-----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, VQ5kE4WRmxofMkpEPjF+gHXW1EFezOw0yxChHfbyFt4IwomROD48GC/0oIR4owFy JmnfmneDQvrSIBLURqA0zQ== 0001017062-97-002073.txt : 19971117 0001017062-97-002073.hdr.sgml : 19971117 ACCESSION NUMBER: 0001017062-97-002073 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD 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: 97720217 BUSINESS ADDRESS: STREET 1: 505 N EUCLID ST STREET 2: PO BOX 3210 CITY: ANAHEIM STATE: CA ZIP: 92803-3210 BUSINESS PHONE: 7147781005 10-Q 1 FORM 10-Q 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 September 30, 1997 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 of incorporation) (I.R.S. Employer Identification No.) 505 NORTH EUCLID STREET ANAHEIM, CALIFORNIA 92801 (Address of principal executive offices) (Zip Code) (714) 778-1005 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of registrant's common stock, par value $.01 per share, at September 30, 1997, was 4,717,498 shares (not including 3,274,788 shares of common stock held in treasury). Page 1 of 13 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 INFORMATION INCLUDED IN REPORT
Page ---- Part I. FINANCIAL INFORMATION Item 1. 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 8 Part II. OTHER INFORMATION Item 1. Legal Proceedings 10 Item 5. Other Information 10 Item 6. Exhibits and Reports on Form 8K 11 SIGNATURES 13
Page 2 of 13 PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (000's omitted, except share data)
September 30, 1997 December 31, 1996 ------------------ ----------------- ASSETS (Unaudited) Current assets: Cash $ 8,232 $ 706 Investments available for sale, at estimated fair value 2,254 6,420 Investments held to maturity, at cost 1,566 2,681 Accounts and notes receivable, net of allowances of $776 in 1997 and $531 in 1996 11,398 6,375 Income taxes receivable 14 44 Prepaid expenses and other current assets 1,407 1,110 Deferred income taxes 165 165 Net assets of discontinued operations - 6,250 -------- -------- Total current assets 25,036 23,751 -------- -------- Property and equipment, net 11,795 11,841 Investments held to maturity, at amortized cost 7,284 3,631 Notes receivable - long-term 15,423 3,125 Other assets 414 231 Goodwill, net of accumulated amortization of $626 in 1997 and $134 in 29,684 21,786 1996 Intangibles and covenants not to compete, net of accumulated amortization of $2,111 in 1997 and $1,431 in 1996 5,144 3,751 -------- -------- Total assets $ 94,780 $ 68,116 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 8,500 $ 2,000 Current portion of notes payable 1,692 1,192 Accounts payable and accrued expenses 3,944 4,759 Reserves for incurred but not reported claims 1,386 3,130 Deferred revenue 1,119 552 -------- -------- Total current liabilities 16,641 11,633 -------- -------- Long-term debt 32,500 17,000 Notes payable 1,692 2,086 Deferred income taxes 4,512 1,784 Accrued compensation agreement 392 413 Stockholders' equity Preferred stock - $.01 par value; 1,000,000 shares authorized; no shares issued or outstanding - - Common stock - $.01 par value; 30,000,000 shares authorized; 4,717,000 in 1997 and in 1996 shares outstanding, stated at 21,261 21,255 Retained earnings 35,958 32,165 Net unrealized loss on investment securities available for sale, net of deferred taxes (53) (97) Treasury stock, at cost (18,123) (18,123) -------- -------- Total stockholders' equity 39,043 35,200 -------- -------- $ 94,780 $ 68,116 ======== ========
See accompanying Notes to Consolidated Financial Statements. Page 3 of 13 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (000's omitted, except per share data)
Three months ended Nine months ended September 30, September 30, ----------------------------------------- 1997 1996 1997 1996 --------- -------- -------- ------- Revenues $26,843 $19,937 $77,506 $57,919 Expenses: Health care services 17,961 14,408 52,091 43,121 Selling, general and administrative 6,597 3,669 18,450 10,324 ------- ------- ------- ------- Total expenses 24,558 18,077 70,541 53,445 ------- ------- ------- ------- Operating income 2,285 1,860 6,965 4,474 Other income 795 170 1,488 709 Interest expense (836) - (1,960) - ------- ------- ------- ------- Income from continuing operations before provision for income taxes, cumulative effect and discontinued operations 2,244 2,030 6,493 5,183 Provision for income taxes 917 792 2,700 2,039 ------- ------- ------- ------- Income from continuing operations before cumulative effect of a change in accounting principle and discontinued operations 1,327 1,238 3,793 3,144 Cumulative effect of change in accounting principle, net of income taxes of $536 in 1996 - - - 824 ------- ------- ------- ------- Income before discontinued operations 1,327 1,238 3,793 3,968 Discontinued operations: Loss from dental office operations to be disposed of (net of income tax benefits of $2,194 and $3,074 in 1997 and $643 and $649 in 1996) (3,291) (1,471) (4,611) (2,313) Gain on disposal of dental practices (net of income taxes of $2,194 and $3,074 in 1997 and $721 in 1996) 3,291 1,128 4,611 1,128 ------- ------- ------- ------- Loss from discontinued operations - (343) - (1,185) ------- ------- ------- ------- Net income $ 1,327 $ 895 $ 3,793 $ 2,783 ======= ======= ======= ======= Earning per share: Income from continuing operations before cumulative effect of a change in accounting principle and discontinued operations $ 0.26 $ 0.25 $ 0.76 $ 0.63 Cumulative effect of change in accounting principle 0.00 0.00 0.00 0.17 Loss from discontinued operations 0.00 (0.07) 0.00 (0.24) ------- ------- ------- ------- Net income $ 0.26 $ 0.18 $ 0.76 $ 0.56 ======= ======= ======= =======
See accompanying Notes to Consolidated Financial Statements. Page 4 of 13 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (000's omitted)
Nine months ended September 30, ----------------- 1997 1996 ---- ---- Cash flows from operating activities: Net income $ 3,793 $ 2,783 Adjustments to reconcile net income to net cash (used in) provided by Operating activities: Loss from discontinued operations 7,685 2,962 Gain on disposal of discontinued general dental practices (7,685) (1,849) Depreciation and amortization 2,730 1,458 Deferred income taxes 2,728 791 Changes in operational assets and liabilities: Accounts and current notes receivable, net (2,076) (2,014) Income taxes receivable 30 45 Prepaid expenses and other current assets 130 4 Accounts payable and accrued expenses (815) 532 Income taxes payable - 404 Deferred revenue 567 (68) Reserves for incurred but not reported claims (1,744) (321) ------- ------- Net cash provided by continuing operations 5,343 4,727 Net cash used in discontinued operations (7,757) (2,943) ------- ------- Net cash (used in) provided by operating activities (2,414) 1,784 ------- ------- Cash flows from investing activities: Purchase of investments available for sale (3,526) (9,160) Proceeds from sales/maturity of investments available for sale 7,736 11,314 Purchase of investments held to maturity (4,014) (7,771) Proceeds from maturity of investments held to maturity 1,476 8,211 Purchases of property and equipment (2,143) (1,704) Capital expenditures of discontinued operations (394) (1,690) Cash paid for business acquired (1,459) (20,320) Additions to intangibles and other assets, net (363) (142) ------- ------- Net cash used in investing activities (2,687) (21,262) ------- ------- Cash flows from financing activities: Payments received on notes receivable 36 - Proceeds from exercise of stock options 6 211 Proceeds from long-term debt 35,500 19,000 Payments on accrued compensation agreement (21) - Payments on bank debt (22,000) - Payments on notes payable (894) - ------- ------- Net cash provided by financing activities 12,627 19,211 ------- ------- Net increase (decrease) in cash 7,526 (267) Cash at beginning of period 706 506 ------- ------- Cash at end of period $ 8,232 $ 239 ======== ======== Purchase of businesses acquired: Fair value of assets acquired $ 17,342 $ 25,697 Less: cash acquired (5,455) (201) Less: note payable issued (1,000) (3,576) Less: long-term debt issued (8,500) - Less: liabilities assumed (928) (1,600) -------- -------- Cash paid for businesses acquired $ 1,459 $ 20,320 ======== ========
See accompanying Notes to Consolidated Financial Statements. Page 5 of 13 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 ("Enterprises" or the "Company") for the quarter ended September 30, 1997, 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, 1996. Management believes that the disclosures herein are adequate to make the information presented not misleading. As described in Note 4 herein, the operating results for the quarter and nine months ended September 30, 1996 have been restated to reflect the effect of the discontinued operation of the general dental practices ("General Practices"). On January 1, 1996, the Company changed its method of recognizing revenues relating to providing orthodontic health care services to the proportional performance method. This change in method of revenue recognition results in revenues being recognized based on the ratio of costs incurred to total estimated costs, which better matches revenues and expenses over the life of an orthodontic contract. Previously, the Company recognized revenue on a contracted basis. The Company believes this method provides for a better matching of expenses to revenues over the life of each individual orthodontic contract. As of January 1, 1996, the company recorded a cumulative effect of $824, net of taxes, for this change. 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 September 30, 1997, a total of 3,819,088 shares had been acquired at an average cost of $5.54 per share. 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. Earnings per share for the periods ended September 30, 1997 and 1996 were computed by dividing net income by 4,980,417 and 4,958,456 shares, respectively, which was the weighted average number of outstanding common shares and common share equivalents (stock options) during the respective periods. 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 will adopt FAS 128 in fiscal year 1997 as required, and its adoption is not expected to have a significant effect on the Company's financial position or results of operations. Note 4: Discontinued Operations - -------------------------------- On October 21, 1996, the Company implemented a strategic plan to sell all of the General Practices owned by the Company. Five (5) General Practices were sold during 1996 and the remaining twenty-seven (27) General Practices were sold during the nine month period ended September 30, 1997. The assets of the General Practices sold, pursuant to the Company's plan, consisted primarily of accounts receivable, supply inventories and leasehold improvements. Each General Practice sold had the option of entering into a long-term contract with the Company's newly formed practice Page 6 of 13 management subsidiary, whereby the Company will provide certain services to support the dentists in the operation of their practices, including administrative support. The Company has retained the orthodontic practice in each of the General Practices. On August 1, 1997, the Company sold all of the tangible assets of its then remaining fifteen (15) General Practices to Associated Dental Services, Inc. ("Associated"). Under the terms of the sale, Associated paid an aggregate purchase price of $4.5 million for the assets, to be wholly financed by the Company pursuant to an 8.5%, thirty (30) year promissory note, secured by the assets sold. In addition, the Company shall provide Associated with a $1.0 million line of credit for a period of up to eighteen (18) months. The Company has also entered into a management services agreement with Associated to provide ongoing dental services, including marketing and administrative support. In a transaction related to Associated, the Company sold all of the intangible assets of the remaining fifteen (15) General Practices to Pacific Coast Dental, Inc. ("Pacific"). Under the terms of the sale, the total purchase price paid by Pacific was $3.5 million, to be wholly financed by the Company pursuant to an 8.5%, thirty (30) year promissory note, secured by the assets sold to Pacific. The Company has recorded the completion of the sale of the remaining General Practices in the third quarter of 1997. All deferred losses recorded in prior periods have been offset against the gain recorded on the sale of these General Practices during this quarter. Additionally, the Company has accrued against the gain on these sales, certain run-out expenses that the Company expects to incur in future periods relating to the discontinuation of this business. Therefore, the Company realized a break-even result on the completion of the sale of all of the General Practices for the nine month period ended September 30, 1997. Note 5: Acquisition - -------------------- On August 7, 1997, the Company completed the acquisition of all the outstanding shares of Consumers Life Insurance Company of North Carolina ("Consumers"), a privately held dental indemnity insurance company with licenses in sixteen (16) states. The Company purchased the licenses and obtained all of the statutory deposits held on behalf of Consumers for a cash payment of $3.2 million, and capitalized Consumers with total capital and surplus of $5.0 million. Note 6: Senior Notes Payable - ----------------------------- On October 7, 1997, the Company announced that it had consummated a $32.5 million private placement of eight (8) year Senior Notes. SBC Warburg Dillon Read Inc. acted as agent in connection with the placement. The Company used the proceeds from the placement to repay long-term indebtedness and for general corporate purposes. In addition, the Company also terminated its existing Credit Agreement with its existing lender. The terms of the agreement pursuant to which the Senior Notes were issued contain, among other provisions, the interest rate of the notes, the final maturity date, and certain financial covenants, including net worth and debt covenants. Page 7 of 13 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.
1997 versus 1996 Nine months ended September 30, ------------------------ Increase/ Percent Results of operations (000's omitted) (Decrease) Change - ------------------------------------------------------------------------------------------------------------------ Health care revenues Managed care revenues $19,247 37.2 Orthodontic revenues 340 5.4 ------- ---- Total health care revenues $19,587 33.8 - ------------------------------------------------------------------------------------------------------------------ Health care expenses Managed care expenses $ 8,144 20.7 Orthodontic expenses 826 21.8 ------- ---- Total health care expenses $ 8,970 20.8 - ------------------------------------------------------------------------------------------------------------------ Total selling, general and administrative expenses $ 8,126 78.7 - ------------------------------------------------------------------------------------------------------------------ Other income $ 779 109.9 - ------------------------------------------------------------------------------------------------------------------ Interest expense $ 1,960 N/A - ------------------------------------------------------------------------------------------------------------------ Income from continuing operations before cumulative effect of a change in accounting principle and discontinued operations $ 649 20.6 - ------------------------------------------------------------------------------------------------------------------ Loss from discontinued operations, net of gain on sale of general dental practices, net $(1,185) (100.0) - ------------------------------------------------------------------------------------------------------------------ Net income $ 1,010 36.3 - ------------------------------------------------------------------------------------------------------------------
1997 Versus 1996 - ---------------- Health care revenues for the nine months ended September 30, 1997 were $77,506 or a 33.8% increase on an increase of 19.3% in membership over the corresponding period a year ago. This increase included the impact on revenues and membership for the acquisition of both First American Dental Benefits, Inc. ("First American"), completed on September 27, 1996 and Advantage Dental HealthPlans, Inc. ("Advantage"), completed on May 13, 1997. Excluding the impact of the two acquisitions, revenues for the same period increased 13.3% on a 6.4% increase in membership. The revenue increases were attributable to growth in sales to new clients, moderate price increases to renewing clients, and the sale by the Company of other product offerings to existing clients. Orthodontic revenues grew by 5.4% due to an increase in the number of orthodontic cases over the prior year. Health care expenses for the nine months ended September 30, 1997 increased $8,970, or 20.8%. Health care expense as a percentage of health care revenues improved by 7.3% from 74.5% of revenues for the nine months ended September 30, 1996, to 67.2% for the same period in 1997. This was due primarily to improvements in managed care expenses as a result of the effect of the acquisitions of First American and Advantage, both of which have lower health care costs as a percent of revenues. Additionally, the health care ratios were positively impacted by improved control of costs and the impact of moderate price increases. General and administrative expenses for the nine months ended September 30, 1997 increased $8,126, and was 23.8% of revenue. This was due primarily to the acquisitions of First American and Advantage, both of which had a higher ratio of general and administrative expenses to revenues than the Company had prior to the acquisitions. Additionally, goodwill expense of $1,105 related to the two acquisitions is included in general and administrative expenses. Excluding the Page 8 of 13 impact of the acquisitions and the associated goodwill expense, the ratio of general and administrative expenses to revenues was 20.5% for the nine months ended September 30, 1997 compared to 17.8% for the corresponding period a year ago. This was due primarily to increases in telecommunications and computer network costs, as well as increased management staffing levels. Other income increased 109.9% to $1,488 due to an increase in interest bearing notes receivables resulting from the sale of the discontinued General Practices. Interest expense of $1,960 is primarily a result of the borrowings obtained for the acquisition of both First American and Advantage. The operating results, net of taxes, of the discontinued General Practices for the nine month period ended September 30, 1997, reflect a net loss of $4,611, which included the after tax loss previously deferred from 1996 of $621. This compares to a net after tax loss of $2,313 for the same period in 1996. This net loss was entirely offset by an after tax gain of $4,611 on the sale of the remaining General Practices during the nine month period ended September 30, 1997. Net income for the nine month period ended September 30, 1997 was $3,793, which increased by 36.3% from the same period in 1996 due to the above discussed factors. Net income for the same period in 1996 was $2,783, which included the cumulative effect, after taxes, of $824 for the change in accounting principle adopted by the Company as of January 1, 1996. Business Segment Information - ---------------------------- The Company is engaged primarily in two distinct businesses; the operation of managed care dental programs and the operation of orthodontic practices. Summarized financial information by business segment is as follows (in $000's):
1997 versus 1996 Nine months ended September 30, -------------------------------------------------------------- 1997 Percent of 1996 Percent of Amount Revenue Amount Revenue - ---------------------------------------------------------------------------------------------------------------------------------- Health care revenues Managed care revenues $70,921 91.5 $51,673 89.2 Orthodontic revenues 6,585 8.5 6,246 10.8 ------- ----- ------- ----- Total health care revenues $77,506 100.0 $57,919 100.0 - --------------------------------------------------------------------------------------------------------------------------------- Health care expenses Managed care expenses $47,472 66.9 $39,328 76.1 Orthodontic expenses 4,619 70.1 3,793 60.7 ------- ------- ----- Total health care expenses $52,091 67.2 $43,121 74.5 - ------------------------------------------------------------------------------------------------------------------------------- Total Selling, General and Administrative Expenses $18,450 23.8 $10,324 17.8
Liquidity and Capital Resources - ------------------------------- The Company's business has not been capital intensive. The Company has principally utilized debt for the acquisitions made over the last twelve months. The Company's operational cash requirements have been met principally from operating cash flow and this is expected to continue. At September 30, 1997, the current ratio was 1.50 to 1.0. The Company's net worth was $39.0 million compared to $35.0 million a year earlier. The Company had $19.3 million of cash and investments as of September 30, 1997, compared to $14.8 million a year earlier. The Company believes that income from operations, together with the existing cash and investments on hand, current debt, and other available sources of financing, should be adequate to meet operating capital needs for the foreseeable future. Page 9 of 13 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. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 - -------------------------------------------------------------------------------- The statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations concerning any future premium pricing levels, future dental health care expense levels, the Company's ability to control health care, selling, general and administrative expenses, and all other statements that are not historical facts, are forward looking statements. Actual results may differ materially from those projected in the forward-looking statements, if any, which statements involve risks and uncertainties. The Company's ability to expand is affected by competition not only in benefit program choices, but also the number of dental plan competitors in the markets in which the Company operates. Certain large employer groups and other purchasers of commercial dental health care services, continue to demand minimal premium rate increases, while limiting the number of choices offered to employees. In addition, securing cost effective contracts with dentists may become more difficult in part due to the increased competition among dental plans for dentist contracts. The Company's profitability depends, in part, on its ability to maintain effective control over health care costs, while providing members with quality dental care. Factors such as levels of utilization of dental health care services, new technologies, specialists costs, and numerous other external influences may effect the Company's operating results. The Company's expectations for the future are based on current information and evaluation of external influences. Changes in any one factor could materially impact the Company's expectations relating to premium rates, benefit plans offered, membership growth, the percentage of health care expenses, and as a result, profitability and therefore, effect the forward looking statements which may be included in these reports. In addition, past financial performance is not necessarily a reliable indicator of future performance. An investor should not use historical performance alone to anticipate future results or future period trends. Part II. Other Information Item 1. Legal Proceedings The Company is a defendant in litigation arising in the normal course of business. In the opinion of management, the defense costs and/or ultimate outcome of such litigation is covered by insurance or will not have material effect on the Company's financial position or results of operations. Item 5. Other Information On October 21, 1996, the Company announced its plans to sell the "staff model" General Practices of its subsidiary, Guards Dental, Inc., a California corporation ("Guards"). The Company sold five (5) General Practices in 1996, and twenty-seven (27) in the nine month period ended September 30, 1997. On August 1, 1997, Guards sold all of the tangible non-orthodontic related assets of its remaining fifteen (15) general dental practices ("Remaining Practices"), to Associated Dental Services, Inc., a California corporation ("Associated"), pursuant to that certain Dental Practice Asset Purchase Agreement (the "Associated Purchase Agreement"), dated August 1, 1997, by and between Guards and Associated. Under the terms of the Associated Purchase Agreement, Associated paid an aggregate purchase price of Four Million Five Hundred Thousand Dollars ($4,500,000) for the transferred assets, to be wholly financed by Guards pursuant to an 8.5%, thirty (30) year negotiable promissory note in the principal amount of $4,500,000, secured by the assets sold to Associated by Guards. The amount of consideration paid for the Assets was determined based on the book value of the Assets according to Guards. In addition, pursuant to the Associated Purchase Agreement, Enterprises shall provide Associated with a One Million Dollar ($1,000,000) line of credit for a period of up to eighteen (18) months, commencing on August 1, 1997. Finally, as required by the Associated Purchase Agreement, Associated has entered into that certain Management Services Agreement dated August 1, 1997, with Enterprises' newly formed Page 10 of 13 practice management subsidiary, Imprimis Practice Management Company, Inc., a Delaware corporation ("Imprimis"), whereby Imprimis will provide ongoing dental management services to support the dentists in the operation of the dental practices relating to the Remaining Practices, including marketing and administrative support. In a transaction related to the transactions represented by the Associated Purchase Agreement, Guards sold all of the non-orthodontic Remaining Practices and all of the intangible non-orthodontic assets related to the Remaining Practices to Pacific Coast Dental, Inc., a California corporation ("Pacific"), pursuant to that certain Dental Practices Purchase Agreement (the "Pacific Purchase Agreement"), dated August 1, 1997, by and between Guards and Pacific. Under the terms of the Pacific Purchase Agreement, the total purchase price paid by Pacific to Guards for the transferred assets was Three Million Five Hundred Thousand Dollars ($3,500,000), to be wholly financed by Guards pursuant to an 8.5%, thirty (30) year negotiable promissory note in the principal amount of $3,500,000 secured by the assets sold to Pacific by Guards. Enterprises shall retain and currently intends to operate the orthodontic practices in each of the Remaining Practices. The amount of consideration paid for the intangible and non- orthodontic assets was determined based upon the book value of such assets according to Guards. On August 5, 1997, Enterprises announced that it had completed the sale of its thirty-two (32) General Practices for an aggregate value of $17.5 Million. These General Practices were originally established primarily for the purposes of supplementing, where needed, plan coverage provided by independent panel offices. Enterprises retained its related orthodontic business. As of the three months ended September 30, 1997, the Company has recorded the completion of the sale of the remaining General Practices. All deferred losses recorded in prior periods have been offset against the gain recorded on the sale of these General Practices during this quarter. Additionally, the Company has accrued against the gain on these sales, certain run-out expenses that the Company expects to incur in future periods relating to the discontinuation of this business. Although the Company believes that it has recorded all necessary expenses associated with the discontinuation of this business, there can be no assurance that the Company will not be required to record additional expenses not offset by any gain in the sale of such General Practices in future periods. Therefore, the Company realized a break-even result on the completion of the sale of all of the General Practices for the nine month period ended September 30, 1997. On October 7, 1997, the Company announced that it had consummated a $32.5 million private placement of eight (8) year Senior Notes. SBC Warburg Dillion Read Inc. acted as agent in connection with the placement. The Company used the proceeds from the placement to repay long-term indebtedness and for general corporate purposes. In addition, the Company also terminated its existing Credit Agreement with its existing lender. The terms of the agreement pursuant to which the Senior Notes were issued contain, among other provisions, the interest rate of the notes, the final maturity date, and certain financial covenants, including net worth and debt covenants. Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 2.1 Plans of Acquisition. 3.1 Articles of Incorporation**** 3.2 Bylaws**** 10.1 1984 Stock Option Plan*** 10.2 Stock Option Plan Amendment* 10.3 Stock Option Plan Amendment+ 10.4 Stock Option Plan Amendment++ 10.5 Amended Stock Option Plan... 10.6 Corporation Grant Deed, dated December 21, 1984, relating to a property located at 505 North Euclid Avenue, Anaheim, California**
Page 11 of 13 10.7 Employment Agreement, as Amended, dated May 25, 1995, between Steven J. Baileys, D.D.S. and the Company.+++ 10.8 Employment Agreement, as Amended, dated May 25, 1995, between Ronald I. Brendzel and the Company.+++ 10.9 Employment Agreement dated May 25, 1995, between John E. Cox and the Company.+++ 10.10 Employment Agreement dated May 25, 1995, between Wayne K. Butts and the Company.+++ 10.11 Form of Rights Agreement, dated as of March 22, 1996, between the Company and American Stock Transfer and Trust Company, as Rights Agent.+++ 10.12 Employment Agreement dated January 5, 1997, between Herb J. Kaufman, D.D.S. and the Company... 10.13 Credit Agreement dated September 25, 1996, between Bank of America National Trust and Savings Association and the Company.. 10.14 Stock Purchase Agreement between Consumers Life Insurance Company and SafeGuard Health Enterprises, Inc. dated March 6, 1997/1/ 10.15 Purchase Agreement between Associated Dental Services, Inc. and Guards Dental, Inc. dated August 1, 1997/1/ 10.16 Purchase Agreement between Pacific Coast Dental, Inc. and Guards Dental, Inc. dated August 1, 1997./1/ 10.17 Form of Note Purchase Agreement dated as of September 30, 1997, and form of Promissory Note... 18.0 Independent Auditors' Preferability Letter for Change in Accounting Method... 21.1 Subsidiaries of the Company... 27.1 Financial Data Schedule (b) Reports on Form 8-K Report on Form 8-K was filed with the Securities and Exchange Commission on October 7, 1997. The Report on Form 8-K mentioned in this Item 6, is hereby incorporated herein to this Quarterly Report on Form 10-Q for the period ended September 30, 1997, as if entirely set forth herein. _____________ * Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Registration Statement on Form S-1 filed on September 12, 1983 (File No. 2-86472). ** 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). *** 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). **** 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. + 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. ++ 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. +++ 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. . Incorporated by reference herein to Exhibit D filed as an exhibit to the Company's Report on Form 8-K dated September 27, 1996. .. Incorporated by reference herein to Exhibit E filed as an exhibit to the Company's Report on Form 8-K dated September 27, 1996. ... 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. .... 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. - -------------------- /1/ Incorporated by reference herein to the exhibit of the same number filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997. Page 12 of 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) or the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Anaheim, State of California, on the 14th of November, 1997. SAFEGUARD HEALTH ENTERPRISES, INC. By: STEVEN J. BAILEYS, D.D.S. -------------------------- STEVEN J. BAILEYS, D.D.S., Chairman, and Chief Executive Officer By: THOMAS C. TEKULVE ------------------ THOMAS C. TEKULVE, Vice President and Chief Financial Officer Page 13 of 13 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 9-MOS DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 SEP-30-1997 SEP-30-1997 8,232 706 3,820 9,101 11,398 6,375 776 531 0 0 25,036 23,751 11,795 11,841 0 0 94,780 68,116 16,641 11,633 0 0 0 0 0 0 21,261 21,255 0 0 94,780 68,116 26,843 77,506 26,843 77,506 0 0 24,558 70,541 0 0 0 0 836 1,960 2,244 6,493 917 2,700 1,327 3,793 0 0 0 0 0 0 1,327 3,793 .26 .76 .26 .76
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