-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ViHPcitR59xLcSVeZpvNYQ7tp1zI/uZU2tlrZTaLSrDD27VnmLftERJT3GfqP6YI 3t/SyrpTKe9AEktIF/JaXA== 0000892569-99-002234.txt : 19990816 0000892569-99-002234.hdr.sgml : 19990816 ACCESSION NUMBER: 0000892569-99-002234 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAFEGUARD HEALTH ENTERPRISES INC CENTRAL INDEX KEY: 0000727303 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 521528581 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12050 FILM NUMBER: 99689651 BUSINESS ADDRESS: STREET 1: 95 ENTERPRISE T CITY: ALISO VIEJO STATE: CA ZIP: 92656-2601 BUSINESS PHONE: 9494254110 10-Q 1 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED 06/30/99 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 0-12050 SAFEGUARD HEALTH ENTERPRISES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 52-1528581 - ---------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 95 ENTERPRISE ALISO VIEJO, CALIFORNIA 92656 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (949) 425-4300 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of registrant's common stock, par value $.01 per share, at June 30, 1999, was 4,747,498 shares (not including 3,274,788 shares of common stock held in treasury). Page 1 of 19 2 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999 INFORMATION INCLUDED IN REPORT
Page ---- Part I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements 3 Consolidated Statements of Financial Position 3 Consolidated Statements of Income 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk 15 Part II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities and Use of Proceeds 15 Item 3. Defaults Upon Senior Securities 15 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 19
Page 2 of 19 3 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (000'S OMITTED)
June 30, 1999 December 31, 1998 ------------- ----------------- (Unaudited) ASSETS Current assets: Cash $ 3,440 $ 3,256 Investments available for sale, at estimated fair value 3,721 2,959 Accounts receivable, net of reserves of $3,264 in 1999 and $2,954 in 1998 4,917 4,641 Notes receivable, net of allowances of $24,765 in 1999 and $17,305 in 1998 3,052 10,892 Income taxes receivable 4,076 485 Prepaid expenses and other current assets 653 478 Deferred income taxes 6,478 6,672 Assets held for sale -- 3,562 -------- -------- Total current assets 26,337 32,945 -------- -------- Property and equipment, net 6,384 6,105 Investments available for sale, at estimated cost 4,993 4,225 Notes receivable - long term, net of allowances of $2,523 in 1999 and $2,601 in 1998 4,161 4,083 Other assets 237 240 Goodwill, net of accumulated amortization of $1,930 in 1999 and $1,563 in 1998 27,547 27,914 Intangibles and covenant not to compete, net of accumulated amortization of $2,517 in 1999 and $2,059 in 1998 3,385 3,893 Deferred income taxes - long term 539 539 -------- -------- Total assets $ 73,583 $ 79,944 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt $ 7,050 $ 8,000 Current portion of note payable 548 1,894 Accounts payable and accrued expenses 11,919 10,905 Income taxes payable 69 -- Reserves for incurred but not reported claims 4,224 3,558 Deferred revenue 1,158 1,022 -------- -------- Total current liabilities 24,968 25,379 Long-term debt 32,500 32,500 Accrued compensation agreement 293 311 Stockholders' equity Common stock $.01 par value; 30,000,000 shares authorized; 4,747,000 in 1999 and in 1998 shares outstanding, stated at 21,509 21,509 Preferred stock - $.01 par value; 1,000,000 shares authorized; no shares issued or outstanding -- -- Retained earnings 12,461 18,722 Net unrealized loss on investments available for sale, net of deferred taxes (25) (354) Treasury stock, at cost (18,123) (18,123) -------- -------- Total stockholders' equity 15,822 21,754 -------- -------- $ 73,583 $ 79,944 ======== ========
See accompanying Notes to Consolidated Financial Statements Page 3 of 19 4 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (000'S OMITTED, EXCEPT PER SHARE DATA)
Three months ended Six months ended June 30, June 30, ------------------------------------------ 1999 1998 1999 1998 ---- ---- ---- ---- Revenues $ 25,050 $ 24,440 $ 49,805 $ 48,836 Expenses: Health care services 16,509 16,288 32,951 32,719 Selling, general and administrative 9,339 6,857 17,051 14,158 -------- -------- -------- -------- Total expenses 25,848 23,145 50,002 46,877 -------- -------- -------- -------- Operating income (798) 1,295 (197) 1,959 Other income 789 534 2,341 1,504 Other expense (10,355) (10,355) Interest expense (1,102) (973) (2,049) (1,895) -------- -------- -------- -------- Income from continuing operations before provision for income taxes and discontinued operations (11,466) 856 (10,260) 1,568 Provision for income taxes (4,420) (370) (3,999) 683 -------- -------- -------- -------- Income from continuing operations before discontinued operations (7,046) 486 (6,261) 885 Loss from discontinued operations net of taxes (58) (58) -------- -------- -------- -------- Net income $ (7,046) $ 428 $ (6,261) $ 827 ======== ======== ======== ======== Basic earning per share: Income from continuing operations $ (1.48) $ 0.10 $ (1.32) $ 0.18 Income from discontinued operations $ 0.00 $ (0.01) $ 0.00 $ (0.01) -------- -------- -------- -------- Net income $ (1.48) $ 0.09 $ (1.32) $ 0.17 ======== ======== ======== ======== Weighted average shares outstanding 4,747 4,747 4,747 4,747 Diluted earning per share: Income from continuing operations $ (1.48) $ 0.10 $ (1.32) $ 0.18 Income from discontinued operations $ 0.00 $ (0.01) $ 0.00 $ (0.01) -------- -------- -------- -------- Net income $ (1.48) $ 0.09 $ (1.32) $ 0.17 ======== ======== ======== ======== Weighted average shares outstanding 4,747 4,820 4,747 4,820
See accompanying Notes to Consolidated Financial Statements. Page 4 of 19 5 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (000'S OMITTED)
Six months ended June 30, --------------------- 1999 1998 ---- ---- Cash flows from operating activities: Net income $(6,261) $ 827 Adjustments to reconcile net income to net cash provided by (used in) continuing operations: Loss on discontinued operations -- 96 Loss on valuation of assets 9,491 -- Depreciation and amortization 1,507 1,457 Deferred income taxes 194 (95) Changes in operating assets and liabilities: Accounts and notes receivable, net (1,903) (165) Income taxes receivable (3,592) (1) Prepaid expenses and other current assets (172) 106 Accounts payable and accrued expenses 1,076 850 Income taxes payable 69 (374) Deferred revenue 137 264 Reserves for incurred but not reported claims 666 (325) ------- ------- Net cash provided by continuing operations 1,212 2,640 Net cash used in discontinued operations -- (4,016) ------- ------- Net cash provided by (used in) operating activities 1,212 (1,376) ------- ------- Cash flows from investing activities: Purchase of investments available for sale (2,838) (2,342) Proceeds from sales/maturity of investments available for sale 1,636 3,705 Purchase of investments held to maturity -- (1,658) Proceeds from maturity of investments held to maturity -- 4,739 Proceeds from the sale of assets 3,000 -- Purchases of property and equipment (911) (1,237) Issuance of notes receivable -- (550) Payments received on notes receivable 399 -- Additions to intangibles and other assets -- 65 ------- ------- Net cash provided by investing activities 1,286 2,722 ------- ------- Cash flows from financing activities: Proceeds from bank loan -- 8,000 Payments on bank loan (950) -- Payments on accrued compensation agreement (18) (18) Payments on notes payable (1,346) (9,096) ------- ------- Net cash (used in) provided by financing activities (2,314) (1,114) ------- ------- Net increase (decrease) in cash 184 232 Cash at beginning of period 3,256 3,652 ------- ------- Cash at end of period $ 3,440 $ 3,884 ======= =======
See accompanying Notes to Consolidated Financial Statements. Page 5 of 19 6 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF REPORTING - --------------------------- The accompanying unaudited Consolidated Financial Statements of SafeGuard Health Enterprises, Inc. and subsidiaries (the "Company") for the quarter ended June 30, 1999, have been prepared in accordance with generally accepted accounting principles applicable to interim periods, and reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of results for the interim periods. The statements have been prepared in accordance with the regulations of the Securities and Exchange Commission, but omit certain information and footnote disclosures necessary to present the statements in accordance with generally accepted accounting principles. This information should be read in conjunction with the Consolidated Financial Statements and Notes, including Significant Accounting Policies, contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Management believes that the disclosures herein are adequate to make the information presented not misleading. As described in Note 6 herein, the operating results for the quarter ended June 30, 1998 have been reclassified to reflect the effect of the discontinued operation of the general dental practices and the orthodontic practices. NOTE 2: STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE - ---------------------------------------------------- Since October 1986, the Company's Board of Directors has, at various times, authorized the repurchase of up to 4,510,888 shares of its common stock through open market or private transactions. As of June 30, 1999, a total of 3,819,088 shares had been acquired. All shares acquired prior to August 24, 1987, have been retired as required by California law. All shares acquired after the August 24, 1987 reincorporation in Delaware are being held as treasury stock at an average cost of $5.54 per share. Earnings per share have been restated to conform with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share". Basic earnings per share excludes the effect of all potentially dilutive securities. Diluted earnings per share includes the effect of all potentially dilutive common securities. For the quarters ended June 30, 1999 and 1998 the current presentation of diluted earnings per share is identical to the Company's former presentation of primary earnings per share. NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS - ----------------------------------------- In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128 ("FAS 128"), Earnings Per Share, which becomes effective for fiscal years ending after December 15, 1997. FAS 128 specifies the computation, presentation and disclosure requirements for earnings per share, and its objective is to simplify the computation of earnings per share, and to make the U.S. standard for computing earnings per share more compatible with the standards of other countries. The statement requires that all prior period earnings per share data presented shall be restated. The Company adopted FAS 128 in fiscal year 1997 as required, and for the quarters ended June 30, 1999 and 1998, the current presentation of diluted earnings per share is identical to the Company's former presentation of primary earnings per share. In June 1997, FASB issued Statement of Financial Accounting Standards No. 130 ("FAS 130"), Reporting Comprehensive Income, which becomes effective for fiscal years ending after December 15, 1997. FAS 130 requires that all components of comprehensive income be displayed with the same prominence as other financial statements. The Company adopted FAS 130 in fiscal year 1998 as required. The reconciliation of net income to comprehensive income is as follows:
Six months ended June 30, ------------------------- 1999 1998 ---- ---- Net income $(6,261) $ 827 Unrealized loss on investments, net (25) (855) ------- ------- Total comprehensive income $(6,286) $ (28) ======= =======
Page 6 of 19 7 In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 ("FAS 131"), Disclosure About Segments of an Enterprise and Related Information, which becomes effective for fiscal years ending after December 15, 1997. FAS 131 requires that future financial statements contain disclosures about products and services, geographic areas and major customers related to its reportable operating segments. The Company anticipates the adoption of FAS 131 will not have a significant effect on the Company's financial position or results of operations. In June 1998, the FASB issued Statement of Financial Accounting Standard No. 133 ("FAS 133"), Accounting for Derivative Instruments and Hedging Activities, which becomes effective for fiscal years beginning after June 15, 1999. FAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company does not expect the adoption of FAS 133 to have a significant impact on the Company's financial position or results of operations. NOTE 4: DISCONTINUED OPERATIONS - -------------------------------- On February 26, 1998, the Company announced the discontinuance of its orthodontic practices. On April 1, 1998, the Company completed the sale of its orthodontic practices to Pacific Coast Dental, Inc./Associated Dental Services, Inc., and affiliated dentists. The practices were sold for $15 million in 8.5% long-term notes. The transaction included the sale of all assets and associated liabilities of the orthodontic practices and a long-term commitment from the purchaser to continue to provide orthodontic services to members of a subsidiary of the Company. The assets of the orthodontic practices sold consist of accounts receivable, supply inventory and dental equipment. The Company recorded a loss of $96,000 net of $38,000 in taxes on the sale of the discontinued orthodontic practices in the second quarter 1998. In the fourth quarter of 1998 and as part of an ongoing review process, the Company ascertained that some of the promissory notes granted to the Company by the purchasers of certain general and orthodontic practices were not performing at currently stated levels and such purchasers were unable to service such promissory notes pursuant to the terms and conditions thereof. As a result, the Company reduced the value of the promissory notes on its books so that they reflect management's then current estimate of their market value. Rather than the Company exercising its right to foreclose on the promissory notes, the Company entered into a Default Forbearance Agreement and an Irrevocable Power of Attorney with the purchasers, which will enable the Company to resell either the assets or the promissory notes relating to the practices. As part of management's continuing evaluation of the promissory notes given to the Company in connection with the sale of those dental practices, the Company has ascertained that a further reduction in value of the promissory notes is prudent and appropriate and as such has recorded an additional asset impairment charge of $7.6 million in connection therewith. The Forbearance Agreement and Irrevocable Power of Attorney referred to above given to the Company by the purchaser of certain of these general dental and orthodontic practices expires on August 12, 1999. Absent an extension of such agreements, the Company will be unhindered in taking any action upon the assets to protect its interest. The Company intends to exercise any and all prudent and appropriate actions depending upon the circumstances, which may include the foreclosure on some or all of the assets, which are subject to the purchase agreements referred to above and the subsequent sale of such assets to an unaffiliated third party. In connection therewith, the Company has entered into a Letter of Intent to sell such assets to an unaffiliated third party. The agreement to sell such dental and orthodontic assets is subject to the execution of definitive agreements, the satisfaction of due diligence, certain standard closing conditions and appropriate regulatory approvals. Although there is a Letter of Intent to sell such assets in effect, no assurance can be given that the parties will execute definitive and binding agreements with respect to the sale of such assets. NOTE 5: CREDIT AGREEMENTS - -------------------------- On September 30, 1997, the Company completed a private placement of $32.5 million in long-term debt consisting of eight-year notes through John Hancock Mutual Life Insurance Company ("Hancock"). The Company used the proceeds to repay all of its long-term indebtedness and for general corporate purposes. The senior notes (the "Notes") are unsecured and are due September 30, 2005, with a principal payment of $6.5 million due on September 30, of each year starting in 2001. The interest rate for the loan is fixed at 7.91 percent. On January 29, 1998, the Company entered into a $8,000,000 revolving working capital credit facility with Silicon Valley Bank (the "Bank"), all of which is currently being utilized by the Company. The loan had a maturity date of January 28, 1999, and is currently due and payable. The interest rate for the facility, as amended, was established at the Bank's Prime rate, plus 1.5 percent or at the Company's option, LIBOR plus 2.25 percent. The loan is secured by a first priority security interest in all the personal property of the Company, including accounts receivable, fixed assets and intangibles and a negative pledge on the stock of the Company's subsidiaries and on the real property owned by the Company. In connection with the Bank and Hancock loan, the Company is subject to certain financial and operational debt covenants. Page 7 of 19 8 As a result of underperforming notes related to the sale of the dental offices that were previously sold and discontinued, a reduction in the value of the Company's former headquarters building in Anaheim, California, which the Company sold in June 1999, severance payments to a number of former employees who left the Company in the fourth quarter of 1998 as a result of the Company's continuing efforts to streamline its operations, and expenses for a reduction in its account receivable balances, which may be uncollectible, as ascertained after the Company completed its systems conversion in October 1998, as of the end of the fourth quarter of 1998, the Company was not in compliance with the Bank and Hancock loan covenant requirements. As a result of these conditions, the Company executed definitive agreements with Hancock to restructure the debt owed by the Company, which was referenced, disclosed and filed as an exhibit to the Company's Report on Form 8-K dated June 4, 1999. The Notes have been modified to provide for an interest rate increase from 7.91% to 9.91% from the date that the Company and Hancock executed the definitive documents. Thereafter, the interest rate will decrease to 8.91% and then to 7.91% after the Company has satisfied certain conditions. The Company also became responsible for all reasonable out-of-pocket attorneys' fees and costs, and consultant's fee incurred by Hancock after January 1, 1999. In consideration of this agreement, Hancock has waived all existing defaults or events of defaults through May 28, 1999. The sale of certain assets of the Company will also not be considered an event of default under the agreement with Hancock so long as the proceeds are used to repay Hancock in accordance with the amendments to the agreement. Various technical terms, covenants and provisions of the agreement relating to consolidated net worth, interest expense coverage and limitation on consolidated total debt were amended. New provisions include a requirement for the Company to provide Hancock of any notice of intent to audit received by the Company from any regulatory agency, copies of correspondence from any regulatory agency and the Company's response thereto. In addition, the Company is not to declare dividends or other distributions, and not incur any liens on the Company's subsidiary's stock. The Company is also required to provide consolidated financial reports and cash flows at regular intervals. The Company is also required to pay from the proceeds of certain sales of assets owned by the Company, specified amounts to Hancock on a prorata basis, including the sale of the Company's former headquarters building (the "Building"), and certain promissory notes owned by the Company. The agreement also provides that prior to December 31, 1999, the Company may satisfy all of the financial obligations due to Hancock without prepayment penalty. The Company also issued to Hancock non-transferable and cancelable warrants representing the right to acquire 382,000 shares of the Company's common stock, which are exercisable at any time after January 1, 2000, and prior to December 31, 2003, at a price per share of $4.54. However, the warrants will be automatically canceled on the date the Company's debt to Hancock is satisfied in full by December 31, 1999. Certain "piggyback" and demand registration rights with respect to the warrants have been granted to Hancock. Additional principal and collateral payments are required under the agreement, including payment of a portion of the proceeds from the sale of the Building, and with all appropriate regulatory approval, the payment of funds derived from the sale of certain promissory notes granted to the dental office subsidiary of the Company in connection with the sale of the general dental and orthodontic practices previously owned by the Company, and a portion of the Company's 1998 federal tax refund. The Company has also executed definitive documents with the Bank to extend the maturity date of the existing obligation to January 29, 2000, which was referenced, disclosed and filed as an exhibit to the Company's Report on Form 8-K dated June 4, 1999. The interest rate which shall be paid by the Company to the Bank from and after the closing date of May 28, 1999 will be equal to the prime interest rate, plus 4%. Thereafter, the rate shall be prime plus 3% and then the rate shall be prime plus 1.5% thereafter until paid in full upon the Company satisfying certain conditions. The Company is also required to make certain principal payment reductions during specified periods and in specified amounts, consisting of the payment of proceeds received from the sale of certain promissory notes owned by the Company, and certain promissory notes, after appropriate regulatory approval is received, owned by a subsidiary of the Company relating to previously sold general dental and orthodontic dental practices, the payment of a portion of the 1998 federal tax refund, and a portion of the net cash proceeds of the sale of Building. The Company also granted to Hancock and the Bank a first priority deed of trust on the Building, delivery of any promissory notes given to the Company in connection with the sale of the Building, and certain other promissory notes owned by the Company, to a collateral agent for the benefit of Hancock and the Bank. Page 8 of 19 9 The agreement also provides that prior to the extended maturity date, the Company may repay the Bank in full without penalty. The Company is obligated to pay reasonable out-of-pocket attorneys' fees and costs incurred by the Bank through the closing date, and certain consulting fees for consultants required to be hired by the Company. In consideration of the agreement, the Bank waived all existing defaults and has extended the payment obligation of outstanding principal and interest due to the Bank. Additionally, the Company will provide the Bank with monthly consolidated financial statements and covenants compliance certificates, all Securities and Exchange Commissions filings, and other financial documents as they may reasonably request, and the same notice requirements as described above. Certain standard conditions were required as a condition of closing. NOTE 6: RESTATEMENT OF QUARTERLY INFORMATION - --------------------------------------------- The following balance sheet accounts for the quarter ended June 30, 1998 were restated as follows (in 000's):
As Previously Recorded As Restated ------------- ----------- Prepaid and other current assets $ 1,361 $ 923 Property and equipment, net 10,184 9,998 Notes receivable 21,753 19,668 -------- -------- Total Assets $ 91,630 $ 88,921 ======== ======== Accounts payable and accrued expenses $ 5,907 $ 6,043 Income taxes payable -- (374) Deferred revenues 1,341 1,441 Deferred income taxes 2,789 1,976 Retained earnings 32,401 30,643 -------- -------- Total Liabilities and Stockholders' Equity $ 91,630 $ 88,921 ======== ========
Page 9 of 19 10 NOTE 6: RESTATEMENT OF QUARTERLY INFORMATION (CONT'D) The following income statement accounts for the three months ended June 30, 1999 was restated as follows (in 000's except per share data):
As Previously Recorded As Restated ------------- ----------- Selling, general and administrative $ 6,567 $ 6,857 Income from continuing operations before tax 1,246 856 Provision for income taxes 538 370 ------- ------- Net income from continuing operations before discontinued operations 708 486 Net income from discontinued operations 1,214 (58) ------- ------- Net income $ 1,922 $ 428 ======= ======= Basic earnings (loss) per share: Income from continuing operations per share $ 0.15 $ 0.10 Income from discontinued operations per share $ 0.26 $ (0.01) ------- ------- Net income (loss) per share $ 0.41 $ 0.09 ======= ======= Weighted average shares 4,747 4,747 Diluted earnings per share: Income from continuing operations per share $ 0.15 $ 0.10 Income from discontinued operations per share $ 0.25 $ (0.01) ------- ------- Net income (loss) per share $ 0.40 $ 0.09 ======= ======= Weighted average shares 4,802 4,802
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the attached consolidated financial statements and notes thereto.
===================================================================================================================== 1999 versus 1998 Six months ended June 30, ----------------------------------- Increase/ Percent (Decrease) Change - --------------------------------------------------------------------------------------------------------------------- Results of operations (000's omitted) Health care revenues $ 969 2.0 - --------------------------------------------------------------------------------------------------------------------- Health care expenses $ 232 0.7 - --------------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses $ 2,893 20.4 - --------------------------------------------------------------------------------------------------------------------- Other income, net $ 837 55.7 - --------------------------------------------------------------------------------------------------------------------- Interest expense $ 154 8.1 - --------------------------------------------------------------------------------------------------------------------- Net income $(7,088) (857.1) =====================================================================================================================
1999 Versus 1998 - ---------------- Health care revenues for the quarter ended June 30, 1999 were $25,050, or a 2.5% increase over the corresponding period a year ago which represents the improved customer and product mix implemented by the Company over the last twelve months. The increase of $969 or 2.0% for the six months ended June 30, 1999 further demonstrates this improvement. Health care expenses for the three months ended June 30, 1999 increased $221, or 1.4%. Health care expense as a percentage of health care revenues improved by 0.7% from 66.6% of revenues for the three months ended June 30, 1998, to 65.9% for the same period in 1999. For the six-month period, health care expenses increased $232 or 0.7% but decreased as a percent of revenue from 67.0% in 1998 to 66.2% in 1999. This improvement was primarily as a result of Page 10 of 19 11 the effect of the continued improvements in the Company's health care cost ratios in its existing business as well as cost control measures implemented in recent quarters. Selling, general and administrative expenses for the three months ended June 30, 1999, increased $2,482, or 37.3% of revenue compared to 28.1% of revenue for the same period a year ago. Similarly, the six-month results reflect an increase of 20.4% or $2,893 over the same period a year ago. This was impacted by the Company's relocation of its Corporate and Western Region operations from Anaheim, California to Aliso Viejo, California together with one-time costs to adopt a more conservative approach to reserving for uncollectable accounts receivable. Other income for the three months ended June 30, 1999 was $789, which increased from $534 for the same period a year ago and increased $837 or 55.7% for the six-month period. This was largely due to gains on the sale of certain securities coupled with interest recorded on notes receivable resulting from the sale of certain dental practices. Other expenses, which include costs associated with the restructuring of the Company's debt, which was finalized during the second quarter, and a reduction in the value of certain dental practice notes consistent with a Letter of Intent executed by the Company for the resale of the dental practice assets which secure the notes. Interest expense of $1,102 for the three months ended June 30, 1999 and $2,049 for the six months ended June 30 are the result of the interest associated with the Senior Notes and the $8 million revolving working capital credit facility pursuant to the terms and conditions of the restructuring agreements. This represents an increase of $129 from $973 for three months and $154 for six months as compared to the prior year periods. Net income for the three months ended June 30, 1999, was $(7,046), which resulted from the factors discussed above. Net income for the same period in 1998 was $428. Net income for the six months ended June 30, 1999 is $(6,261) compared to $827 in the prior year. Business Segment Information - ---------------------------- The Company is engaged in a single business segment: the provision of dental benefits to employer groups, associations and individuals. Liquidity and Capital Resources - ------------------------------- The Company's capital and operational cash requirements have been met principally from operating cash flows, and corporate borrowings, and this is expected to continue. At June 30, 1999, the current ratio was 1.1 to 1.0. The Company's net worth was $15.8 million compared to $21.8 million a year earlier. The Company had $9.2 million of cash and investments as of June 30, 1999 compared to $6.2 million a year earlier. As a result of its regulated nature, the Company is required to maintain various regulatory bank accounts in an aggregate amount of approximately $7.0 million to satisfy depository requirements imposed by state regulatory agencies. Due to the significant cash and investments maintained by the Company, these requirements do not pose a significant liquidity burden on the Company. The Company believes that cash flow from continuing operations, together with the existing cash and investments on hand and other available sources of financing should be adequate to meet operating capital and regulatory needs for the foreseeable future. Credit Facilities - ----------------- Please see information set forth in Note 5 of Notes to Consolidated Financial Statements herein. Impact of Inflation - ------------------- Management believes that the Company's operations are not materially affected by inflation. The Company believes that a majority of its costs are capitated or fixed in nature and are directly related to membership levels, and therefore related to premium levels. Risk Factors - ------------ In addition to the Risk Factors set forth in the Company's 1998 Annual Report on Form 10-K, we have received a notice from NASDAQ indicating that the Company no longer meets the tangible net asset requirement for continued Page 11 of 19 12 listing on the NASDAQ National Market under Maintenance Standard Number 1. We have provided NASDAQ our proposal for achieving compliance, which may result in our meeting all NASDAQ National Market listing requirements under Maintenance Standard Number 2. A hearing on this matter was held on July 16, 1999 in Washington, D.C., at which time additional information was provided to NASDAQ. The Company has not yet received the ruling from the NASDAQ hearing panel, and no assurance can be made that after any applicable appeal periods, the Company will be able to maintain our NASDAQ National Market listing. In such event, the trading ability of its stock may be impaired. Year 2000 Compliance - -------------------- Company's State of Readiness The Company relies heavily upon information technology ("IT") systems and other systems and facilities such as telephones, building access control systems and heating and ventilation equipment ("embedded systems") to conduct its business. The Company also has business relationships with dental health care providers, financial institutions and other third parties ("Vendors") as well as regulators and customers who are themselves reliant upon IT and embedded systems to conduct their business. As part of the Company's proactive approach to automation, the Company began planning an awareness activity as early as January 1996 and incorporated Year 2000 compliance into its business continuity plans. As a result, the Company purchased and is in the final implementation process of upgrading any and all information systems software and hardware. The implementation of such new and upgraded computer information systems will recognize the Year 2000 and process date data correctly, including the Company's manipulation of data when dates are in the 20th or 21st century. The Company executed its initial steps in 1996 when it continued to enhance its information systems, including all hardware and software products, individually and in combination, to better manage operational resources and analysis of data. A review was also performed to determine the future needs of the Company and to enhance technology to better enable the Company to provide its services. In addition, as a foundation for developing and executing its Year 2000 compliance program, SafeGuard utilized and integrated Year 2000 compliance programs developed by both Federal and State governments and corporate industry leaders. Moreover, SafeGuard developed a comprehensive five-phase approach for all of its Year 2000 program activities and management processes. The five phases are included in the following table and indicates the percentage completed as of June 30, 1999.
====================================================================================================================== Anticipated Program Goals Start Date Date Completed Completion Date - ---------------------------------------------------------------------------------------------------------------------- Planning and Awareness 1 Jan 1996 1 Jun 1997 N/A - ---------------------------------------------------------------------------------------------------------------------- Assessment 1 Jun 1996 1 Jan 1998 N/A - ---------------------------------------------------------------------------------------------------------------------- Renovation 1 Dec 1996 1 Jan 1999 N/A - ---------------------------------------------------------------------------------------------------------------------- Validation 1 Jan 1997 In Process 1 Sept 1999 - ---------------------------------------------------------------------------------------------------------------------- Implementation 1 Jun 1996 1 Jun 1999 N/A ======================================================================================================================
The Company's five-phase comprehensive approach is as follows: (1) Phase 1: Planning and Awareness - identify all IT and other systems and facilities and risk rate each according to its potential business impact; (2) Phase 2: Assessment - identify IT and other systems and facilities that utilize date functions and assessing them for Year 2000 functionality; (3) Phase 3: Renovation - reprogram or replace when necessary, inventoried items to ensure that they are Year 2000 compliant; Page 12 of 19 13 (4) Phase 4: Validation - test the code modifications and new inventory of other associated systems, including extensive date testing and performing quality assurance testing to ensure successful operation in a post-1999 environment; and (5) Phase 5: Implementation of Year 2000 Compliant IT and other systems. As indicated in the above-referenced chart, the Company completed Phase 1 Planning and Awareness on or about June 1, 1997, Phase 2 Assessment on or about January 1, 1998, and Phase 3 Renovation of all of its IT and other systems and related facilities on or about January 1, 1999. In addition, the Company anticipates completing Phase 4 Validation by September 1, 1999 and it completed Phase 5 Implementation of such Year 2000 Compliant IT and other systems and facilities by June 1, 1999. The Company has inventoried and risk rated substantially all of its embedded systems. The results of these processes indicate that embedded systems should not present a material Year 2000 risk to the Company. The Company's remaining steps include testing selected embedded systems and remediating through replacement and/or repair and certifying systems that exhibit Year 2000 issues. The Company is focusing its testing and facilities such as data centers, service centers and communication centers. The Company completed the testing and implementation of these systems in June 1999, and anticipates that it will complete implementation by September 1, 1999. The Company has also inventoried and risk rated its systems. Substantially all of the tested systems have been found to be compliant. As part of the Company's Year 2000 Compliance Program Planning/Awareness and Assessment phases, the Company documented the state and condition of existing systems and processes and conducted a thorough analysis of inventory and vendor supplied systems and subsystems. The Company included information technology systems and non-information technology systems. The Company also faces the risk that one or more of its Vendors will not be able to interact with the Company due to the Vendor's inability to resolve its own Year 2000 issues, including those associated with its own external relationships. The Company has completed its inventory of Vendors and risk rated each external relationship based upon the potential business impact, available alternatives and cost of substitution. Although the Company is diligently working with its vendors regarding Year 2000 compliance, there can be no guarantee that all of the Company's vendors will be Year 2000 compliant. The Company has previously compiled a comprehensive list of any and all Vendors and Vendor products, which was included in a Vendor identification matrix. Although the Company does not currently rely upon external Vendors for proprietary software or data services, all other Vendors have been identified and have either stated their full compliance or partial compliance with contingent solutions to Year 2000 issues. The Company believes that its Vendors with which it has a material relationship are Year 2000 Compliant, based upon such vendor's assurances. Nonmaterial Vendors of the Company currently have provided either full and/or partial certification of compliance with the Year 2000 issue. The Company will continue to monitor such nonmaterial Vendor compliance activity in order to determine the risk to overall company operations. As a result of the anticipated execution of the Renovation, Validation and Implementation phases of the Company's Year 2000 Compliance Program, the Company believes the Year 2000 issue will not have a material impact on the Company's results or operations. Cost to Address Company's Year 2000 Issues The cost the Company incurred to address Year 2000 Compliance issues from a historical perspective is approximately $2.5 million. Whereas, the estimated cost of the Company's completion of the final phases of renovation, validation and implementation is estimated to be approximately $0.5 million. A large majority of these costs are expected to be incremental expenses that will not recur in Year 2000 or thereafter. The Company's current estimates primarily reflect increased remediation and testing efforts. The source of funds for the Year 2000 Compliance Program costs, including the percentage of the information technology budget utilized for the program was $3.0 million. Year 2000 Compliance is critical to the Company. Therefore, the Company has redeployed some resources from non-critical system enhancements to address Year 2000 issues. Due to the importance of IT systems to the Company's business, management has not deferred the decision to make non-critical systems enhancements Year 2000 ready. The Company Page 13 of 19 14 does not expect these redeployments to have a material impact on the Company's financial condition or result of operations. Risk and Contingency/Recovery Planning The Company reasonably believes that its Year 2000 Compliance Program, which involves the phases of planning and awareness, assessment, renovation, validation and implementation should prevent the Year 2000 from having a material effect on the Company's business or financial condition. However, if the Company's Year 2000 issues were unresolved, potential consequences would include, among other possibilities, the inability to accurately and timely process benefits claims, update client groups' accounts, process financial transactions, bill client groups, report accurate data to management, shareholders, customers, regulators and others as well as business interruptions or shutdowns, financial losses, reputational harm, increased scrutiny by regulators and litigation related to Year 2000 issues. The Company is attempting to limit the potential impact of the Year 2000 by monitoring the progress of its own Year 2000 project and those of its critical Vendors by developing contingency/recovery plans. The Company has begun to develop contingency/recovery plans aimed at ensuring the continuity of critical business functions before and after December 31, 1999. As part of that process, the Company has begun to develop reasonably likely failure scenarios for its critical IT systems and external relationships and the embedded systems. Once these scenarios are identified, the Company will develop plans that are designed to reduce the impact on the Company, and provide methods of returning to normal operations, if one or more of those scenarios occur. The Company completed the contingency/recovery planning as of June 1, 1999. To reduce the risk of the Company presented by the Year 2000, the Company has also increased its on-hand supplies of inventory for printed documents and materials that are provided to client groups, and has identified alternative Vendors, whether such Vendors have previously provided assurances that they are fully Year 2000 Compliant or are in the process of becoming Year 2000 Compliant. Therefore, based upon the Company's proactive Year 2000 Compliance Program, the Company anticipates that the Year 2000 issue will not have a material impact on the Company's results or operations. See "Safe Harbor Statement" heading for factors that could cause actual Year 2000 results to differ from the Company's expectations. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 - -------------------------------------------------------------------------------- The Private Securities Litigation Reform Act of 1995 (the "1995 Act") provides a "safe harbor" for forward-looking statements, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. The Company desires to take advantage of these safe harbor provisions. The statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations concerning any future premium pricing levels, future dental health care expense levels, the Company's continued listing on the NASDAQ National Market, the Company's ability to control health care, selling, general and administrative expenses, items discussed under heading "Year 2000" and all other statements that are not historical facts, are forward looking statements. Words such as expects, projects, anticipates, intends, plans, believes, seeks or estimates, or variations of such words and similar expressions are also intended to identify forward-looking statements. These forward-looking statements are subject to significant uncertainties and contingencies, many of which are beyond the control of the Company. Actual results may differ materially from those projected in the forward looking statements, if any, which statements involve risks and uncertainties: The Company's ability to expand is affected by competition not only in benefit program choices, but also the number of dental plan competitors in the markets in which the Company operates. Failure of the Company to maintain its NASDAQ National Market listing may impair its stock price. The ability to consummate the Company's transaction with the Investor Group may effect the financial condition of the Company. Certain large employer groups and other purchasers of commercial dental health care services continue to demand minimal premium rate increases, while limiting the number of choices offered to employees. In addition, securing cost effective contracts with dentists may become more difficult in part due to the increased competition among dental plans for dentist contracts. The Company's profitability depends, in part, on its ability to maintain effective control over health care costs, while providing members with Page 14 of 19 15 quality dental care. Factors such as levels of utilization of dental health care services, new technologies, specialists costs, and numerous other external influences may effect the Company's operating results. Any critical unresolved Year 2000 issues at the Company or its Vendors could have a material adverse effect on the Company's results of operations, liquidity or financial condition. In addition, the Company's expectations about the future costs and timely and successful completion of its Year 2000 Program are subject to uncertainties that could cause actual results to differ materially from what has been discussed above under the heading "Year 2000." Factors that could influence the amount of future costs and the completion dates and effectiveness of remediation, testing and certification and contingency planning efforts include the Company's success in identifying IT systems and embedded systems that contain two-digit year codes, the nature and amount of required reprogramming, testing and certification, the rate and magnitude of related labor and consulting costs, the availability of qualified personnel and the success of the Company's external relationships in addressing their own Year 2000 issues. The Company's expectations for the future are based on current information and evaluation of external influences. In addition, the financial condition of the Company may be affected by its ability to maintain compliance with the financial and operational covenants in the debt restructure agreements with its credit lenders. Changes in any one factor could materially impact the Company's expectations relating to premium rates, benefit plans offered, membership growth, the percentage of health care expenses, and as a result, profitability and therefore, effect the forward looking statements which may be included in these reports. In addition, past financial performance is not necessarily a reliable indicator of future performance. An investor should not use historical performance alone to anticipate future results or future period trends. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is not subject to material risk from interest rate or foreign currency exchange rate fluctuations. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a defendant in litigation arising in the normal course of business. In the opinion of management, the defense costs and/or ultimate outcome of such litigation is covered by insurance or will not have material effect on the Company's financial position or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) On July 8, 1999, the Company's Stockholders Rights Plan was amended so that the transactions described in Part II Item 5 below will not trigger issuance of the Rights thereunder. Such amendment is filed with this Report as Exhibit 10.23. (c) On May 28, 1999, the Company issued to the John Hancock Life Insurance Company ("Hancock") non-transferable and cancelable warrants representing the right to acquire 382,000 shares of the Company's common stock, which are exercisable at any time after January 1, 2000, and prior to December 31, 2003, at a price per share of $4.54. The warrants were issued in consideration of the restructure by Hancock of the Company's debt to Hancock. See Note 5 to the Consolidated Financial Statements. The warrants will be automatically canceled if the Company's debt to Hancock is satisfied in full by December 31, 1999. Certain "piggyback" and demand registration rights with respect to the warrants have been granted to Hancock. The warrants were issued by the Company in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Please see information set forth in Note 5 of Notes to Consolidated Financial Statements herein. Page 15 of 19 16 ITEM 5. OTHER INFORMATION On June 30, 1999, the Company announced that it executed a definitive agreement (the "Agreement") with an investor group led by CAI Partners and Company and Jack R. Anderson ("Investors") to invest $40 million into SafeGuard. The transaction would involve the issuance of an aggregate of $20 million of convertible preferred stock and convertible subordinated debentures, and $20 million of 8% ten-year senior notes. The preferred stock and the debentures will be convertible into 5 million shares of common stock of the Company at a price of $4.00 per share, subject to certain adjustments and have voting rights on an as converted basis. The purchasers of the senior notes will receive warrants to purchase an aggregate of 2.5 million shares of common stock of the Company at an exercise price of $8.00 per share, subject to antidilution adjustment. As a result of the investment, the holders of the preferred stock and debentures would control a majority of the voting power of the Company and would be able to designate 50% of the directors of the Company. Moreover, as part of the transaction, a Stockholder Agreement between the Investors and Steven J. Baileys, D.D.S., the Company's Chairman of the Board and Chief Executive Officer, was also executed, which among other things, requires that Dr. Baileys and a family trust which he controls, vote as stockholders in favor of the Agreement. The Agreement, together with all Exhibits thereto, and the Stockholder Agreement with Dr. Baileys were referenced, disclosed and filed as exhibits to the Company's Current Report on Form 8-K, dated June 30, 1999. The Stockholder Agreement with the Baileys Family Trust is in the same form except that it relates to shares owned by the Trust. The proceeds of this transaction will be used to repay existing debt of SafeGuard. At the closing of this transaction, the existing agreements with SafeGuard's current senior note holders and line of credit lender will be terminated. The transaction is subject to approval by the Company's stockholders, approval by various regulatory agencies, including agencies in states in which the Company does business, and other customary conditions. The Company's Stockholders Rights Plan has also been amended so that this transaction does not trigger issuance of the Rights thereunder, which is filed with this Report as Exhibit 10.23. The Agreement has been amended to allow for the change of the number of the Company's Board of Directors from eight (8) to six (6) upon the Closing Date of Agreement, which is filed with this Report as Exhibit 10.24. Page 16 of 19 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------ ----------- 2.1 Plans of Acquisition.(8) 3.1 Articles of Incorporation.(4) 3.2 Bylaws.(4) 10.1 1984 Stock Option Plan.(3) 10.2 Stock Option Plan Amendment.(1) 10.3 Stock Option Plan Amendment.(5) 10.4 Stock Option Plan Amendment.(6) 10.5 Amended Stock Option Plan.(10) 10.7 Employment Agreement, as Amended, dated May 25, 1995, between Steven J. Baileys, D.D.S. and the Company.(7) 10.8 Employment Agreement, as Amended, dated May 25, 1995, between Ronald I. Brendzel and the Company.(7) 10.9 Employment Agreement dated May 25, 1995, between John E. Cox and the Company.(7) 10.10 Form of Rights Agreement, dated as of March 22, 1996, between the Company and American Stock Transfer and Trust Company, as Rights Agent.(7) 10.11 Employment Agreement dated January 5, 1997, between Herb J. Kaufman, D.D.S. and the Company.(10) 10.12 Credit Agreement dated September 25, 1996, between Bank of America National Trust and Savings Association and the Company.(9) 10.13 Stock Purchase Agreement between Consumers Life Insurance Company and SafeGuard Health Enterprises, Inc. dated March 6, 1997.(11) 10.14 Purchase Agreement between Associated Dental Services, Inc. and Guards Dental, Inc. dated August 1, 1997.(11) 10.15 Purchase agreement between Pacific Coast Dental, Inc. and Guards Dental, Inc. dated August 1, 1997.(11) 10.16 Form of Note Purchase Agreement dated as of September 30, 1997, and form of Promissory Note.(12) 10.17 Form of Master Asset Purchase Agreement effective as of April 1, 1998, and Form of Promissory Note without exhibits.(13) 10.18 Credit Agreement dated January 29, 1998, between Silicon Valley Bank and the Company.(14) 10.19 Default Forbearance Agreement and Irrevocable Power of Attorney.(15) 10.20 First Waiver and Amendment Agreement to Note Purchase Agreement.(16) 10.21 Amended and Restated Loan and Security Agreement by and between Silicon Valley Bank and SafeGuard Health Enterprises, Inc. dated May 27, 1999.(16) 10.22 Debenture and Note Purchase Agreement by and among SafeGuard Health Enterprises, Inc. and CAI Partners and Company II, L.P., CAI Capital Partners and Company II, L.P. and Jack R. Anderson dated as of June 29, 1999 with Exhibits A through I.(17) 10.23 First Amendment to the Rights Agreement.(18) 10.24 First Amendment to Debenture and Note Purchase Agreement.(18) 10.25 Form of Warrants granted to Hancock dated as of May 28, 1996.(16) 10.26 Contract for Sale of Building in Anaheim, California. 27.1 Financial Data Schedule 99.1 Stockholder Agreement by and between CAI Partners and Company II, L.P., CAI Capital Partners and Company II, L.P. and Jack R. Anderson and Steven J. Baileys, D.D.S., dated as of June 29, 1999.(17) Page 17 of 19 18 - ------------------------- (1) Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Registration Statement on Form S- filed on September 12, 1983 (File No. 2-86472). (2) Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Registration Statement on Form S-1 filed on August 22, 1985 (File No. 2-99663). (3) Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Registration Statement on Form S-1 filed on July 3, 1984 (File No. 2-92013). (4) Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Annual Report of Form 10-K for the period ended December 31, 1987. (5) Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Annual Report of Form 10-K for the period ended December 31, 1989. (6) Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Annual Report of Form 10-K for the period ended December 31, 1992. (7) Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Annual Report of Form 10-K for the period ended December 31, 1995. (8) Incorporated by reference herein to Exhibit D filed as an exhibit to the Company's Report on Form 8-K dated September 27, 1996. (9) Incorporated by reference herein to Exhibit E filed as an exhibit to the Company's Report on Form 8-K dated September 27, 1996. (10) Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Annual Report on Form 10-K for the period ended December 31, 1996. (11) Incorporated by reference to the exhibit of the same number filed as an exhibit to the Company's quarterly statement on Form 10-Q for the period ended June 30, 1997. (12) Incorporated by reference herein to Exhibit 99.1 filed as an exhibit to the Company's Report on Form 8-K dated October 7, 1997. (13) Incorporated by reference herein to Exhibit F filed as an exhibit to the Company's Report on Form 8-K dated April 1, 1998. (14) Referenced and disclosed in the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1998 and filed as an exhibit to the Company's Annual Report on Form 10-K for the period ended December 31, 1998. (15) Referenced, disclosed and filed as an exhibit to Company's Annual Report on Form 10-K for the period ended December 31, 1998. (16) Referenced, disclosed and filed as an exhibit to Company's Report on Form 8-K dated June 4, 1999. (17) Referenced, disclosed and filed as an exhibit to Company's Report on Form 8-K dated June 30, 1999. (18) Referenced, disclosed and filed as an exhibit to Company's Report on Form 10-Q for the period ended June 30, 1999. (b) Reports on Form 8-K. Current Reports on Form 8-K were filed with the Securities and Exchange Commission on or about June 4, 1999 regarding executed definitive agreements with credit lenders restructuring the Company's debt and June 30, 1999 regarding an executed definitive agreement with an investor group. Such Reports on Form 8-K mentioned in this Item 6 are hereby incorporated by reference herein to this Quarterly Report on Form 10-Q for the period ended June 30, 1999, as if entirely set forth herein. Page 18 of 19 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Aliso Viejo, State of California, on the 13th of August, 1999. SAFEGUARD HEALTH ENTERPRISES, INC. By: /s/ STEVEN J. BAILEYS, D.D.S. ------------------------------------ STEVEN J. BAILEYS, D.D.S., Chairman and Chief Executive Officer By: /s/ ROBERT J. POMMERSHEIM ------------------------------------ ROBERT J. POMMERSHEIM, Interim Chief Financial Officer (Chief Accounting Officer) Page 19 of 19 EX-10.23 2 FIRST AMENDMENT TO RIGHTS AGREEMENT 1 EXHIBIT 10.23 FIRST AMENDMENT TO RIGHTS AGREEMENT This FIRST AMENDMENT TO RIGHTS AGREEMENT (the "Amendment") is entered into as of July 8, 1999 by and between SAFEGUARD HEALTH ENTERPRISES, INC., a Delaware corporation (the "Company"), and AMERICAN STOCK TRANSFER & TRUST COMPANY, as Rights Agent (in such capacity, the "Rights Agent"). RECITALS: A. The Company and the Rights Agent are parties to that certain Rights Agreement, dated as of March 22, 1996 (the "Rights Agreement"). Unless otherwise defined herein, capitalized terms used herein shall have the respective meanings ascribed thereto in the Rights Agreement; and B. The Company has entered into a Debenture and Note Purchase Agreement, dated as of June 29, 1999 (the "CAI Purchase Agreement"), by and among the Company, CAI Partners and Company II, L.P., CAI Capital Partners and Company II, L.P. and Jack R. Anderson (collectively, the "Investors" and individually, an "Investor"), pursuant to which, among other things, the Company has agreed to issue and sell to the Investors, and the Investors have subscribed for and agreed to purchase from the Company, a combination of (i) $20,000,000 aggregate principal amount of the Company's 8% Convertible Debentures, in the form attached to the CAI Purchase Agreement as Exhibit B (the "Debentures"), which Debentures will be convertible, in the manner set forth in the Debentures, into fully paid and nonassessable shares of the Common Stock at an initial conversion price (subject to adjustment) of $4.00 and which Debentures shall have the rights and power to vote in respect of the corporate affairs and management of the Company as set forth in the form of Certificate of Amendment to the Company's Certificate of Incorporation attached to the CAI Purchase Agreement as Exhibit E, (ii) $20,000,000 aggregate principal amount of the Company's 8% Senior Notes, in the form attached to the CAI Purchase Agreement as Exhibit C (the "Senior Notes"), (iii) detachable warrants to purchase up to an aggregate of 2,500,000 shares (subject to adjustment) of Common Stock, in the form attached to the CAI Purchase Agreement as Exhibit D (the "Warrants"), and (iv) in lieu of Debentures under certain circumstances described in the CAI Purchase Agreement, up to 15,000 shares of the Company's 8% Cumulative Convertible Preferred Stock, having the rights, preferences, powers and limitations set forth in the form of Certificate of Designations attached to the CAI Purchase Agreement as Exhibit F (the "CAI Preferred Stock"), all on the terms and subject to the conditions set forth in the Purchase Agreement and the exhibits thereto (collectively, the CAI Securities"); and C. Certain stockholders of the Company have entered into Stockholder Agreements dated June 20, 1999, agreeing to vote in favor of the foregoing transactions and to provide proxies to vote in certain events (collectively, the "Stockholder Agreements"), and D. The Board of Directors of the Company has unanimously approved the execution and delivery of the Purchase Agreement and the transactions contemplated thereby, including, without limitation, the issuance of the CAI Securities to the Investors and the issuance of the shares of Common Stock issuable upon the exercise or conversion thereof; -1- 2 NOW, THEREFORE, in consideration of the premises, the parties hereby agree as follows: 1. Certain Definitions. The Rights Agreement is hereby amended by adding the following terms and definitions to Section 1 thereof: (kk) "CAI Parties" shall mean CAI Partners and Company II, L.P., a Canadian limited partnership, CAI Capital Partners and Company II, L.P., a Canadian limited partnership, and Jack R. Anderson. (ll) "CAI Securities" shall mean Debentures, Senior Notes, 8% Preferred Stock and Warrants, and any shares of Common Stock issued or issuable upon conversion or exercise of the foregoing, of the Company issued and sold to the CAI Parties pursuant to or in connection with the consummation of the transactions contemplated by the Purchase Agreement. (mm) "CAI Purchase Agreement" shall mean that certain Debenture and Note Purchase Agreement, dated as of June 29, 1999, by and among the Company and the CAI Parties, as the same may from time to time be amended, modified or supplemented. (nn) "Stockholder Agreements" shall mean those certain Stockholder Agreements, dated as of June 29, 1999, by and among the CAI Parties, Steven J. Baileys, DDS, and the Baileys Family Trust. 2. The CAI Securities. The Rights Agreement is hereby further amended by adding the following new Section 35 thereto: "Section 35. The CAI Securities. Notwithstanding any provision of this Agreement to the contrary, none of the CAI Parties or any of their respective Affiliates or Associates shall be deemed to become an Acquiring Person, and no Distribution Date or Stock Acquisition Date shall occur or be deemed to occur, in either case solely by reason of: (i) the execution or delivery by the Company of the Purchase Agreement or the performance by the Company of its obligations thereunder; (ii) the execution or delivery by Steven J. Baileys, DDS, and the Baileys Family Trust of the Stockholder Agreements; (iii) the issuance by the Company to the CAI Parties of the CAI Securities; (iv) the issuance to, or the acquisition by, any of the CAI Parties or any of their respective Affiliates or Associates of shares of Common Stock of the Company issued or issuable upon exercise of the CAI Securities; or (v) the announcement, commencement or consummation of any of the foregoing." IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the day and year first above written. SAFEGUARD HEALTH ENTERPRISES, INC., a Delaware corporation By: /s/ STEVEN J. BAILEYS, DDS ------------------------------------ STEVEN J. BAILEYS, DDS Chairman and Chief Executive Officer By: /s/ RONALD I. BRENDZEL ----------------------------------- RONALD I. BRENDZEL Senior Vice President and Secretary AMERICAN STOCK TRANSFER & TRUST COMPANY By: [SIG] ------------------------------------ Authorized Officer -2- EX-10.24 3 FIRST AMENDMENT TO DEBENTURE & NOTE PURCHASE AGREE 1 EXHIBIT 10.24 FIRST AMENDMENT TO DEBENTURE AND NOTE PURCHASE AGREEMENT This First Amendment to Debenture and Note Purchase Agreement (the "First Amendment") is made as of July , 1999 by and between SafeGuard Health Enterprises, Inc., a Delaware corporation (the "Company"), and CAI Partners and Company II, L.P., a Canadian limited partnership, CAI Capital Partners and Company II, L.P., a Canadian limited partnership, and Jack R. Anderson (each of such parties being individually referred to herein as an "Investor" and collectively as the "Investors"). WHEREAS, the Company and the Investors entered into that certain Debenture and Note Purchase Agreement dated June 29, 1999 (the "Purchase Agreement"); and WHEREAS, the Company and the Investors mutually desire to amend the Purchase Agreement as hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual terms and provisions hereof, the Company and Investors hereby agree as follows: 1. Amendments to Purchase Agreement. (a) Section 7.3(c) of the Purchase Agreement is hereby amended to read in its entirety as follows: "(c) Effective as of the Closing Date, the Board of Directors of the Company shall consist of six (6) members and three (3) of the Directors of the Company effective as of the Closing Date shall consist of individuals designated in writing to the Company by the Investors;" (b) Section 3 of Article Twelfth contained in the form of Certificate of Amendment to the Certificate of Incorporation of the Company attached as Exhibit E to the Purchase Agreement is hereby amended to change the reference to the size of the Board of Directors of the Company from "eight (8)" to "six (6)" and the Certificate of Amendment to the Certificate of Incorporation of the Company to be filed with the Secretary of the State of Delaware on or prior to the Closing Date pursuant to the Purchase Agreement shall be in the form of Exhibit E as the same is hereby amended. 2. Ratification. As expressly amended by this First Amendment, the Purchase Agreement is hereby ratified and confirmed in all respects. 3. Counterparts. This First Amendment may be executed in two or more counterparts, each of which shall be deemed an original but which together shall constitute one and the same agreement. 1 2 IN WITNESS WHEREOF, the Company and the Investors have executed this First Amendment as of the day and year first written above. COMPANY: INVESTORS: - -------- ---------- SAFEGUARD HEALTH ENTERPRISES, INC. CAI PARTNERS AND COMPANY II, L.P. By: CAI PARTNERS GP & CO., L.P., the General Partner By: /s/ STEVEN J. BAILEYS - ----------------------------------- Name: Steven J. Baileys, D.D.S. By: /s/ LESLIE B. DANIELS Title: Chairman and Chief Executive ---------------------------- Officer Leslie B. Daniels, President of CLEA II Co., a General Partner By: /s/ RONALD I. BRENDZEL - ----------------------------------- Name: Ronald I. Brendzel Title: Secretary CAI CAPITAL PARTNERS AND COMPANY II, L.P. By: CAI CAPITAL PARTNERS GP & CO., L.P., the General Partner By: /s/ LESLIE B. DANIELS ---------------------------- Leslie B. Daniels, President of CLEA II Co., a General Partner /s/ JACK R. ANDERSON --------------------------------- Jack R. Anderson 2 EX-10.26 4 SUPPLEMENTAL ESCROW INSTRUCTIONS 1 EXHIBIT 10.26 [FIRST AMERICAN TITLE INSURANCE COMPANY LETTERHEAD] SUPPLEMENTAL ESCROW INSTRUCTIONS Maricel Borras ESCROW NO: 9952759M - ---------------------------- ---------- ESCROW OFFICER DATE: April 01, 1999 --------------- Our previous instructions are hereby modified - supplemented in the following particular(s) only: 1. Escrow Holder, FIRST AMERICAN TITLE INSURANCE COMPANY, is hereby handed that certain STANDARD OFFER, AGREEMENT AND ESCROW INSTRUCTIONS FOR PURCHASE OF REAL ESTATE and ADDENDUM by and between the undersigned dated May 7, 1998 and modified by the AMENDMENT TO ESCROW INSTRUCTIONS executed on 3/29/1999 (collectively, "Agreement") which Escrow Holder is instructed to proceed and process in accordance with said "Agreement". General provisions of FIRST AMERICAN TITLE INSURANCE COMPANY, attached hereto and made a part hereof, are hereby incorporated in the "Agreement", referred to herein. To the extent that the "Agreement" contains any provisions inconsistent with, or contrary to the provisions of these supplemental escrow instructions, such agreement shall remain as the agreement of the parties thereto, but FIRST AMERICAN TITLE INSURANCE shall be guided by the terms of its general provisions. 2. This escrow has re-opened as of MARCH 29, 1999. 3. Escrow to close on or before MAY 13, 1999. 4. Buyer has deposited the additional amount of $100,000.00. 5. Seller has already received $20,000.00 from Buyer, through escrow # 9846491M which is applicable towards this transaction. 6. Sales Price is $3,500,000.00. FIRST AMERICAN TITLE INSURANCE COMPANY CONDUCTS ESCROW BUSINESS UNDER CERTIFICATE OF AUTHORITY NO. 2787 ISSUED BY THE STATE OF CALIFORNIA DEPARTMENT OF INSURANCE. FUNDS HELD FEE AGREEMENT: If funds remain in escrow on the date which is ninety (90) days after close of escrow (or in the event escrow has not closed, ninety (90) days after the estimated closing date as set forth in these instructions), then a monthly "funds held" fee of $25.00 shall accrue for each month or fraction of a month thereafter that the funds, or any portion thereof, remain in escrow. Escrow Holder is authorized to deduct the monthly "funds held" fee directly from the funds held on a monthly, or other periodic basis (i.e., quarterly, semi-annually, etc.). By initialing below, the parties acknowledge and agree to pay these sums to compensate Escrow Holder for the administration, monitoring, accounting reminders and other notifications, and processing of the funds so held in accordance with this "funds held" fee agreement. BUYER INITIALS: /s/ SELLER INITIALS: /s/ ------- ------- All other terms and conditions remain the same. END OF AMENDMENT Seller Buyer SAFEGUARD HEALTH ENTERPRISES, INC. ANAHEIM PLACE PARTNERS, L.P. - -------------------------------------- ---------------------------------------- BY: /s/ JOHN E. COX BY: /s/ ROBERTO BRUTOCO --------------------------------- ----------------------------------- John E. Cox Robert Brutoco President General Partner BY: /s/ RONALD I. BRENDZEL BY: --------------------------------- ----------------------------------- Ronald I. Brendzel Senior Vice President and Secretary BY: BY: --------------------------------- ----------------------------------- EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 3,440 3,721 7,969 (28,029) 0 26,337 6,384 (4,386) 73,583 24,968 32,500 0 0 21,509 (5,687) 73,583 49,805 49,805 0 50,002 (8,014) (8,904) (2,049) (10,260) (3,999) (6,261) 0 0 0 (6,261) (1.32) (1.32)
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