon such a Change of Control may be
seen as an anti-takeover provision and may have the effect of discouraging a
proposal for merger, a takeover attempt or other efforts to gain control of the
Company.
Cancellation/Regrant
The Committee has the authority to effect, from time to time, the cancellation
of outstanding options under the Discretionary Option Grant Program in return
for the grant of new options for the same or different number of option shares
with an exercise price per share equal to the fair market value of the Company's
Common Stock on the new grant date.
Automatic Option Grant Program
Although there is a program to provide for the automatic granting of options to
non-employee directors, the present intention of the Board is to not utilize
this program.
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<PAGE>
Change in Capital Structure
In the event any change is made to the Common Stock issuable under the Plan by
reason of any recapitalization, stock dividend, stock split, combination of
shares, exchange of shares, or other change in corporate structure effected
without the Company's receipt of consideration, appropriate adjustments will be
made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the number and/or class of securities and price per share in effect
under each outstanding option and (iii) the number and/or class of securities
per non-employee Board member for which option grants will subsequently be made
under the Automatic Option Grant Program.
If the Company is the surviving corporation in any merger or consolidation, each
continuing option will pertain and apply to the number and class of securities,
which a holder of the number of shares subject to the option right would have
been entitled to receive in the consummation of such merger or consolidation.
Amendment and Termination of the Plan
The Board may amend or modify the Plan at any time; however, no such amendment
may, without the approval of the Company's stockholders, (i) materially increase
the benefits accruing to optionees or modify the class of individuals eligible
for option grants, or (ii) materially increase the number of shares available
for issuance, except in the event of certain changes to the Company's capital
structure. Amendments to the Automatic Option Grant Program may not be made at
intervals more frequently than once every six (6) months, except in certain
limited circumstances. The Plan will terminate on December 31, 2006, unless
sooner terminated by the Board.
Federal Tax Consequences
Options granted under the Plan may be either Incentive Options, which satisfy
the requirements of Section 422 of the Internal Revenue Code, or non-statutory
options, which are not intended to meet such requirements. The Federal income
tax treatment for the two (2) types of options differs as follows:
Incentive Options. The optionee recognizes no taxable income at the time of the
option grant and no taxable income is generally recognized at the time the
option is exercised. The optionee will, however, recognize taxable income in
the year in which the purchased shares are sold or otherwise made the subject of
disposition.
For Federal income tax purposes, dispositions are divided into two (2)
categories: (i) qualifying and (ii) disqualifying. The optionee will make a
qualifying disposition of the purchased shares if the sale or other disposition
of such shares is made after the optionee has held the shares for more than two
(2) years after the grant date of the option and more than one (1) year after
the exercise date. If the optionee fails to satisfy either of these two (2)
holding periods prior to the sale or other disposition of the purchased shares,
then a disqualifying disposition will result.
Upon a qualifying disposition of the shares, the optionee will recognize
long-term capital gain in an amount equal to the excess of (i) the amount
realized upon the sale or other disposition of the purchased shares over (ii)
the exercise price paid for such shares. If there is a disqualifying
disposition of the shares, then the excess of (i) the fair market value of those
shares on the date the option was exercised over (ii) the exercise price paid
for the shares will be taxable as ordinary income. An additional gain
recognized upon the disposition will be a capital gain.
If the optionee makes a disqualifying disposition of the purchased shares, then
the Company will be entitled to an income tax deduction, for the taxable year in
which such disposition occurs, equal to the excess of (i) the fair market value
of such shares on the date the option was exercised over (ii) the exercise price
paid for the shares. In no other instance will the Company be allowed a
deduction with respect to the optionee's disposition of the purchased shares.
Non-Statutory Options. An optionee upon the grant of a non-statutory option
recognizes no taxable income. The optionee will, in general, recognize ordinary
income, in the year in which the option is exercised, equal to the excess of the
fair market value of the purchased shares on the exercise date over the exercise
price paid for the shares, and the optionee will be required to satisfy any
applicable tax withholding requirements applicable to such income.
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The Company will be entitled to a business expense deduction equal to the amount
of ordinary income recognized by the optionee with respect to the exercised
non-statutory option. The deduction will in general be allowed for the
Company's taxable year in which such ordinary income is recognized by the
optionee.
BOARD RECOMMENDATION AND VOTE REQUIRED
THE BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE PROPOSAL TO
INCREASE THE NUMBER OF SHARES OF COMMON STOCK UNDER THE COMPANY'S STOCK OPTION
PLAN. THE AFFIRMATIVE "FOR" VOTE OF THE HOLDERS OF A MAJORITY OF THE SHARES OF
THE COMPANY'S COMMON STOCK REPRESENTED AND VOTING AT THE MEETING IS REQUIRED FOR
APPROVAL OF THIS PROPOSAL. SHARES OF COMMON STOCK REPRESENTED AT THE SPECIAL
MEETING BY SIGNED BUT UNMARKED PROXIES WILL BE VOTED "FOR" THE PROPOSAL.
PROPOSALS BY STOCKHOLDERS
A stockholder that intends to present a proposal at the next annual meeting of
the Company's stockholders and desires the proposal to be included in the
Company's proxy statement and form of proxy relating to that meeting must
deliver or mail a notice of such proposal to the Company at its principle
executive offices on a timely basis. In order to be timely, such notice must be
submitted a reasonable time before the Company begins to print and mail its
proxy materials. The Company anticipates that it will announce the date for its
next annual meeting in a public report filed in the last quarter of 2000 or the
first quarter of 2001.
In addition and even if the stockholder does not wish to include a proposal in
the Company's proxy materials, pursuant to the Company's Bylaws in order for a
proposal to be timely submitted and considered at the next annual meeting, the
stockholder's notice must be delivered to the Company not later than the close
of business on the 10th day following the day on which public announcement of
the date of such annual 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.
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, 2000. Deloitte & Touche LLP
has served as the independent accountants for the Company for more than five (5)
years. A representative of Deloitte & Touche LLP will be present at the Special
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.
ADDITIONAL INFORMATION
The Company files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission (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. 20549-0001, 7 World Trade Center, Suite 1300, New York, New
York 10048-1276 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. 20549-0001. Please call the SEC at (800)
SEC-0330 for further information on the operation of the public reference
facilities.
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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 Special Meeting.
1. Annual Report on Form 10-K for the year ended December 31, 1999;
2. Quarterly Reports on Form 10-Q for the quarters ended March 31, 2000
and June 30, 2000; and
3. Current Report on Form 8-K dated March 16, 2000.
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 THE COMPANY AT THE FOLLOWING ADDRESS:
Corporate Secretary
SafeGuard Health Enterprises, Inc.
95 Enterprise
Aliso Viejo, California 92656-2601
Telephone: (949) 425-4300
Facsimile: (949) 425-4586
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors of the Company
was not aware of any other matters that may properly come before the Special
Meeting other than those referred to in the Notice of Special Meeting of
Stockholders. If any other matters shall properly come before the Special
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 represented by the proxy as the Board of Directors has
recommended herein.
ALL STOCKHOLDERS ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING
PROXY IN THE ENCLOSED POSTAGE PREPAID ENVELOPE.
BY ORDER OF THE BOARD OF DIRECTORS,
RONALD I. BRENDZEL
Corporate Secretary
September 15, 2000
Aliso Viejo, California
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