SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
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[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
240.14a-12
BriteSmile, Inc.
(Name of Registrant as Specified in Charter)
(Name of Person(s) Filing Proxy Statement If Other Than The Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction
applies:
2) Aggregate number of securities to which transaction applies:
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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):
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[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
1) Amount Previously Paid:
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4) Date Filed:
<PAGE>
BRITESMILE, INC.
490 North Wiget Lane
Walnut Creek, California 94598
(925) 941-6260
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 12, 2000
To the Shareholders:
Notice is hereby given that the Annual Meeting of the Shareholders of
BriteSmile, Inc. (the "Company") will be held at the law offices of Richards &
O'Neil, LLP, located at 885 Third Avenue, 7th Floor, New York, New York 10022,
on Tuesday, September 12, 2000, at 2:00 o'clock p.m., local time, and at any
postponement or adjournment thereof, for the following purposes, which are
discussed in the following pages and which are made part of this Notice:
1. To elect nine directors, each to serve until the next annual
meeting of shareholders and until his successor is elected
and shall qualify;
2. To ratify and approve an amendment to the Company's Revised
1997 Stock Option and Incentive Plan pursuant to which the
total number of shares of common stock issuable under the
Plan has been increased from 4,000,000 to 5,000,000;
3. To ratify and approve a series of transactions pursuant to
which the Company (i) has issued its 5% convertible
subordinated notes in the aggregate principal amount of
$20,000,000 to eleven investors, including seven investors
presently affiliated with the Company, which notes are
convertible into 3,236,245 shares of common stock, and (ii)
has issued warrants to the investors to purchase a total of
1,618,122 shares of common stock. The net effect of the
forgoing transactions, if the notes are converted and the
warrants are exercised, will be the issuance of more than
20% of the total number of shares of the Company's common
stock issued and outstanding prior to the commencement of
such transactions;
4. To approve the Board of Directors' selection of Ernst
& Young LLP as the Company's independent auditors;
and
5. To consider and act upon any other matters that
properly may come before the meeting or any
adjournment thereof.
The Company's Board of Directors has fixed the close of
business on July 21, 2000 as the record date for the determination of
shareholders having the right to notice of, and to vote at, the Annual Meeting
of Shareholders and any adjournment thereof. A list of such shareholders will be
available for examination by a shareholder for any purpose related to the
<PAGE>
meeting during ordinary business hours at the offices of the Company at 490
North Wiget Lane, Walnut Creek, California 94598 during the ten days prior to
the meeting.
You are requested to date, sign and return the enclosed Proxy which is
solicited by the Board of Directors of the Company and will be voted as
indicated in the accompanying Proxy Statement and Proxy. Your vote is important.
Please sign and date the enclosed Proxy and return it promptly in the enclosed
return envelope, whether or not you expect to attend the meeting. The giving of
your proxy as requested will not affect your right to vote in person if you
decide to attend the Annual Meeting. The return envelope requires no postage if
mailed in the United States. If mailed elsewhere, foreign postage must be
affixed. Your proxy is revocable at any time before the meeting.
By Order of the Board of Directors,
Paul A. Boyer, Executive Vice President, CFO, and Secretary
Walnut Creek, California
August 22, 2000
<PAGE>
BRITESMILE, INC.
490 North Wiget Lane
Walnut Creek, California 94598
(925) 941-6260
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
The enclosed Proxy is solicited by the Board of Directors of BriteSmile,
Inc. (the "Company") for use in voting at the Annual Meeting of Shareholders to
be held at the law offices of Richards & O'Neil, LLP, located at 885 Third
Avenue, 7th Floor, New York, New York 10022, on September 12, 2000, at 2:00
o'clock p.m., local time, and at any postponement or adjournment thereof, for
the purposes set forth in the attached notice. When proxies are properly dated,
executed and returned, the shares they represent will be voted at the Annual
Meeting in accordance with the instructions of the shareholder completing the
proxy. If no specific instructions are given, the shares will be voted FOR the
election of the nominees for directors set forth herein, FOR approval of the
amendment to the Company's Revised 1997 Stock Option and Incentive Plan, FOR
approval of the transactions constituting the Company's recent private offering
of 5% convertible subordinated notes and related investor warrants, and FOR
ratification of the appointment of auditors. A shareholder giving a proxy has
the power to revoke it at any time prior to its exercise by voting in person at
the Annual Meeting, by giving written notice to the Company's Secretary prior to
the Annual Meeting, or by giving a later dated proxy.
The presence at the meeting, in person or by proxy, of
shareholders holding in the aggregate a majority of the outstanding shares of
the Company's common stock entitled to vote shall constitute a quorum for the
transaction of business. The Company does not have cumulative voting for
directors; a plurality of the votes properly cast for the election of directors
by the shareholders attending the meeting, in person or by proxy, will elect
directors to office. Action on a matter, other than the election of directors,
is approved if the votes properly cast favoring the action exceed the votes cast
opposing the action. Abstentions and broker non-votes will count for purposes of
establishing a quorum, but will not count as votes cast for the election of
directors or any other questions and accordingly will have no effect. Votes cast
by shareholders who attend and vote in person or by proxy at the Annual Meeting
will be counted by inspectors to be appointed by the Company (it is anticipated
that the inspectors will be employees, attorneys or agents of the Company).
The close of business on July 21, 2000, has been fixed as the record date
for determining the shareholders entitled to notice of, and to vote at, the
Annual Meeting. Each share shall be entitled to one vote on all matters. As of
the record date there were 23,975,885 shares of the Company's common stock
outstanding of record and entitled to vote. For a description of the principal
holders of such stock, see "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" below.
This Proxy Statement and the enclosed Proxy are being
furnished to shareholders on or about August 22, 2000.
<PAGE>
PROPOSAL 1 -- ELECTION OF DIRECTORS
As amended on July 23, 1999, the Company's Bylaws provide that the number
of directors shall range from three to ten, as determined from time to time by
the shareholders or the Board of Directors. Presently the Company's Board of
Directors consists of ten members, all of whom except Jennifer Scott are
nominees for election at the Annual Meeting. Each director elected at the Annual
Meeting will hold office until a successor is elected and qualified, or until
the director resigns, is removed or becomes disqualified. Unless marked
otherwise, proxies received will be voted FOR the election of each of the
nominees named below. If any such person is unable or unwilling to serve as a
nominee for the office of director at the date of the Annual Meeting or any
postponement or adjournment thereof, the proxies may be voted for a substitute
nominee, designated by the proxy holders or by the present Board of Directors to
fill such vacancy, or for the balance of those nominees named without nomination
of a substitute, or the Board may be reduced accordingly. The Board of Directors
has no reason to believe that any of such nominees will be unwilling or unable
to serve if elected as a director.
The following information is furnished with respect to the nominees. Stock
ownership information is shown under the heading "Security Ownership of Certain
Beneficial Owners and Management" and is based upon information furnished by the
respective individuals.
Anthony M. Pilaro
Mr. Pilaro has been a director of the Company since August 1997. Presently,
he serves as Chairman of CAP Advisers Limited which maintains offices in Dublin,
Ireland. He is also founder and Chairman of Excimer Vision Leasing L.P., a
partnership engaged in the business of leasing Excimer laser systems. Mr. Pilaro
has been involved in private international investment banking. He was a Founding
Director and former Chief Executive Officer of DFS and a founder of the
predecessor of VISX, Inc. A graduate of the University of Virginia `57, and the
University of Virginia Law School `60, Mr. Pilaro practiced law in New York City
through 1964.
John L. Reed
Prior to joining the Company as its Chief Executive Officer, Mr. Reed was
Chairman of the Pacific Retailing Division of Duty Free Shoppers Group Limited
("DFS"), the world's leading specialty retailer catering to international
travelers. At DFS he was responsible for the operations of multiple retail
stores, including the largest single, self-standing retail operation in the
world. During his 21-year career at DFS, prior to being named Chairman of the
Pacific Retail Division in 1997, Mr. Reed was President of DFS Hawaii. From 1982
to 1988, Mr. Reed was President of the DFS U.S. Mainland Operation. Mr. Reed has
also served as Vice President of Merchandising for both Federated Department
Stores and John Wanamaker.
Linda S. Oubre
Linda S. Oubre commenced serving as a director of the Company in May 1998.
In July 1998, she was named to the position of President, Chief Administrative
Officer of the Company. She has also functioned as President of the Company's
Whitening Center Division. Prior to joining the Company, Ms. Oubre served for 3
years as President of Tri Com Ventures in Walnut Creek, California. Tri Com
specialized in new venture planning and implementation consulting. At Tri Com,
Ms. Oubre's clients included McGraw Hill's Business Week Magazine, Prodigy
Online Service, and the United Nations Business Development Project in the
Republic of Belarus. Prior to starting Tri Com Ventures in 1996, Ms. Oubre was
General Manager, New Business Development, for the Los Angeles
2
<PAGE>
Times, and also served as Director of Operations for Walt Disney's Consumer
Products Division and Manager of Financial Planning for the Times Mirror
Company. She has also been a visiting instructor at the Wharton Business School.
Ms. Oubre' is a graduate of the University of California, Los Angeles and
received her MBA from the Harvard Business School.
Gerald Poch
Mr. Poch is currently serving as Managing Director of Pequot Capital
Management, Inc. He joined the Pequot family of funds as a Principal in 1998.
Mr. Poch was the former Chairman, President and CEO of GE Capital Information
Technology Solutions ("ITS"), and before ITS, founder, Co-Chairman and
Co-President of AmeriData Technologies, Inc. (NYSE:ADA) until its acquisition by
GE Capital in 1996. From 1979 until 1983 he was Senior Vice President of
TIE/Communications, Inc. and President of Technicom, Inc., two public
telecommunications companies. Mr. Poch graduated Cum Laude from Boston
University School of Law where he was Managing Editor of the Law Review. He is
admitted to practice law in the District of Columbia, New York, and
Massachusetts.
Dr. Gasper Lazzara, Jr.
Dr. Gasper Lazzara, Jr. has served as Chairman of the Board and a director
of the Orthodontic Centers of America, Inc. ("OCA") since its inception in July
1994. He has served as Co-Chief Executive Officer of Orthodontic Centers since
September 1998, and he served as Chief Executive Officer of OCA from July 1994
to September 1998. Dr. Lazzara also served as President of OCA from July 1994 to
June 1997. From 1989 to 1994, Dr. Lazzara served as President or Managing
Partner of certain predecessor entities of OCA. He is a licensed orthodontist
and, prior to founding OCA, maintained a private orthodontic practice for over
25 years. He is a member of the American Association of Orthodontists and is a
Diplomat of the American Board of Orthodontists.
R. Eric Montgomery
Mr. Montgomery has been a director of the Company since May 1998. He is an
experienced consultant, researcher and entrepreneur in the oral care and
cosmetic products industries, and has been granted over 65 US and foreign
patents since 1981. Previously, from November 1997 until May 1998, he served as
an independent consultant to the Company through Applied Dental Sciences, Inc.
(Monterey, MA), the oral care products research and development firm of which he
has been President since 1992. Mr. Montgomery is also the Founding Manager and
President of OraCeutical LLC (Lee, MA), an organization dedicated to the
development of next generation products for use in the professional dental
office. Oraceutical is currently under contract with the Company to provide
technology development services. Mr. Montgomery's organizations have developed
products for companies including The Dial Corporation, Natural White, Virbac SA,
ProHealth Laboratories, OPI Products, American Dental Hygienics, and Boots PLC.
Mr. Montgomery is also President of IDEX Dental Sciences, Inc. (Lee, MA), an
intellectual property-holding firm established by Mr. Montgomery in March 1996.
Brad Peters
Mr. Peters has been a director of the Company since December 1999. He is
the President of Blackfin Capital, a privately held investment company based in
New York. Prior to founding Blackfin Capital, from July 1993 to June 1998, Mr.
Peters was with Morgan Stanley Private Wealth Management Group. Mr. Peters holds
an MBA degree from Duke University.
3
<PAGE>
Harry Thompson
Mr. Thompson has served as a director of the Company since December 1999.
Mr. Thompson is currently the President of The Strategy Group and Managing
Director of Swiss Army Brands, Inc. Prior to founding The Strategy Group, Mr.
Thompson served in senior management of several core units of the Interpublic
Group of Companies, one of the world's leading advertising groups. Mr. Thompson
also has served as either manager or chairman of several telecommunication
companies of The Galesi Group. Mr. Thompson holds an MBA degree from Harvard
Business School. Currently, Mr. Thompson is a director of Schwinn/GT Corp.
Peter Schechter
Mr. Schechter was appointed a director of the Company in July 1999. Mr.
Schechter is a founder of Chlopak, Leonard, Schechter and Associates, an
international communications consulting firm. Previously, Mr. Schechter was
Managing Director in charge of international business at the Sawyer/Miller
Group, specializing in the management of international financial issues,
political campaigns and country image programs. A graduate of the School of
Advanced International Studies at Johns Hopkins University, Mr. Schechter has
lived in Europe and Latin America and has extensive experience in the area of
governmental relations. He is fluent in six languages.
There is no family relationship between any executive officer or director
of the Company and any other executive officer or director.
DIRECTOR COMPENSATION
Outside directors of the Company (non-employees, non-consultants) receive
options to purchase 20,000 shares of common stock per year for each year during
which they serve as a director. The exercise price of such options is 100% of
the fair market price on the date of grant. Actual expenses incurred by outside
directors are reimbursed.
Certain directors of the Company have been granted Units of Company equity
participation by LCO. As of May 11, 1998, LCO adopted an Incentive Compensation
Plan (the "LCO Plan"). Under the LCO Plan, certain key employees, consultants or
directors of the Company may be given the opportunity to benefit from the
appreciation in the value of LCO's present equity holdings in the Company. Such
appreciation rights are granted by way of incentive compensation units
("Units"), whose value is determined by the increase in value of LCO's present
holdings of Company Common Stock above a prescribed base value of $4.75 per
share. Each Unit represents a percentage interest (determined by the total
number of Units granted under the LCO Plan) in such increase in value of LCO's
holdings. LCO has granted Units to the following directors or former directors
of the Company as incentive compensation: John Reed, Richard Trefz, Brian
Delaney, and Linda Oubre. Rich Trefz' interest in the LCO plan has been paid out
and Mr. Trefz has no further interest in the LCO plan or rights thereunder.
Pursuant to an agreement in effect from November, 1997 through May 1998,
Richard Trefz received compensation from a Company affiliate, CAP Advisers
Limited ("CAP"), related to Mr. Trefz' service as a director of the Company.
During the period the agreement was in force, Mr. Trefz received a consulting
fee paid by CAP of $25,000.
4
<PAGE>
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
The Company's Board of Directors took action at 5 duly noticed special
meetings of the Board during the fiscal year ended April 1, 2000. Each nominee
for director then serving as a director attended all of the Company's special
meetings of the Board of Directors except Mr. Thompson, who was not available
for the Board meeting held on March 24, 2000. The Company has established an
Audit Committee and a Compensation Committee. At present, the Audit Committee
and the Compensation Committee consist of directors Poch, Peters, Thompson and
Reed.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH NOMINEE DIRECTOR.
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES/CONSULTANTS
The following individuals serve as executive officers or
significant employees or consultants of the Company:
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION(S)1
<S> <C> <C>
John Reed 59 Chief Executive Officer and Director
Paul Dawson 44 Chief Executive Officer of BriteSmile International Limited,
a subsidiary of the Company
Linda S. Oubre 41 President, Chief Administrative Officer and Director
Andrew Hofmeister 40 President, Associated Center Division
Michael Whan 35 President Worldwide Marketing
Paul A. Boyer 36 Executive Vice-President, Chief Financial Officer and Secretary
Stephen Miller 52 Executive Vice-President, Real Estate and Construction
Anthony M. Pilaro 64 Chairman of the Board
R. Eric Montgomery 45 Director since May, 1998
Jennifer Scott 36 Director since November, 1998
Peter Schechter 40 Director since June, 1999
Bradford G. Peters 32 Director since December, 1999
Harry Thompson 70 Director since December, 1999
Gerald Poch 53 Director since May, 2000
Dr. Gasper Lazzara, Jr. 58 Director since May 2000
John W. Warner 55 Research and Development Director
Salim A. Nathoo 45 Consultant
</TABLE>
1. All officers serve at the pleasure of the Board of Directors. There are no
family relationships between any of the officers and directors.
Biogrophical information regarding John Reed, Anthony Pilaro, and Linda
Oubre, each of whom currently also serves as a director of the Company, is
included in this Proxy Statement under "Proposal 1-Election of Directors."
Biographical information regarding the other executive officers and significant
consultants of the Company follows:
5
<PAGE>
Paul A. Boyer
Mr. Boyer was named the Company's Executive Vice President and
Chief Financial Officer in October 1999. Prior to joining BriteSmile, Mr. Boyer
was Senior Vice President and Chief Financial Officer of Dynatec International,
Inc., a manufacturer and marketer of consumer products. While at Dynatec, he was
directly responsible for all financing, accounting and operations of that
company, including manufacturing, purchasing, production and information
systems. Mr. Boyer also served as Director of Finance at Mrs. Field's Original
Cookies, Inc., where his responsibilities included that company's merger and
acquisition activity, treasury functions, financial forecasting, budgeting,
planning and analysis. Previously, Mr. Boyer was Chief Financial Officer of
Wasatch Education Systems. During his six and one half year tenure at Wasatch,
he handled all accounting and financial activities and steered the company
though a successful public offering. Mr. Boyer received his BS degree and an MBA
in Accountancy from San Diego State University.
Paul Dawson
Mr. Dawson, prior to joining the Company's subsidiary,
BriteSmile International as its Chief Executive Officer, was Chief Executive
Officer of Camus International, a global marketer of luxury goods. During his
nine-year tenure with Camus, he spearheaded an aggressive worldwide market
expansion program of the company's premium cognac market. Prior to Camus, Mr.
Dawson held the position of Engagement Manager at McKinsey & Company, an
international consulting firm. While at McKinsey, he advised a broad range of
multinational consumer companies on international expansion strategies. Mr.
Dawson has lived and worked in the United States, Europe, Asia and the Middle
East. He holds masters degrees from Cambridge University and UC Berkeley, and an
MBA from Stanford University.
Andrew Hofmeister
Mr. Hofmeister joined BriteSmile in August 1998. He currently
serves as President of BriteSmile's Associated Center Division. Prior to joining
BriteSmile, Mr. Hofmeister was Chief Executive Officer of Excimer Vision Leasing
L.P., a partnership engaged in the business of leasing Excimer laser systems,
and a former director of the Company prior to its relocation from Salt Lake City
to Lester, Pennsylvania. From 1989 to 1995 he was a consultant for McKinsey &
Company, specializing in retail and consumer products. Mr. Hofmeister is a
graduate of St. Olaf College and the Stanford Graduate School of Business.
Stephen Miller
Prior to joining BriteSmile in May 1999 as it Executive Vice
President, Real Estate and Construction, Mr. Miller was for 11 years Vice
President of Facility Development for DFS. While at DFS, Mr. Miller was
responsible for the development of the flagship retail gallerias, high-end
boutiques, duty free stores and entertainment complexes in the U.S., Oceania and
the Pacific. Prior to DFS, Mr. Miller was Senior Vice President of Commercial
and Industrial Development for Castle and Cooke, Inc. where for 17 years he was
responsible for commercial, industrial and retail development for Hawaii's
second largest private landowner.
6
<PAGE>
Michael P. Whan
Mr. Whan joined BriteSmile as its President of World Wide Marketing in May
2000. Prior to joining BriteSmile, Mr. Whan had served as Vice President,
General Manager of Taylor Made Golf from 1996 to 2000. From 1987 to 1995 Mr.
Whan held various posts at Proctor & Gamble Company, including Director of
Marketing, oral care and Brand Manager of Crest toothpaste. Mr. Whan is a
graduate of Miami (Ohio) University.
Dr. John W. Warner
Dr. Warner accepted the position of Research and Development Director for
the Company in May 1998. Mr. Warner is an experienced research and technology
consultant and entrepreneur who was one of the leading contributors to the
development of ophthalmic applications of laser technology. Dr. Warner leads the
Company's assessment of existing products and LATW development efforts. Dr.
Warner has served as a consultant to Northwestern University in the areas of
technology development and commercialization. From March 1986 to December 1990
he was the founder and CEO of Taunton Technologies, Inc., a predecessor of VISX,
Inc., engaged in the business of developing and manufacturing Excimer laser
systems to perform ophthalmic surgery.
Salim A. Nathoo, D.D.S.
Dr. Nathoo was formerly employed by Colgate-Palmolive Co. as a Senior
Researcher from 1990 to 1998 and was a key member in the successful worldwide
launch of the Colgate Whitening program during his tenure there. Dr. Nathoo has
lectured globally on both the clinical and scientific aspects of teeth
whitening, and he is recognized as one of the leading authorities on the
subject. Dr. Nathoo is one of the founders of Oral Health Clinical Services, LLC
("Oral Health"). The Company has entered into a consulting agreement with Oral
Health in order to assist the Company in obtaining an American Dental
Association ("ADA") seal of approval for its LATW system. Dr. Nathoo holds both
a PhD and DDS from New York University, and has published over 40 papers in
major scientific journals.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of August 15, 2000 regarding
beneficial stock ownership of (i) all persons known to the Company to be
beneficial owners of more than 5% of the outstanding common stock; (ii) each
director or director nominee, and any other executive officer of the Company
whose compensation is required to be reported in this Proxy Statement, and (iii)
all officers and directors of the Company as a group. Each of the persons in the
table below has sole voting power and sole dispositive power as to all of the
shares shown as beneficially owned by them, except as otherwise indicated.
7
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
Beneficially
Owned(1) Percent of
Name and Address Outstanding Shares(2)
Executive Officers and Directors
<S> <C> <C>
Paul Dawson 367,397(3) 1.5%
36 Fitzwilliam Place
Dublin 2, Ireland
Andrew J. Hofmeister 123,397(4) *
490 North Wiget Lane
Walnut Creek, CA 94598
Dr. Gasper Lazzara, Jr. 364,077(15) 1.5%
Orthodontic Centers of America
500 Sawgrass Village Circle
Ponte Verdra Beach, Florida 32082
R. Eric Montgomery 265,957 1.1%
29 Fairview Road
P. O. Box 487
Monterey, MA 01245
Linda S. Oubre 105,331(5) *
490 North Wiget Lane
Walnut Creek, CA 94598
Bradford Peters 1,620,104(6) 6.3%
Blackfin Capital
1633 Broadway, 33rd Floor
New York, New York 1001
Anthony M. Pilaro 13,633,159(7) 54.4%
36 Fitzwilliam Place
Dublin 2, IRELAND
Gerald Poch 4,364,658(8) 17.5%
Pequot Capital Management, Inc.
500 Nyala Farm Road
Westport, CT 06880
John L. Reed 1,418,618(9) 5.7%
490 North Wiget Lane
Walnut Creek, CA 94598
8
<PAGE>
Peter Schechter 22,000(10) *
Chlopak Leonard Schechter & Assoc.
1850 M Street, N.W., #550
Washington, D.C. 20036
Jennifer Scott 40,423(11) *
Applied Research & Consulting LLC
295 Lafayette Street, 5th Floor
New York, NY 10012
Harry Thompson 100,000(12) *
169 E. 78th Street
New York, New York 10021
Richard V. Trefz 152,831(13) *
Airport Business Center
200 Diplomat Drive, Bay 204
Lester, PA 19113
All Officers and Directors as a Group 21,897,587(14) 77.9%
(17 persons)
5% Beneficial Owners
LCO Investments Limited 13,633,159(7) 54.4%
Canada Court
Upland Road
St. Peter Port
Guernsey
Channel Islands
9
<PAGE>
Pequot Capital Management, Inc. 4,364,658(8) 17.5%
500 Nyala Farm Road
Westport, CT 06880
Bradford Peters 1,620,104(6) 6.3%
Blackfin Capital
1633 Broadway, 33rd Floor
New York, New York 10019
John L. Reed 1,418,618(9) 5.7%
490 North Wiget Lane
Walnut Creek, CA 94598
-----------------
</TABLE>
* Constitutes less than 1%.
1 Includes any options or warrants to purchase share which are presently
exercisable or exercisable within 60 days.
2 All percentages are calculated based upon a total number of shares
outstanding which includes 23,970,685 shares of the Company issued and
outstanding as of June 19, 2000, plus that number of options presently
exercisable or exercisable within 60 days by the named security holder.
3 Includes 227,397 shares owned beneficially, and 140,000 shares which Mr.
Dawson has the right to acquire upon the exercise of vested options at
$6.00 per share.
4 Includes 37,397 shares owned beneficially, options to purchase 5,000 shares
exercisable at $9.00 per share, options to purchase 5,000 shares
exercisable at 6.81 per share, options to purchase 40,000 shares presently
exercisable at $1.75 per share, options to purchase 18,000 shares presently
exercisable at $2.75 per share, and options to purchase 18,000 shares
presently exercisable at $13.375 per share.
5 Includes 25,331 shares owned beneficially, and options to purchase 80,000
shares presently exercisable at $1.75 per share.
6 Represents the following shares held of record by Andrew J. McKelvey:
533,939 shares held of record, the right to acquire 724,110 shares upon
conversion of Convertible Notes of the Company at a conversion price of
$6.18 per share, and warrants to purchase 362,055 shares exercisable at
$7.21 per share. Mr. Peters has an economic interest in any appreciation
with respect to the shares beneficially owned by Mr. McKelvey, and shares
control over disposition of the shares.
7 Represents 11,526,768 shares owned of record and beneficially by LCO,
1,000,000 shares held indirectly through PdeP Tech Limited, a subsidiary of
LCO Investments Limited, warrants to purchase 368,797 shares exercisable at
$7.21 per share, and the right to acquire 737,594 shares upon conversion of
Convertible Notes of the Company at a
10
<PAGE>
conversion price of $6.18 per share. Mr. Pilaro is Chairman of CAP. CAP is
the sole trustee of the ERSE Trust, of which LCO is a wholly owned
subsidiary.
8 Mr. Poch is a managing director of Pequot Capital Management, Inc. and
disclaims beneficial ownership of these shares, except to the extent of his
pecuniary interest. The share amount represents 1,666,667 shares held of
record, the right to acquire 337,109 shares upon conversion of Convertible
Notes of the Company at a conversion price of $6.18 per share, and warrants
to purchase 168,554 shares exercisable at $7.21 per share, held by Pequot
Private Equity Fund II, L.P.; 833,333 shares held of record, the right to
acquire 168,554 shares upon conversion of Convertible Notes of the Company
at a conversion price of $6.18 per share, and warrants to purchase 84,277
shares exercisable at $7.21 per share, held by Pequot Partners Fund, L.P.;
833,333 shares held of record, the right to acquire 168,554 shares upon
conversion of Convertible Notes of the Company at a conversion price of
$6.18 per share, and warrants to purchase 84,277 shares exercisable at
$7.21 per share, held by Pequot International Fund, Inc.; options to
purchase 10,000 shares held by Gerald Poch; and 20,000 shares held of
record by Pequot Scout Fund, L.P. All of the Pequot entities listed above
are managed by Pequot Capital Management, Inc., which holds voting and
dispositive power for all shares of stock held by the Pequot entities.
9 Includes 575,900 shares owned beneficially, options to purchase 350,000
shares at $2.50 per share, options to purchase 250,000 shares at $9.25 per
share, the right to acquire 161,812 shares upon conversion of Convertible
Notes of the Company at a conversion price of $6.18 per share, and warrants
to purchase 80,906 shares exercisable at $7.21 per share.
10 Includes 2,000 shares owned beneficially in a Revocable Living Trust, and
options to purchase 20,000 shares presently exercisable at $11.25 per
share.
11 Includes 20,423 shares owned beneficially, and options to purchase 20,000
shares presently exercisable at $1.0625 per share.
12 Options to purchase from LCO 100,000 shares presently exercisable at $1.50
per share.
13 Includes 47,831 shares owned beneficially, and options to purchase 105,000
shares presently exercisable at $1.75 per share.
14 Includes presently exercisable options, warrants, or rights to acquire upon
conversion 4,108,842 shares.
15 Represents the right to acquire 242,718 shares upon conversion of
Convertible Notes of the Company at a conversion price of $6.18 per share,
and warrants to purchase 121,359 shares exercisable at $7.21 per share.
11
<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's officers, directors and persons who beneficially own more than 10
percent of a registered class of the Company's equity securities to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than 10 percent shareholders are
required by regulation of the Securities and Exchange Commission to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely upon its review of the copies of such forms
furnished to it during the fiscal year ended April 1, 2000, and representations
made by certain persons subject to this obligation that such filings were not
required to be made, the Company believes that all reports required to be filed
by these individuals and persons under Section 16(a) were filed in a timely
manner, except as follows (all such transactions have since been reported to the
SEC on Form 5 reports filed in May and June, 2000): Form 4 report of A.
Hofmeister for reporting transaction in June 1999; Form 3 report of H. Thompson
for reporting transaction in August 1999; Form 3 and two Form 4 reports of S.
Miller for reporting transactions in February, March, June and October 1999;
Form 3 report of A. Flint for reporting transactions in August and November
1999; Form 3 report of P. Schechter for reporting transactions in April and July
1999; Form 3 report of B. Peters for reporting transactions in June 1999 and
January 2000.
Except as disclosed, the Company is not aware of any
transactions in its outstanding securities by or on behalf of any director,
executive officer or 10 percent holder, which would require the filing of any
report pursuant to Section 16(a) during the fiscal year ended April 1, 2000,
that has not been filed with the Securities and Exchange Commission.
EXECUTIVE COMPENSATION
The following Summary Compensation Table shows compensation
paid by the Company for services rendered during the past three fiscal years to
each person who served as the Company's Chief Executive Officer during the
fiscal year ended April 1, 2000, and to the Company's four most highly
compensated executive officers in fiscal 2000 other than the CEO. The Company
appointed Richard V. Trefz as President and CEO, effective June 1, 1998. Mr.
Trefz served as CEO through December 1998. Effective June 1999, the Company
appointed John L. Reed as its new President and CEO.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
------------------------
Annual
Compensation Awards
------------------------
Securities
Underlying
Name and Fiscal Options/
Principal Position Year Salary ($) SARs (#)
-------------------------- ------------- ---------------------- ------------------------
<S> <C> <C> <C> <C>
John L. Reed 2000 $201,923 250,000 (1)
President and CEO 1999 0 750,000 (2)
Paul Dawson 2000 $167,723 200,000 (3)
CEO, BriteSmile 1999 0 0 (4)
International, Ltd.
12
<PAGE>
Richard V. Trefz 2000 250,000 20,000 (5)
President, 1999 157,635 225,000 (6)
Manufacturing
Linda S. Oubre 2000 176,058 25,000 (7)
President, Chief 1999 117,883 200,000 (8)
Administrative Officer
Andrew J. Hofmeister 2000 157,500 75,000 (9)
President, Associated 1999 97,464 150,000 (10)
Center Division
</TABLE>
(1) 83,333 of which are vested, 83,333 of which vest on March 24, 2001, and
83,334 of which vest on March 24, 2002.
(2) Mr. Reed received no cash compensation from the Company in fiscal 1999.
Prior to commencing full-time work for the Company at the Company's
offices, Mr. Reed performed occasional services for the Company beginning
January 1999. Mr. Reed's employment contract with the Company provides for
an annual salary of $250,000, commencing June 1999, and options to purchase
750,000 shares granted January 1999, 250,000 of which are vested, the
remainder of which vest 100,000 per year beginning July 22, 2000.
(3) All of which options vest and become exercisable on November 1, 2000.
(4) Mr. Dawson received no compensation from the Company in fiscal 1999. Mr.
Dawson's employment contract with the Company, effective April 19, 1999,
provides for an annual salary of $200,000, and options to purchase 300,000
shares, 140,000 of which are vested, the balance of which vest 40,000 per
year beginning April 19, 2001.
(5) Mr. Trefz' employment with the Company terminated as of May 31, 2000. In
connection therewith the 20,000 options granted to Mr. Trefz in fiscal year
2000 were cancelled.
(6) Mr. Trefz' employment with the Company terminated as of May 31, 2000. Of
the 225,000 options granted in 1999, 105,000 are vested and are exercisable
until May 7, 2008. The balance were cancelled in connection with Mr. Trefz'
termination of employment.
(7) All of which options vest and become exercisable on November 1, 2000.
(8) 80,000 of which are vested, the balance of which vest 30,000 per year
beginning July 1, 2000.
(9) 18,000 of which are vested, 32,000 of which vest 8,000 per year beginning
May 19, 2001, and 25,000 of which vest on November 1, 2000.
(10) 58,000 of which are vested, 60,000 of which vest in increments of 15,000
each year beginning August 1, 2000; 32,000 of which vest in increments of
8,000 each year beginning March 2, 2001.
The following table lists individual grants of stock options made during the
Company's last completed fiscal year as compensation for services rendered
as an officer of the Company:
13
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SAR Employees in Base Price Expiration
Name Granted (#) Fiscal Year(1) ($/Share) Date
............................... ... ............... ..... .................... ... ............... .. ..............
<S> <C> <C> <C> <C>
John L. Reed 250,000(2) 13.2% $9.250 03-24-10
Paul Dawson 20,000(3) 1.2% $5.875 11-01-09
Richard V. Trefz 20,000(3) 1.2% $5.875 11-01-09
Linda S. Oubre 25,000(3) 1.5% $5.875 11-01-09
Andrew J. Hofmeister 25,000(3) 1.5% $5.875 11-01-09
Andrew J. Hofmeister 50,000(4) 3.0% $13.395 05-19-09
</TABLE>
(1) Based upon options to purchase a total of 1,890,500 shares granted by the
Company to employees of the Company during the fiscal year ended April 1,
2000.
(2) 83,333 of which are vested, 83,333 of which vest on March 24, 2001, and
83,334 of which vest on March 24, 2002.
(3) These options vest and become exercisable on November 1, 2000 (after one
year from the date of grant), conditioned on continued employment with the
Company.
(4) 18,000 of which are vested, the balance to vest 8,000 per year beginning
5-19-01, conditioned on continued employment with the Company.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 2000
AND APRIL 1, 2000 OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Options Value of Unexercised
Shares(#) Value at In-the-Money Options at
Acquired on Realized April 1, 2000(1) April 1, 2000(1)
Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
--------------- ------------ ------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
John L. Reed 0 0 350,000/650,000 $2,471,875/$2,903,125
Paul Dawson 0 0 140,000/180,000 $498,750/$643,750
Richard V. Trefz 0 0 105,000/120,000(2) $820,312/$0
Linda S. Oubre 0 0 80,000/145,000 $625,000/$1,029,687
Andrew J. Hofmeister 0 0 86,000/149,000 $451,699/$788,937
--------------
</TABLE>
14
<PAGE>
1 Potential unrealized value is calculated as the fair market value at March
31, 2000 ($9.5625 per share), less the option exercise price, times the
number of shares.
2 Mr. Trefz' employment with the Company terminated effective May 31, 2000.
In connection with the termination, Mr. Trefz retained options to purchase
105,000 shares of the Company. All other unvested options held by Mr. Trefz
were canceled.
15
<PAGE>
EMPLOYMENT CONTRACTS AND
TERMINATION OF EMPLOYMENT ARRANGEMENTS
Certain of the Company's executive officers whose compensation
is required to be reported in the Summary Compensation Table are parties to
written employment agreements with the Company as follows:
John Reed
Pursuant to a letter agreement between the Company and John
Reed dated January 20, 1999, Mr. Reed agreed to serve as Chief Executive Officer
of the Company. The agreement provides that the Company will pay Mr. Reed
$250,000 a year for his services. Mr. Reed also received options to purchase
750,000 shares of the Company's common stock at the closing price on the date of
the agreement. Mr. Reed's employment began full-time and on location on June 2,
1999. On March 24, 2000, Mr. Reed was granted options to purchase 250,000 shares
of the Company's common stock at the closing price on that date.
Linda Oubre
The Company entered into an employment agreement with Linda
Oubre on January 22, 1999. Under the terms of the agreement, Ms. Oubre currently
serves as President, Chief Administrative Officer. The initial term of the
agreement is from January 22, 1999 through June 30, 2000. Her employment with
the Company will continue on an at-will basis thereafter. The Company paid Ms.
Oubre $165,000 per annum from January 22, 1999 through June 30,1999 and $175,000
per annum from July 1, 1999 through June 30, 2000. On July 1, 2000, Ms. Oubre's
salary will increase to $200,000 per annum. Ms. Oubre is eligible to receive
bonus compensation under such cash bonus plan as the Company may adopt for its
key executives. If no such plan is adopted, Ms. Oubre will be eligible for bonus
compensation based on the attainment of annual profitability and management
objectives relating to the Company's Center Division as agreed upon by Ms. Oubre
and the Company. Ms. Oubre was also granted options to purchase 200,000 shares
of the Company's common stock at $1.75 per share. Options to purchase 80,000 of
the 200,000 shares have vested and are currently exercisable; the right to
purchase an additional 30,000 of such shares will vest each of July 1, 2000,
July 1, 2001, July 1, 2002 and July 1, 2003 if Ms. Oubre has remained in the
employ of the Company from the date of the agreement to such date.
Paul Dawson
BriteSmile International, Ltd. entered into an employment
agreement with Paul Dawson on April 19, 1999. Under the terms of the agreement,
Mr. Dawson has served as Chief Executive Officer of BriteSmile International, a
wholly-owned subsidiary of the Company. The Company pays Mr. Dawson $16,666 per
month for his services. Mr. Dawson is eligible for a bonus based on the number
of paid teeth whitening procedures performed in a designated international area.
The bonus will be paid in cash and Common Stock of the Company. In addition, Mr.
Dawson received options to purchase 300,000 shares of the Company's common stock
at the closing price on the date of the agreement. Options to purchase 100,000
shares vested on the date of the agreement. The remaining 200,000 options vest
in equal installments over the next five years.
16
<PAGE>
Richard V. Trefz
The Company entered into an employment agreement with Richard
Trefz in May 1998, initially as President and CEO of the Company. The term of
the agreement was from May 1998 to May 31, 2000. The Company did not renew Mr.
Trefz' employment at May 31, 2000 and the employment agreement terminated. The
employment agreement provided for a salary of $250,000 per year and options to
purchase 225,000 shares of the Company's common stock at $1.75 per share. Mr.
Trefz was entitled to participate in all employee insurance and other fringe
benefit programs.
In connection with his termination of employment as of May 31,
2000, Mr. Trefz retained the right to exercise 105,000 of the 225,000 options
granted in May 1998. The balance of Mr. Trefz' options were cancelled.
Compensation Committee
The Compensation Committee of the Board of Directors is currently comprised
of directorsPoch, Peters, Thompson, and Reed. The committee meets periodically
to review the compensation of the Company's officers.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective January 12, 2000, the Company sold 77,318 shares of
Common Stock in a private placement to Andrew J. McKelvey for cash proceeds of
$463,908. Bradford Peters, a director of the Company, shares in the economic
benefits of any appreciation in the shares acquired by Mr. McKelvey. Mr. Peters
also shares with Mr. McKelvey authority to dispose of the shares.
On December 1, 1999 the Company, as lessee, entered into an
Agreement of Sublease with LCO Properties, Inc., a Delaware corporation, as
lessor. LCO Properties, Inc. is affiliated with the Company's principal
shareholder, LCO Investments Limited. The Sublease covers approximately 4,821
square feet of space located in the building known as 16-18 West 57th Street in
the Borough of Manhattan, New York City. The sublease term is for ten years and
calls for initial lease payments of $401,500 per year, subject to increase in
the event of increases in the rent payable under the parent lease for the
property between LCO and its lessor.
In August 1999 Harry Thompson, a director of the Company,
agreed to provide marketing consulting services to the Company. In consideration
for Mr. Thompson's services to the Company, and pursuant to a letter agreement
dated August 17, 1999, the Company's principal shareholder, LCO granted Mr.
Thompson the right to purchase from LCO up to 100,000 shares of Common Stock of
the Company at a price of $1.50 per share. The option to purchase from LCO
expires on August 31, 2004.
Effective June 4, 1999, the Company sold 1,355,555 shares of
Common Stock in a private placement for of $15,000,000. 1,004,043 of the shares
were sold to nine private investors for $11,120,000, including LCO. The
remaining 351,512 shares were sold to a group of up to 18 members of senior
management of the Company, including directors and executive officers, for
$3,880,000. The purchase price was $10.95 per share. However, four of the
purchasers, including three non-employee directors of the Company and LCO,
purchased at $11.525 per share. CAP Advisers Limited, an entity affiliated with
LCO, provided financing for the management purchasers. All purchasers acquired
certain registration rights. See the Company's Current Report on Form 8-K filed
June 21, 1999.
17
<PAGE>
On April 7, 1999, the Company entered into a Letter Agreement with Chlopak,
Leonard, Schechter and Associates ("CLS") Washington, D.C. Pursuant to the
agreement, CLS provides public relations advice and serves as communications
counselors to the Company for consideration of $22,500 per month, plus expenses.
The agreement was entered into for a minimum of six months, and remains in
force. Peter Schechter, a director of the Company, is a one-third co-owner and
Secretary of CLS.
On March 24, 1999, the Company entered into a Consulting Agreement with
Oral Health Clinical Services, LLC ("Oral Health"), Salim A. Nathoo and R. Eric
Montgomery. Mr. Montgomery is a director of the Company. Pursuant to the
agreement, Oral Health and Dr. Nathoo will devote their services to obtaining
American Dental Association ("ADA") Certification for the BS2000 procedure. The
term of the contract is for two years or until ADA Certification, whichever is
earlier. In consideration for the services, the Company granted 75,000 stock
options to Dr. Nathoo which are vested. The Company will grant up to 225,000
additional stock options, of which the number and exercise price is dependent
upon obtaining ADA Certification, at the date the Certification is obtained.
On December 7, 1998, the Company sold 9,302,326 shares of Common Stock to
LCO in a private placement for $10,000,000. Under an amendment to a prior
registration agreement, LCO acquired certain registration rights with respect to
these shares.
On May 17, 1998, the Company entered into a Consulting Agreement with
Oraceutical, LLC. R. Eric Montgomery, a director of the Company, is the founding
Manager and President of Oraceutical. Pursuant to the agreement, Oraceutical
provides technology development services to the Company for various
light-activated teeth whitening products and procedures. The Company and
Oraceutical are currently negotiating an extension of their agreement beyond its
original term. In consideration for its services, Oraceutical has been paid
$35,000 a month, plus options to purchase 200,000 shares of Common Stock,
subject to vesting provisions, exercisable at $1.75 per share.
On May 5, 1998, the Company sold 1,860,465 shares of its Common Stock to
LCO, for $5,000,000 pursuant to a Stock Purchase Agreement dated as of May 4,
1998.
On June 27, 29, 2000, the Company signed closed a Securities Purchase
Agreement with nine investors (the "Initial Investors"), pursuant to which the
sold Company sold in a private placement (the "Initial Closing") its 5%
Subordinated Convertible Notes due June 29, 2005 (the "Notes") in the aggregate
principal amount of $15,583,332.
The Notes are convertible into shares of the Company's Common Stock, par
value $.001 per share (the "Common Stock"), at a per share conversion price of
$6.18, which is 120% of the average of the closing bid price of the Common Stock
during the ten-trading day period immediately prior to June 27, 2000, the date
the transaction documents were signed. The Company also issued to the Investors,
pro rata, warrants (the "Warrants") to purchase a total of 1,260,787 shares of
Common Stock, which have a term of five years and an exercise price of $7.21 per
share. The conversion price of the Notes and the exercise price of the Warrants
are subject to certain reset and/or penalty provisions as set forth in the
transaction documents.
Two of the Initial Investors who purchased a total
of $3,500,000 principal amount of the Notes, are unaffiliated with the Company.
These unaffiliated investors are CapEx, L.P., and Pacific Mezzanine Fund.
18
<PAGE>
Seven of the Initial Investors, who purchased an aggregate amount of
$12,083,332 of the Notes, are presently affiliates of the Company. The
affiliated Initial Investors include LCO Investments Limited (shareholder and
affiliated with director Anthony Pilaro), John Reed (shareholder, CEO and
director), Gasper Lazzara, Jr. (director), Andrew McKelvey (shareholder and
affiliated with director Bradford Peters), and Pequot Private Equity Fund II,
L.P., Pequot International Fund, Inc., and Pequot Partners Fund, L.P.
(shareholders and affiliated with director Gerald Poch).
Pursuant to a Registration Rights Agreement between the Initial Investors
and the Company, the Company agreed to register with the Securities and Exchange
Commission, within 120 days from the closing date, the shares of Common Stock
underlying the Notes and Warrants for resale under the Securities Act of 1933,
as amended.
Effective August 3, 2000, the completed a subsequent sale (the "Subsequent
Closing") of an additional $4,416,667 principal amount of the Notes, together
with Warrants to purchase 357,334 shares of Common Stock, as part of the same
private placement. The Notes sold in the Subsequent Closing are due August 3,
2005, and the Warrants are exercise for 5 years until August 3, 2005. In all
other material respects, the Note and Warrants have the same terms and
conditions as the those sold in the Initial Closing.
Purchasers in the Subsequent Closing included five of the seven Initial
Investors affiliated with the Company (LCO, Andrew McKelvey, Pequot Private
Equity Fund II, L.P., Pequot International Fund, Inc., and Pequot Partners Fund,
L.P.) for $3,616,668 principal amount of the Notes. Two new investors, VenCap
Opportunities Fund, L.P. and Wendell Starke, also purchased Notes and Warrants
in the Subsequent Offering for an aggregate principal investment of $800,000.
All sales of the Notes and Warrants in the Initial Closing and the
Subsequent Closing were made in private transactions, exempt from the
registration requirements of the Securities Act of 1933 pursuant to Section 4(2)
of the Act and Rule 506 promulgated by the Securities and Exchange Commission
thereunder. Each person acquired the Notes and related warrants for investment
purposes only, with no intent to distribute the securities. The Notes and
Warrants are subject to standard restrictive legends with respect to transfer or
resale. All recipients received or had meaningful access to all Company reports
filed with the Commission pursuant to the Securities Exchange Act of 1934.
19
<PAGE>
PROPOSAL 2 -- AMENDMENT TO STOCK OPTION PLAN
On June 9, 2000, the Company's Board of Directors adopted an
amendment to the Company's Revised 1997 Stock Option and Incentive Plan (the
"Plan"). Pursuant to the amendment, the aggregate number of shares of Common
Stock of the Company available for issuance under the Plan was increased from
4,000,000 shares to 5,000,000 shares.
At the Annual Meeting, the Company's shareholders will be
asked to ratify and approve the amendment to the Plan, and the Board of
Directors is soliciting the enclosed proxy as to that decision. A brief
description of the material provisions of the Plan, as amended, and a table
summarizing the benefits to be conferred under the Plan follows.
The Plan provides for the award of incentive stock options to
key employees, and the award of non-qualified stock options, stock appreciation
rights, cash and stock bonuses, and other incentive grants to key employees,
directors, officers, agents and consultants who have important relationships
with the Company or its subsidiaries. Presently there are over 120 employees who
are eligible to participate in the Plan. The Plan was initially adopted by the
Board of Directors effective as of January 31, 1997. It was amended by the Board
of Directors on May 12, 1998, which amendments were ratified and adopted by the
shareholders of the Company at the Company's Annual Meeting of Shareholders held
in August 1998. The Plan was further amended by the Board of Directors on
January 22, 1999 to increase the number of shares issuable under the Plan to
4,000,000. The January 22, 1999 amendment was ratified and adopted by the
shareholders of the Company at the Company's Annual Meeting of Shareholders held
in August 1999.
The only amendment to the Plan since the Plan was ratified and
approved by the shareholders at last year's meeting has been the increase by the
Board of Directors, in June 2000, of the number of shares issuable under the
Plan. That most recent increase is now being submitted to shareholders of the
Company for their approval.
The principal provisions of the Plan are summarized below.
Administration
The Plan is administered by the Board of Directors of the
Company, or a Committee appointed by the Board consisting solely of two or more
non-employee directors (the "Plan Committee"). The Plan Committee will determine
and designate the individuals and classes of individuals to whom awards under
the Plan should be made and the amount, terms and conditions of the awards. The
Plan Committee may adopt and amend rules relating to the administration of the
Plan. Upon election of the director nominees identified in Proposal 1 herein,
the Plan Committee will be comprised of all directors of the Company. The Plan
is intended to comply with, and will be administered in accordance with, Rule
16b-3 adopted under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"), and the regulations thereto.
Eligibility
Awards under the Plan may be made to directors, officers, or
key employees of the Company and its subsidiaries, and to nonemployee agents,
consultants, advisors, and other persons whom the Plan Committee believes have
made or will make an important contribution to the Company or any subsidiary
20
<PAGE>
thereof, subject to Section 422 of the Code, which limits the grant of
"Incentive Stock Options" to executive officers and other senior managerial and
professional employees.
Shares Available
Subject to adjustment as provided in the Plan, a maximum of
5,000,000 shares of the Company's common stock is reserved for issuance
thereunder. If an option or stock appreciation right granted under the Plan
expires or is terminated or canceled, the unissued shares subject to such option
or stock appreciation right are again available under the Plan. In addition, if
shares sold or awarded as a bonus under the Plan are forfeited to the Company or
repurchased by the Company, the number of shares forfeited or repurchased are
again available under the Plan. In the absence of an effective registration
statement under the Securities Act of 1933, as amended (the "Act"), all shares
granted under the Plan will be restricted as to subsequent resales or transfer,
pursuant to Rule 144 under the Act.
Term
Unless earlier terminated by the Plan Committee, the Plan will
continue in effect until the earlier of: (i) January 31, 2007, and (ii) the date
on which all shares available for issuance under the Plan have been issued and
all restrictions on such shares have lapsed. The Plan Committee may suspend or
terminate the Plan at any time except with respect to options, and shares
subject to restrictions, then outstanding under the Plan.
Stock Option Grants
The Plan Committee may grant Incentive Stock Options ("ISOs")
and Non-Statutory Stock Options ("NSOs") under the Plan. With respect to each
option grant, the Plan Committee will determine the number of shares subject to
the option, the option price, the period of the option, the time or times at
which the option may be exercised (including whether the option will be subject
to any vesting requirements and whether there will be any conditions precedent
to exercise of the option), and the other terms and conditions of the option.
The Plan specifies, however, that 6 months must elapse from the date of grant of
the options to the date of disposition by the option holder of the shares of
common stock underlying the option. Options granted under the plan expire six
months after the termination of the option holder's employment for reasons other
than permanent disability, retirement, death, or termination for cause. To date,
options to purchase 4,509,600 shares of Common Stock have been granted
and are currently outstanding pursuant to the Plan.
ISOs are subject to special terms and conditions. The
aggregate fair market value, on the date of the grant, of the common stock for
which an ISO is exercisable for the first time by the optionee during any
calendar year may not exceed $100,000. An ISO may not be granted to an employee
who possesses more than 10% of the total voting power of the Company's stock
unless the option price is at least 110% of the fair market value of the common
stock subject to the option on the date it is granted, and the option is not
exercisable for 5 years after the date of grant. No ISO may be exercisable after
10 years from the date of grant. The option price may not be less than 100% of
the fair market value of the common stock covered by the option at the date of
grant.
In connection with the grant of NSOs or ISOs, the Plan
Committee may issue "Reload Options", which allow employees to receive options
to purchase that number of shares that shall equal (i) the number of shares of
common stock used to exercise underlying NSOs or ISOs, and (ii) the number of
shares of common stock used to satisfy any tax withholding requirement incident
to the exercise of the underlying NSOs or ISOs.
21
<PAGE>
Unless provided otherwise by the Plan Committee in connection
with a particular option grant, no vested option may be exercised unless at the
time of such exercise the holder of such option is employed by or in the service
of the Company or any subsidiary thereof, within three (3) years following
termination of employment by reason of death, retirement, or disability, and
within six (6) months following termination for any other reason, except for
cause, in which case all unexercised options shall terminate forthwith. No
shares may be issued pursuant to the exercise of an option until full payment
therefor has been made. Upon the exercise of an option, the number of shares
reserved for issuance under the Plan will be reduced by the number of shares
issued upon exercise of the option.
Stock Appreciation Rights
Two types of Stock Appreciation Rights ("SARs") may be granted
under the Plan: "Alternate SARs" and "Limited Rights." Alternate SARs are
granted concurrently with or subsequent to stock options, and permit the option
holder to be paid, in common stock, the excess of the fair market value of each
share of common stock underlying the stock option at the date of exercise of the
Alternate SARs over the fair market value of each share of common stock
underlying the option at the grant date. The exercise of Alternate SARs shall be
in lieu of the exercise of the stock option underlying the SARs, and upon such
exercise a corresponding number of stock options shall be canceled. Alternate
SARs are exercisable upon the same terms and conditions as are applicable to the
options underlying them. Upon the exercise of an Alternate SAR, the number of
shares reserved for issuance under the Plan will be reduced by the number of
shares issued.
Limited Rights may be issued concurrently with or subsequent
to the award of any stock option or Alternate SAR under the Plan. Limited Rights
allow the holder thereof to be paid appreciation on the stock option or the
amount of appreciation receivable upon exercise of an Alternate SAR in cash and
in lieu of exercising such options or rights. Limited Rights are exercisable
only to the same extent and subject to the same conditions and within the same
time periods as the stock options or Alternate SARs underlying such Limited
Rights; provided, however, that Limited Rights may not be exercised under any
circumstances until the expiration of 6 months following the date of grant.
Limited Rights are exercisable in full for a period of seven months following a
change in control of the Company. Upon the exercise of Limited Rights, the stock
options or Alternate SARs underlying such Limited Rights shall terminate. Cash
payments upon the exercise of Limited Rights will not reduce the number of
shares of common stock reserved for issuance under the Plan. No SARs have been
granted under the Plan.
Stock Bonus Awards
The Plan Committee may award shares of common stock as a stock
bonus under the Plan. The Plan Committee may determine the recipients of the
awards, the number of shares to be awarded, and the time of the award. Stock
received as a stock bonus is subject to the terms, conditions, and restrictions
determined by the Plan Committee at the time the stock is awarded. No stock
bonus awards have been granted under the Plan.
Cash Bonus Rights
The Plan Committee may grant cash bonus rights under the Plan
either outright or in connection with (i) options granted or previously granted,
(ii) SARs granted or previously granted, (iii) stock bonuses awarded or
previously awarded, and (iv) shares issued under the Plan. Bonus rights granted
in connection with options entitle the optionee to a cash bonus if and when the
related option is exercised. The amount of the bonus is determined by
multiplying the excess of the total fair market value of the shares acquired
22
<PAGE>
upon the exercise over the total option price for the shares by the applicable
bonus percentage. Bonus rights granted in connection with an SAR entitle the
holder to a cash bonus when the SAR is exercised, that is determined by
multiplying the amount received upon exercise of the SAR by the applicable bonus
percentage. Bonus rights granted in connection with stock bonuses entitle the
recipient to a cash bonus, in an amount determined by the Plan Committee, either
at the time the stock bonus is awarded or upon the lapse of any restrictions to
which the stock is subject. No bonus rights have been granted under the Plan.
Non-Assignability of Plan Awards
No award under the Plan shall be assignable or transferable by
the recipient thereof, except by will or the laws of descent or pursuant to a
qualified domestic relations order as defined in the Code.
Changes in Capital Structure
The Plan provides that if the outstanding common stock of the
Company is increased or decreased or changed into or exchanged for a different
number or kind of shares or other securities of the Company or of another
corporation by reason of any recapitalization, stock split or certain other
transactions, appropriate adjustment will be made by the Plan Committee in the
number and kind of shares available for grants under the Plan. In addition, the
Plan Committee will make appropriate adjustments in the number and kind of
shares as to which outstanding options will be exercisable. In the event of a
merger, consolidation or other fundamental corporate transformation, the Board
may, in its sole discretion, permit outstanding options to remain in effect in
accordance with their terms; to be converted into options to purchase stock in
the surviving or acquiring corporation in the transaction; or to be exercised,
to the extent then exercisable, during a period prior to the consummation of the
transaction established by the Plan Committee or as may otherwise be provided in
the Plan.
Tax Consequences
The following description addresses the federal income tax
consequences of the Plan. Although the Company believes the following statements
are correct based on existing provisions of the Code and legislative history and
administrative and judicial interpretations thereof, no assurance can be given
that changes will not occur which would modify such statements. Also, such
statements are intended only to provide basic information. Each Plan participant
should consult his or her own tax advisor concerning the tax consequences of
participation in the Plan because individual financial and federal tax
situations may vary, and state and local tax considerations may be significant.
Certain options authorized to be granted under the Plan are
intended to qualify as ISOs for federal income tax purposes. Under federal
income tax law currently in effect, the optionee will recognize no income upon
grant or exercise of the ISO. If an employee exercises an ISO and does not
dispose of any of the option shares within two years following the date of grant
and within one year following the date of exercise, then any gain realized upon
subsequent disposition of the shares will be treated as income from the sale or
exchange of a capital asset held for more than one year. If an employee disposes
of shares acquired upon exercise of an ISO before the expiration of either the
one-year holding period or the two-year waiting period, any amount realized will
be taxable as ordinary compensation income in the year of such disqualifying
disposition to the extent that the lesser of the fair market value of the shares
on the exercise date or the fair market value on the date of disposition exceeds
the exercise price. The Company will not be allowed any deduction for federal
23
<PAGE>
income tax purposes at either the time of the grant or the exercise of an ISO.
Upon any disqualifying disposition by an employee, the Company will generally be
entitled to a deduction to the extent the employee realized ordinary income.
Certain options authorized to be granted under the Plan will
be treated as NSOs for federal income tax purposes. Under federal income tax law
presently in effect, no income is realized by the grantee of an NSO until the
option is exercised. When the NSO is exercised, the optionee will realize
ordinary compensation income, and the Company will generally be entitled to a
deduction, in the amount by which the market value of the shares subject to the
option at the time of exercise exceeds the exercise price. Upon the sale of
shares acquired upon exercise of an NSO, the excess of the amount realized from
the sale over the market value of the shares on the date of exercise will be
taxable.
An employee who receives stock in connection with the
performance of services will generally realize income at the time of receipt
unless the shares are not substantially vested for purposes of Section 83 of the
Code and no election under Section 83(b) of the Code is filed within 30 days
after the original transfer. The Company generally will be entitled to a tax
deduction in the amount includable as income by the employee at the same time or
times as the employee recognizes income with respect to the shares. The Company
is required to withhold employment taxes on the amount of the income the
employee recognizes. A participant who receives a cash bonus right under the
Plan generally will recognize income equal to the amount of any cash bonus paid
at the time of receipt of the bonus, and the Company generally will be entitled
to a deduction equal to the income recognized by the participant.
Section 162(m) of the Code limits to $1 million per person the
amount the Company may deduct for compensation paid to any of its most highly
compensated officers in any year after 1993. Under proposed regulations,
compensation received through the exercise of an option or SAR will not be
subject to the $1 million limit if the option or SAR and the plan pursuant to
which it is granted meet certain requirements. The currently applicable
requirements are that the option or SAR be granted by a committee of at least
two disinterested directors and that the exercise price of the option or the SAR
be not less than fair market value of the Common Stock on the date of grant.
Accordingly, the Company believes compensation received on exercise of options
and SARs granted under the Plan in compliance with the above requirements will
not be subject to the $1 million deduction limit.
Amendments to Plan
The Plan Committee may at any time and from time to time
terminate or modify or amend the Plan in any respect, including in response to
changes in securities, tax or other laws or rules, regulations or regulatory
interpretations thereof applicable to the Plan or to comply with stock exchange
rules or requirements.
Subject to the Plan, the following options have been awarded
and are currently outstanding:
24
<PAGE>
PLAN BENEFITS
Revised 1997 Stock Option
and Incentive Plan
<TABLE>
<CAPTION>
NO. OF OPTIONS
TO PURCHASE
NAME AND POSITION DOLLAR VALUE ($) COMMON STOCK(2)
----------------- ---------------- -------------
<S> <C> <C>
John L. Reed $1,031,250 750,000(3)
CEO and director
Paul Dawson $ 0 300,000(4)
CEO, BriteSmile International Ltd.
Linda S. Oubre $ 425,000 225,000(5)
President, Chief Administrative Officer
and director
Andrew J. Hofmeister $ 268,750 235,000(6)
President Associated Center Division
Michael Whan $ 0 200,000(7)
President Worldwide Marketing
Paul A. Boyer $ 0 150,000(8)
Executive Vice President, Chief Financial
Officer and Secretary
Stephen Miller $ 225,000 200,000(9)
Executive Vice President, Real Estate
And Construction
Jennifer A. Scott, director $ 56,250 20,000(10)
Peter Schechter, director $ 0 20,000(11)
Current Executive Officers $2,006,250 2,100,000
As a Group (7 persons)
Current Directors Who are Not $ 56,250 40,000
Executive Officers, as a Group
All Current or Former Employees $1,513,937 2,139,600
Who are Not Executive Officers, as a Group
</TABLE>
(1) As of July 14, 2000, the market value of the shares of Common Stock
underlying the options was $3.875, as quoted on Nasdaq.
(2) Exercise prices of options granted pursuant to the Plan range from $1.00
per share to $13.375 per share.
(3) Exercisable at $2.50 per share, 350,000 of which are vested, the remainder
of which vest 100,000 per year beginning January 22, 2001.
(4) Exercisable at $6.00 per share, 140,000 of which are vested, the remainder
of which vest 40,000 per year beginning April 19, 2001.
25
<PAGE>
(5) Exercisable at $1.75 per share 80,000 of which are vested, the balance of
which vest 30,000 per year beginning July 15, 2001, and 25,000 shares,
exercisable at $5.875 per share beginning November 1, 2000.
(6) Represents 5,000 shares exercisable at $9.00 per share, 5,000 shares
exercisable at $6.81 per share, 100,000 shares exercisable at $1.75 per
share (40,000 of which are vested, 60,000 of which vest 15,000 each year
beginning August 1, 2000), 50,000 shares exercisable at $2.75 per year
(18,000 of which are vested, 32,000 of which vest 8,000 per year beginning
March 2, 2001), 50,000 shares exercisable at $13.375 per share (18,000of
which are vested, 32,000 of which vest 8,000 each year beginning May 19,
2001), and 25,000 shares exercisable at 5.875 per share beginning November
1, 2000.
(7) 200,000 shares exercisable at $7.39 per share, 100,000 of which are vested,
the balance of which vest 20,000 each year beginning April 24, 2001.
(8) 150,000 shares exercisable at $7.75 per share, 50,000 of which are vested,
the balance of which vest 20,000 each year beginning December 1, 2000.
(9) 200,000 shares exercisable at $2.75 per share, 80,000 of which are vested,
the balance of which vest 30,000 per year beginning March 2, 2001.
(10) Presently exercisable at $1.0625 per share.
(11) Presently exercisable at $11.25 per share.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF PROPOSAL 2.
PROPOSAL 3
TO APPROVE A SERIES OF TRANSACTIONS PURSUANT TO WHICH THE COMPANY (I) HAS ISSUED
CONVERTIBLE NOTES IN THE AGGREGATE PRINCIPAL AMOUNT OF $20,000,000 TO ELEVEN
INVESTORS, INCLUDING SEVEN INVESTORS PRESENTLY AFFILIATED WITH THE COMPANY,
WHICH NOTES ARE CONVERTIBLE INTO 3,236,245 SHARES OF COMMON STOCK, AND (II) HAS
ISSUED WARRANTS TO THE INVESTORS TO PURCHASE A TOTAL OF 1,618,122 SHARES OF
COMMON STOCK. THE NET EFFECT OF THE FORGOING TRANSACTIONS, IF THE NOTES ARE
CONVERTED AND THE WARRANTS ARE EXERCISED, WILL BE THE ISSUANCE OF MORE THAN 20%
OF THE TOTAL NUMBER OF SHARES OF THE COMPANY'S COMMON STOCK ISSUED AND
OUTSTANDING PRIOR TO THE COMMENCEMENT OF SUCH TRANSACTIONS.
The Note Offering
As of August 3, 2000 the Company had closed Securities Purchase Agreements
("Note Purchase Agreements") with eleven investors ("Investors"), seven of whom
had previously been affiliated with the Company, its executive officers and
directors (the "Note Offering"). Pursuant to the Note Purchase Agreements, the
26
<PAGE>
Investors purchased the Company's 5% Subordinated Convertible Notes due in five
years (the "Notes") in the aggregate principal amount of $20,000,000. Of the
$20,000,000 total proceeds to the Company, $15,583,332 was received in an
initial closing on June 29, 2000. The balance of $4,416,667 was received in a
subsequent closing on August 3, 2000.
27
<PAGE>
The Company also issued to the Investors, pro rata, warrants ("Warrants")
to purchase a total of 1,618,122 shares of Common Stock.
Four of the Investors, who purchased a total of $4,300,000 principal amount
of the Notes, are unaffiliated with the Company. These unaffiliated investors
are CapEx, L.P., Pacific Mezzanine Fund, VenCap Opportunities Fund, L.P., and
Wendell Starke as Trustee under trust dated 10-02-1991.
Seven of the Investors, who purchased an aggregate amount of $15,700,000 of
the Notes, are presently affiliates of the Company. The affiliated Investors
include LCO Investments Limited (shareholder and affiliated with director
Anthony Pilaro), John Reed (shareholder, CEO and director), Gasper Lazzara, Jr.
(director), Andrew McKelvey (shareholder and affiliated with director Bradford
Peters), and Pequot Private Equity Fund II, L.P., Pequot International Fund,
Inc., and Pequot Partners Fund, L.P. (shareholders and affiliated with director
Gerald Poch).
Terms and Conditions of the Notes
The Notes bear interest on the unpaid principal balance at the rate of 5%
per annum. Interest on the Notes is payable in cash on the last day of each
March and the last day of each September during the term of the Notes. The
principal amount of the Notes is due and payable five years from the date of
purchase of the Notes.
The Notes are convertible into shares of the Company's Common Stock at a
per share conversion price of $6.18, which is 120% of the average of the closing
bid price of the Common Stock during the ten trading day period immediately
prior to June 27, 2000, the date the transaction documents for the initial
closing of the Note Offering were signed. On June 27, 2000, the closing sales
price of the Company's Common Stock as quoted on NASDAQ was $5.563. On August 3,
2000, the effective date of the subsequent closing of the Note Offering, the
closing sales price of the Common Stock on NASDAQ was $4.563.
The conversion price of the Notes is subject to a one-time adjustment
downward in nine months from closing to 102% of the market price of the Common
Stock on the adjustment date (provided that in no event will such price be
adjusted downward to less than $3.8625 per share). The conversion price is also
subject to adjustments from time to time upon the occurrence of certain other
events described in the Notes and Warrants, including future issuances of Common
Stock for consideration less than the conversion price then in effect, stock
splits or reverse stock splits, and the occurrence of certain major corporate
events such as mergers, sale of assets, tender offers or exchange offers.
Pursuant to a Registration Rights Agreement between the Investors and the
Company, the Company agreed to register with the Securities and Exchange
Commission (the "Commission"), within 120 days from the initial closing date of
June 27, 2000, the shares of Common Stock underlying the Notes and Warrants for
28
<PAGE>
resale under the Securities Act of 1933, as amended. The Company has filed the
Registration Statement with the Commission. As of the date of this Proxy
Statement, no additional Notes have been purchased in the offering the
Registration Statement has not been declared effective by the Commission.
Terms and Conditions of the Warrants
Each purchaser of Notes in the Note Offering also received Warrants to
purchase shares of Common Stock of the Company. Pursuant to the Note Purchase
Agreements, the number of shares of Common Stock issuable upon the exercise of
the Warrants was 1,618,122, calculated pursuant to the Note Purchase Agreements
as that number equal to the quotient of (A) the product of the aggregate
principal amount of Notes purchased by each Purchaser multiplied by 0.50,
divided by (B) $6.18 (the Conversion Price on the Issuance Date, as those terms
are defined in the Notes).
The Warrants issued in connection with the Note Offering have a term of
five years and an exercise price of $7.21 per share. The exercise price of the
Warrants equals 140% of $5. 15, i.e. 10-day average the market price of the
Common Stock prior to the date of signing the Note Purchase Agreement. The
exercise price of the Warrants is subject to adjustment upon certain events
specified in the Warrant, including the subsequent issuance by the Company of
shares of its Common Stock at prices lower than the original Warrant exercise
price.
Copies of the form of Note Purchase Agreement, together with the form of
Notes and Warrants issued to the Investors, are included as exhibits to the
Company's Current Report on Form 8-K filed with the Commission on July 3, 2000.
As of the date of this Proxy Statement, none of the Notes has been
converted into shares of Common Stock, and none of the Warrants has been
exercised.
Use of Proceeds
The Company plans to use the net proceeds from the Note Offering to fund
ongoing business expansion, including the establishment of additional Whitening
Centers and Associated Centers, and other general working capital purposes.
Summary Tables
The following table identifies the total number of shares of Common Stock
that would be issued assuming the hypothetical conversion, exercise or issuance
of all of the Notes and Warrants granted in the Note Offering in the aggregate
29
<PAGE>
<TABLE>
<CAPTION>
Shares of
Shares of Common
Common Stock Total Shares Shares
Stock Issuable Issuable of Issuable as
Upon Full Upon Full Common Percentage of
Note Warrant Stock Shares
Conversion at Exercise at Issuable Outstanding
Convertible Note $6.18 per $7.21 per Prior to Note
Security Principal Share Share Offering
------------------------ -------------- ------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
5% Subordinated
Convertible Notes $20,000,000 3,236,245 1,618,122 4,854,367 20.25%
</TABLE>
The following table shows the total number of shares of Common Stock that
would be issued to the Investors assuming the conversion price of the Notes is
reset as provided in the reset provisions described above to the lowest possible
per share reset price of $3.8625:
30
<PAGE>
<TABLE>
<CAPTION>
Shares of
Shares of Common
Common Stock Total Shares
Stock Issuable Issuable Issuable as
Upon Full Upon Full Percentage of
Note Warrant Shares
Conversion at Exercise at Total Shares Outstanding
Convertible Note $3.8625 per $7.21 per of Common Prior to Note
Security Principal Share Share Stock Issuable Offering
----------------- ----------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C>
5% Subordinated
Convertible Notes $20,000,000 5,177,993 1,618,122 6,796,116 28.35%
</TABLE>
Nasdaq National Market Shareholder Approval Requirement
The Common Stock is quoted on the Nasdaq National Market. Because of that
listing, the Company is contractually obligated to comply with applicable rules
of the Nasdaq Stock Market. Nasdaq Stock Market Rule 4460(i)(1)(D) requires
shareholder approval for the issuance of shares of common stock in a transaction
or series of transactions involving, among other types of transactions, the sale
or issuance by the issuer of common stock (or securities convertible into or
exercisable for common stock) equal to 20% or more of the common stock or 20% or
more of the voting power obtained before the issuance for less than the greater
of book or market value of the stock. As is noted in the table above, the
conversion of all or substantially all of the aggregate amount of the Notes,
together with the issuance of the shares of Common Stock issuable upon exercise
of the Warrants, would result in the issuance by the Company of more than 20% of
the Common Stock outstanding before the Note Purchase Agreements were executed.
In addition, Nasdaq National Market rule 4460(i)(1)(A) requires shareholder
approval for the issuance of shares of common stock under an arrangement
pursuant to which stock may be acquired by the Company's officers or directors.
As discussed above, seven of the Investors, who have purchased an aggregate of
$15,700,000 of the Notes, are presently affiliates of the Company. These
Investors collectively own 16,989,940, or 70.9 %, of the 23,975,885 shares of
Common Stock outstanding as of the record date and entitled to vote at the
Annual Meeting. Accordingly, these affiliated Investors have a substantial
interest in voting in favor of Proposal No. 3. The affiliated Investors intend
to vote their shares in favor of Proposal No. 3, thereby assuring adoption of
this Proposal. The total percentage of shares that will be held by the affiliate
Investors, assuming all of the Notes are converted and Warrants exercised, will
be 74.9% (76.2% assuming the one-time downward adjustment of the Conversion
Price to the lowest possible price of $3.8625).
In recognition of the forgoing requirements of the Nasdaq Stock Market, the
Company agreed under the Note Purchase Agreements that the Board of Directors
would recommend that the shareholders approve the sale of the Notes and the
related transactions to the extent such transactions have been entered into with
officers and directors of the Company or their affiliates, and to the extent
that such transactions could, upon conversion of the Notes and exercise of the
Warrants, will result in the issuance of more than 20% of the Common Stock
outstanding immediately prior to such series of transactions, potentially at a
price which may be below the then current market price at the time of conversion
or exercise.
Director Recommendation
31
<PAGE>
The Board of Directors recommends that the shareholders approve the sale of
the Notes and Warrants. The directors determined that the Company needed to
complete a private placement of either debt or equity to supply additional
funding necessary for the Company to pursue its expansion goals over the next
twelve months. The Board contemplated a private placement of straight Common
Stock, but determined that such a transaction would create immediate dilution to
current shareholders. In the opinion of the Board members, the private placement
of the Notes was in the best interests of shareholders because: (1) there would
be no immediate dilution to current shareholders, (2) both the Notes and the
shares underlying the Warrants were to be purchased at a premium to the then
market price of the Company's Common Stock of $5.15 (the 10 day average price
immediately preceding the June 27, 2000 initial signing date), and (3) the
Warrants provide for additional future proceeds to the Company in the event the
price of the Company's stock increases above the Warrant exercise price of $7.21
per share.
Potential disadvantages to the Company's shareholders if the sale of the
Notes and Warrants is approved could be said to include: (1) dilution to current
shareholders if and when the Notes are converted and the Warrants exercised,
resulting in the issuance of 4,854,367 additional shares of Common Stock by the
Company at the assumed conversion rate of 6.18 per share, and (2) the potential
depressive effect upon the market price of the Company's Common Stock if the
Investors were to choose to convert their Notes into Common Stock and sell
substantial amounts of those shares into the public market pursuant to the
registration rights granted to them by the Company. The Board of Directors
believes that any such disadvantages to approving Proposal No. 3 are outweighed
by the favorable terms to the Company upon which the Notes and Warrants were
sold, and the receipt by the Company of $20,000,000 in working capital critical
to the Company's ability to execute its plan to open additional teeth whitening
centers.
The Company's Board of Directors now solicits your proxy to be voted to
approve such transactions by approving this Proposal No. 3.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL NO. 3.
32
<PAGE>
PROPOSAL 4 -- APPROVAL OF INDEPENDENT AUDITORS
The Board of Directors of the Company has selected Ernst &
Young LLP as the independent auditors for the Company for the transition fiscal
year of the Company ending December 31, 2000. Ernst & Young LLP served as the
Company's independent auditors for the fiscal year ended April 1, 2000.
At the Annual Meeting, shareholders will be asked to ratify
the selection by the Board of Directors of Ernst & Young LLP as the Company's
independent auditors.
Representatives of Ernst & Young LLP may attend the 2000
Annual Meeting. If they attend, they will have an opportunity to make a
statement if they desire to do so, and they will be available to answer
appropriate questions from shareholders.
THE BOARD RECOMMENDS SHAREHOLDER APPROVAL OF THE SELECTION OF AUDITORS.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors
of the Company does not intend to present, and has not been informed that any
other person intends to present, a matter for action at the 2000 Annual Meeting
other than as set forth herein and in the Notice of Annual Meeting. If any other
matter properly comes before the meeting, it is intended that the holders of
proxies will act in accordance with their best judgment.
The accompanying proxy is being solicited on behalf of the
Board of Directors of the Company. In addition to the solicitation of proxies by
mail, certain of the officers and employees of the Company, without extra
compensation, may solicit proxies personally or by telephone, and, if deemed
necessary, third party solicitation agents may be engaged by the Company to
solicit proxies by means of telephone, facsimile or telegram, although no such
third party has been engaged by the Company as of the date hereof. The Company
will also request brokerage houses, nominees, custodians and fiduciaries to
forward soliciting materials to the beneficial owners of common stock held of
record and will reimburse such persons for forwarding such material. The cost of
this solicitation of proxies will be borne by the Company.
ANNUAL REPORT
COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB
(INCLUDING FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES) FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION MAY BE OBTAINED WITHOUT CHARGE BY WRITING
TO THE COMPANY - ATTENTION: PAUL A. BOYER, SECRETARY, 490 North Wiget Lane,
Walnut Creek, California 94598. A request for a copy of the Company's Annual
Report on Form 10-KSB must set forth a good-faith representation that the
requesting party was either a holder of record or a beneficial owner of Common
Stock of the Company on July 21, 2000. Exhibits to the Form 10-KSB, if any, will
be mailed upon similar request and payment of specified fees to cover the costs
of copying and mailing such materials.
A copy of the Company's 2000 Annual Report to Shareholders is
being mailed with this Proxy Statement, but is not deemed a part of the proxy
soliciting material.
33
<PAGE>
SHAREHOLDER PROPOSALS
Any shareholder proposal intended to be considered for
inclusion in the proxy statement for presentation in connection with the 2001
Annual Meeting of Shareholders must be received by the Company by December 15,
2000. The proposal must be in accordance with the provisions of Rule 14a-8
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934. The Company suggests that any such request be submitted by
certified mail, return receipt requested. The Board of Directors will review any
proposal which is timely received, and determine whether it is a proper proposal
to present to the 2001 Annual Meeting.
MATERIAL INCORPORATED BY REFERENCE
The following financial and other information is incorporated
by reference to the following sections of the Annual Report on Form 10-KSB of
the Company for the fiscal year ended April 1, 2000, as filed with the
Securities and Exchange Commission: Item 7, the Company's Consolidated Financial
Statements and associated notes; and Item 6, Managements Discussion and Analysis
of Financial Condition and Results of Operations.
The enclosed Proxy is furnished for you to specify your
choices with respect to the matters referred to in the accompanying notice and
described in this Proxy Statement. If you wish to vote in accordance with the
Board's recommendations, merely sign, date and return the Proxy in the enclosed
envelope which requires no postage if mailed in the United States. A prompt
return of your Proxy will be appreciated.
By Order of the Board of Directors
Paul A. Boyer, Executive Vice President, CFO, and Secretary
Walnut Creek, California
August 22, 2000
