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BRITESMILE, INC.
490 North Wiget Lane
Walnut Creek, California 94598
(925) 941-6260
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 23, 2005
To the Shareholders:
Notice is hereby given that the Annual Meeting of the Shareholders of
BriteSmile, Inc. (the "Company") will be held at the Lafayette Park Hotel, 3287
Mt. Diablo Boulevard, Lafayette, California, 94549, on June 23, 2005, at 2:00
o'clock p.m., local time, and at any postponement or adjournment thereof, for
the following purposes, which are discussed in the following pages and which are
made part of this Notice:
1. To elect eight directors, each to serve until the next annual
meeting of shareholders and until his successor is elected and
shall qualify;
2. To approve an amendment to the Company's Revised 1997 Stock
Option and Incentive Plan to increase the total number of shares
of common stock issuable under the Plan from 1,500,000 to
1,900,000 (the "Option Plan Amendment");
3. To approve an amendment to the Company's Articles of
Incorporation to create and authorize 5,000,000 shares of "blank
check" preferred stock of the Company (the "Charter Amendment");
4. To ratify and approve the issuance by the Company of (i) Senior
Convertible Notes of the Company, which are convertible into an
aggregate of 1,577,545 shares of the Company's common stock,
subject to adjustment if specified events occur, (ii) Warrants to
purchase up to an aggregate of 544,253 shares of the Company's
common stock, subject to adjustment if specified events occur,
(iii) Additional Investment Rights to purchase additional Senior
Convertible Notes and Warrants, which would be convertible or
exercisable for up to an aggregate of 707,266 additional shares
of the Company's common stock, subject to adjustment if specified
events occur, and (iv) shares of the Company's common stock in
payment of principal and interest on the Senior Convertible Notes
(the "Note and Warrant Issuance");
5. To ratify the selection of Deloitte & Touche, LLP as the
Company's independent auditors by the Audit Committee of the
Company's Board of Directors; and
6. To consider and act upon any other matters that properly may come
before the meeting or any adjournment thereof.
The Company's Board of Directors has fixed the close of business on
April 15, 2005 as the record date for the determination of shareholders having
the right to notice of, and to vote at, the Annual Meeting of Shareholders and
any adjournment thereof. A list of such shareholders will be available for
examination by a shareholder for any purpose related to the meeting during
ordinary business hours at the offices of the Company at 490 North Wiget Lane,
Walnut Creek, California 94598, during the ten days prior to the meeting.
You are requested to date, sign and return the enclosed Proxy, which is
solicited by the Board of Directors of the Company and will be voted as
indicated in the accompanying Proxy Statement and Proxy. Your vote is important.
Please sign and date the enclosed Proxy and return it promptly in the enclosed
return envelope, whether or not you expect to attend the meeting. The giving of
your proxy as requested will not affect your right to vote in person if you
decide to attend the Annual Meeting. The return envelope requires no postage if
mailed in the United States. If mailed elsewhere, foreign postage must be
affixed. Your proxy is revocable at any time before the meeting.
By Order of the Board of Directors,
Kenneth A. Czaja
CFO and Secretary
Walnut Creek, California
May [___], 2005
BRITESMILE, INC.
ANNUAL MEETING OF SHAREHOLDERS
PROXY STATEMENT
TABLE OF CONTENTS
INTRODUCTION..................................................................1
PROPOSAL 1 - ELECTION OF DIRECTORS............................................2
MEETINGS OF THE BOARD OF DIRECTORS............................................4
COMMITTEES OF THE BOARD OF DIRECTORS..........................................4
DIRECTOR COMPENSATION.........................................................5
SHAREHOLDER COMMUNICATIONS WITH DIRECTORS.....................................5
DIRECTOR NOMINATIONS..........................................................5
REPORT OF AUDIT COMMITTEE.....................................................6
AUDIT FEES FOR FISCAL 2003 AND 2004...........................................7
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES/CONSULTANTS......................8
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............10
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT............................12
EXECUTIVE COMPENSATION.......................................................13
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS..............14
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION..................15
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON
EXECUTIVE COMPENSATION...............................................15
STOCK PERFORMANCE GRAPH......................................................18
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................18
PROPOSAL 2 - APPROVAL OF AMENDMENT TO STOCK OPTION PLAN......................21
PROPOSAL 3 - APPROVAL OF CHARTER AMENDMENT...................................26
PROPOSAL 4 - RATIFICATION AND APPROVAL OF NOTE AND WARRANT ISSUANCE..........27
PROPOSAL 5 - APPROVAL OF INDEPENDENT AUDITORS................................31
OTHER MATTERS................................................................31
ANNUAL REPORT................................................................31
SHAREHOLDER PROPOSALS........................................................31
MATERIAL INCORPORATED BY REFERENCE...........................................32
BRITESMILE, INC.
490 North Wiget Lane
Walnut Creek, California 94598
(925) 941-6260
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
The enclosed Proxy is solicited by the Board of Directors of BriteSmile,
Inc. (the "Company") for use in voting at the Annual Meeting of Shareholders to
be held at the Lafayette Park Hotel, 3287 Mt. Diablo Blvd., Lafayette,
California, 94549, on June 23, 2005, at 2:00 o'clock p.m., local time, and at
any postponement or adjournment thereof, for the purposes set forth in the
attached notice.
When proxies are properly dated, executed and returned, the shares they
represent will be voted at the Annual Meeting in accordance with the
instructions of the shareholder completing the proxy. If no specific
instructions are given, the shares will be voted FOR the election of the
nominees for directors set forth herein, FOR approval of the Option Plan
Amendment, FOR approval of the Charter Amendment; FOR ratification and approval
of the Note and Warrant Issuance; and FOR ratification of the appointment of
auditors. A shareholder giving a proxy has the power to revoke it at any time
prior to its exercise by voting in person at the Annual Meeting, by giving
written notice to the Company's Secretary prior to the Annual Meeting, or by
giving a later dated proxy.
The presence at the meeting, in person or by proxy, of shareholders
holding in the aggregate a majority of the outstanding shares of the Company's
common stock entitled to vote shall constitute a quorum for the transaction of
business. The Company does not have cumulative voting for directors; a plurality
of the votes properly cast for the election of directors by the shareholders
attending the meeting, in person or by proxy, will elect directors to office.
Approval of the Charter Amendment will require the affirmative vote of a
majority of the outstanding shares of common stock of the Company. Approval of
the Option Plan Amendment, ratification and approval of the Note and Warrant
Issuance and ratification of the appointment of auditors will require the
affirmative vote of a majority of the votes cast on each proposal. Abstentions
and broker non-votes will count for purposes of establishing a quorum, but will
not count as votes cast for the election of directors or any other proposal and
will have no effect on the outcome of the proposals, other than the Charter
Amendment in which an abstention and broker non-vote will have the same effect
as a vote against approval of the Charter Amendment. Votes cast by shareholders
who attend and vote in person or by proxy at the Annual Meeting will be counted
by inspectors to be appointed by the Company (it is anticipated that the
inspectors will be employees, attorneys or agents of the Company).
The close of business on April 15, 2005 has been fixed as the record
date for determining the shareholders entitled to notice of, and to vote at, the
Annual Meeting. Each share shall be entitled to one vote on all matters. As of
the record date there were [________] shares of the Company's common stock
outstanding of record and entitled to vote. For a description of the principal
holders of such stock, see "Security Ownership of Certain Beneficial Owners and
Management" below.
This Proxy Statement and the enclosed Proxy are being furnished to
shareholders on or about May [___], 2005.
PROPOSAL 1 -- ELECTION OF DIRECTORS
The Company's Bylaws provide that the number of directors shall range
from three to ten, as determined from time to time by the shareholders or the
Board of Directors. Presently the Company's Board of Directors consists of nine
members. All of the current directors of the Company other than Mr. Poch are
nominees for election at the Annual Meeting. The Company has been fortunate to
have Mr. Poch on the Board of Directors as the nominee of Pequot Capital, a
major shareholder of the Company, for nearly five years. The Board of Directors
wishes to thank Mr. Poch for his service to the Company. Concurrently with the
Annual Meeting, the Board of Directors will reduce the number of members of the
Board of Directors to eight.
Each director elected at the Annual Meeting will hold office until a
successor is elected and qualified, or until the director resigns, is removed or
becomes disqualified. Unless marked otherwise, proxies received will be voted
FOR the election of each of the nominees named below. If any such person is
unable or unwilling to serve as a nominee for the office of director at the date
of the Annual Meeting or any postponement or adjournment thereof, the proxies
may be voted for a substitute nominee, designated by the proxy holders or by the
present Board of Directors to fill such vacancy, or for the balance of those
nominees named without nomination of a substitute, and the Board may be reduced
accordingly. The Board of Directors has no reason to believe that any of such
nominees will be unwilling or unable to serve if elected as a director. The
Company does not have a nominating committee of the Board of Directors. Instead,
the independent members of the Board of Directors determine nominees for
director, which permits all directors to fully participate in the process. In
identifying and evaluating candidates to be nominated as directors, the Board
seeks individuals with stated relevant experience that can add to the ability of
the Board to fulfill its fiduciary obligations.
At the meeting, the shareholders will vote to elect four independent
directors (as defined in Marketplace Rule 4200(A)(15) of The Nasdaq Stock
Market) and four associated directors. All of these nominees currently serve as
members of the Board of Directors. Messrs. Peters, Thompson, Schechter and
Pierce are independent directors under the Nasdaq rules.
The following information is furnished with respect to the nominees.
Stock ownership information is shown under the heading "Security Ownership of
Certain Beneficial Owners and Management" and is based upon information
furnished by the respective individuals.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH NOMINEE DIRECTOR.
The table below indicates the position with the Company, tenure as
director and age of each nominee as of April 15, 2005.
Name Position with the Company Age Director Since
---- ------------------------- --- --------------
Anthony M. Pilaro Chairman of the Board of Directors 69 1997
Gregg Coccari Chief Executive Officer and Director 52 2005
R. Eric Montgomery Director 50 1998
Bradford Peters Director 37 1999
Harry Thompson Director 75 1999
Peter Schechter Director 45 1999
L. Tim Pierce Director 53 2003
Dr. Julian Feneley Director 40 2003
Anthony M. Pilaro
Mr. Pilaro has served as a director and Chairman of the Board of the
Company since August 1997. Presently, he serves as Chairman of CAP Advisers
Limited, which maintains offices in Dublin, Ireland. He is also founder and
Chairman of Excimer Vision Leasing L.P., a partnership primarily engaged in the
business of leasing Excimer laser systems. Mr. Pilaro has been involved in
private international investment banking. He was a Founding Director and former
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Chief Executive Officer of Duty Free Shoppers Group Limited, the world's leading
specialty retailer catering to international travelers, and a founder of the
predecessor of VISX, Inc. A graduate of the University of Virginia and the
University of Virginia Law School, Mr. Pilaro practiced law in New York City
through 1964.
Gregg Coccari
Mr. Coccari has served as Chief Executive Officer and director of the
Company since January 2005. Previously, Mr. Coccari was President and CEO of
Teleflora, one of the world's largest floral wire services with operations
throughout North America. Prior to Teleflora, Mr. Coccari was a Senior Managing
Director at Franklin Mint, Eagle's Eye and Johnson & Johnson. Mr. Coccari
received a B.S. from Colgate University and an M.B.A. from Wharton School of the
University of Pennsylvania.
R. Eric Montgomery
Mr. Montgomery has served as a director of the Company since May 1998.
He is a consultant, researcher, and entrepreneur in the oral care and cosmetic
products industries, and has been granted over 65 US and foreign patents since
1981. Prior to his appointment to the Company's Board of Directors, from
November 1997 until May 1998, Mr. Montgomery served as an independent consultant
to the Company through Applied Dental Sciences, Inc. Mr. Montgomery is also the
Founding Manager and President of Oraceutical LLC, an organization that develops
products and technologies for dentistry and consumer oral care. Oraceutical is
currently engaged by the Company as an independent contractor to provide
technology development services. Mr. Montgomery's companies have provided
consulting services to and developed products for oral care and pharmaceutical
companies, and now also provide order fulfillment outsourcing services for
BriteSmile.
Bradford Peters
Mr. Peters has served as a director of the Company since December 1999.
He is the President of Blackfin Capital, a privately held investment company
based in New York. Prior to founding Blackfin Capital, from July 1993 to June
1998, Mr. Peters was with Morgan Stanley Private Wealth Management Group. Mr.
Peters received an M.B.A. from Duke University.
Harry Thompson
Mr. Thompson has served as a director of the Company since December
1999. He is currently the President of The Strategy Group and formerly Chairman
and Managing Director of Swiss Army Brands, Inc., where he has worked since
1989. Prior to founding The Strategy Group, Mr. Thompson served in senior
management of several core units of the Interpublic Group of Companies, one of
the world's leading advertising groups. Mr. Thompson also has served as either
manager or chairman of several telecommunication companies of The Galesi Group.
Mr. Thompson received an M.B.A. from Harvard Business School.
Peter Schechter
Mr. Schechter has served as a director of the Company since July 1999.
Mr. Schechter is a founding partner of Chlopak, Leonard, Schechter and
Associates, an international communications consulting firm, specializing in the
management of crisis communications, corporate reputation programs, political
campaigns and country image initiatives. Mr. Schechter has extensive experience
in public policy management. A graduate of the School of Advanced International
Studies at Johns Hopkins University, Mr. Schechter has lived in Europe and Latin
America. He is fluent in six languages.
L. Tim Pierce
Mr. Pierce, a certified public accountant, has served as a director of
the Company since February 2003. Mr. Pierce is currently serving as an Executive
Vice President and the Chief Financial Officer and Corporate Secretary of SBI
Services, Inc. in Salt Lake City, Utah. He joined SBI and Company (the former
parent of SBI Services, Inc.) in April 1998. SBI and Company was sold in July
2004. Mr. Pierce worked for Mrs. Fields' Original Cookies, Inc. from 1988
through 1998, where he served most recently as Mrs. Fields' Senior Vice
President, Chief Financial Officer, and Corporate Secretary. For twelve years
from 1976 to 1988, Mr. Pierce served as an auditor with Price Waterhouse and
Deloitte & Touche. Mr. Pierce is a former director of Mountain America Credit
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Union, and is currently a director of E&O Holdings, Inc., Lante Corporation and
Scient Japan. Mr. Pierce is a member of the American Institute of Certified
Public Accountants, and the Utah Association of Certified Public Accountants.
Mr. Pierce is considered by the Company to be an audit committee financial
expert. Mr. Pierce received his B.S. from Brigham Young University.
Dr. Julian Feneley
Dr. Feneley has served as a director of the Company since December
2003. Dr. Feneley began working with BriteSmile in January 2002, focusing on
strategic and development initiatives, was appointed Chairman of BriteSmile
Development, Inc. in May 2003, and President of BriteSmile, Inc. in February
2004. Previously, Dr Feneley co-founded narrowbridge, an e-customer acquisition
technology company, and Bioscience Managers, a biotechnology venture capital and
corporate finance boutique. Prior to 2000, Dr. Feneley headed the European
healthcare investment banking franchise of J P Morgan during its period as the
globally ranked #1 investment bank in this industry sector. Dr. Feneley
originated and executed transactions with an aggregate volume in excess of $200
billion, including the then largest merger in corporate history. Prior to
joining J P Morgan in 1990, Dr. Feneley qualified and worked as a medical doctor
at the renowned Guy's Hospital in London, England.
There is no family relationship between any executive officer or
director of the Company and any other executive officer or director.
Meetings of the Board of Directors
The Company's Board of Directors held four duly noticed meetings during
fiscal year 2004. Each nominee for director then serving as a director attended
all of the meetings of the Company's Board of Directors.
Committees of the Board of Directors
The Board of Directors has established an Executive Committee, an Audit
Committee, a Compensation Committee and a Marketing Committee.
Subject to certain restrictions, the Executive Committee possesses and
exercises the powers of the Board of Directors during the intervals between
regular meetings of the Board. The members of the Executive Committee during
2004 were Anthony Pilaro, Gerald Poch, Bradford Peters, Harry Thompson, Gregg
Coccari and Julian Feneley. The same directors will serve on the Executive
Committee during 2005 through the date of the Annual Meeting. Following the
Annual Meeting, Mr. Poch will no longer serve on the Executive Committee. The
Company's Executive Committee held four meetings during fiscal year 2004. Each
member of the Executive Committee then serving as a member of such committee
attended all of the meetings of the Executive Committee, except Mr. Poch missed
one meeting.
The Audit Committee is a separately-designated standing audit committee
established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, as amended, that acts pursuant to a written charter adopted by the
Board of Directors, a copy of which is attached to this Proxy Statement as Annex
A. The Audit committee's objective is to provide assistance to the directors in
fulfilling their responsibility to the shareholders and investment community
relating to corporate accounting, reporting practices, and the quality and
integrity of the financial reports of the Company. Members of the Company's
Audit Committee during 2004 were Gerald Poch, Bradford Peters and Tim Pierce.
The same directors will serve on the Audit Committee during 2005 through the
date of the Annual Meeting. Following the Annual Meeting, Mr. Poch will no
longer serve on the Executive Committee. The Audit Committee held five meetings
during fiscal year 2004. Each member of the Audit Committee then serving as a
member of such committee attended all of the meetings of the Audit Committee,
except Mr. Poch missed one meeting. All members of the Audit Committee are
independent directors, as defined in Marketplace Rule 4200(A)(15) of The Nasdaq
Stock Market.
The Compensation Committee reviews and recommends to the Board of
Directors the salaries, bonuses and other forms of compensation and benefit
plans for the executive officers of the Company and administers the Company's
1997 Stock Option and Incentive Plan. Members of the Company's Compensation
Committee during 2004 were Bradford Peters, Peter Schechter and Harry Thompson.
The same directors will serve on the Compensation Committee during 2005. The
Compensation Committee held two meetings during fiscal year 2004. Each member of
the Compensation Committee then serving as a member of such committee attended
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all of the meetings of the Compensation Committee. All members of the
Compensation Committee are independent directors, as defined in Marketplace Rule
4200(A)(15) of The Nasdaq Stock Market.
The Board of Directors established a Marketing Committee of the Board
in December 2004 to assist the Company's new Chief Executive Officer on
marketing issues. As established by the Board of Directors, the Marketing
Committee consists of two members of the Board of Directors, Harry Thompson and
Peter Schechter, and the Company's Executive Vice President of Marketing, as an
ad hoc member of the Committee. Because the Marketing Committee was not
established until December 2004, it held no meetings during fiscal year 2004.
Director Compensation
Non-employee directors of the Company receive options to purchase 5,000
shares of common stock per year for each year during which they serve as a
director. Directors who serve as chairman of a Board committee receive options
to purchase an additional 10,000 shares of common stock per year of service. The
exercise price of such options is 100% of the fair market price on the date of
grant. Actual expenses incurred by outside directors are reimbursed. In
addition, the chairman of the Audit Committee receives an annual retainer in the
amount of $2,500, and Mr. Thompson received $20,800 per month for his service on
the Marketing Committee between December 2004 and March 2005.
Shareholder Communications With Directors
The Board of Directors has not established a formal process for
shareholders to follow to send communications to the Board or its members, as
the Company's policy has been to forward to the directors any shareholder
correspondence it receives that is addressed to them. Shareholders who wish to
communicate with the directors may do so by sending their correspondence
addressed to the director or directors at the Company's headquarters at 490
North Wiget Lane, Walnut Creek, CA, 94598.
Directors are encouraged by the Company to attend the Annual Meeting of
Shareholders if their schedules permit. Julian Feneley and Bruce Fleming
attended the Annual Meeting of the Shareholders held in June 2004.
Director Nominations
The Board of Directors does not have a nominating committee or other
committee that recommends qualified candidates to the Board for nomination or
election as directors. The Board of Directors believes that, because of the
Company's size and the current composition of the Board of Directors and because
of the historically few and infrequent vacancies on the Board, it is in the best
interest of the Company to permit all of the independent directors to fully
participate in the director nomination process. The Board of Directors has
adopted a nominations process that provides that the Company's independent
directors (as defined under the Nasdaq Marketplace Rules), acting by a majority
vote, are authorized to recommend individuals to the Board of Directors for the
Board's selection as director nominees.
The independent directors are responsible for reviewing and
interviewing qualified candidates to serve on the Board of Directors, for making
recommendations to the full Board for nominations to fill vacancies on the Board
and for selecting the management nominees for the directors to be elected by the
Company's shareholders at each annual meeting.
Director Qualifications
The independent directors have not established specific minimum age,
education, experience or skill requirements for potential directors. The
independent directors have, however, been authorized by the Board of Directors
to take into account all factors they consider appropriate in fulfilling their
responsibilities to identify and recommend individuals to the Board as director
nominees. Those factors may include, without limitation, the following:
o an individual's business or professional experience,
accomplishments, education, judgment, understanding of the
business and the industry in which the Company operates, specific
skills and talents, independence, time commitments, reputation,
general business acumen and personal and professional integrity or
character;
5
o the size and composition of the Board and the interaction of its
members, in each case with respect to the needs of the Company and
its shareholders; and
o regarding any individual who has served as a director of the
Company, his or her past preparation for, attendance at, and
participation in meetings and other activities of the Board or its
committees and his or her overall contributions to the Board and
the Company.
Identification and Evaluation of Nominees
In making nominations for director, the independent directors identify
nominees by first evaluating the current members of the Board willing to
continue their service. Current members with qualifications and skills that are
consistent with the independent directors' criteria for Board service are
re-nominated. As to new candidates, the independent directors will generally
poll the Board members and members of management for recommendations. The
independent directors may also review the composition and qualification of the
boards of directors of the Company's competitors, and may seek input from
industry experts or analysts. The independent directors review the
qualifications, experience and background of potential candidates. In making
their determinations, the independent directors evaluate each individual in the
context of the Board as a whole, with the objective of assembling a group that
can best represent shareholder interests through the exercise of sound judgment.
After review and deliberation of all feedback and data, the independent
directors make recommendations to the Board of Directors by a majority vote.
Historically, the Board of Directors has not relied on third-party search firms
to identify director nominees. The Board of Directors may in the future choose
to engage third-party search firms in situations where particular qualifications
are required or where existing contacts are not sufficient to identify an
appropriate candidate.
The independent directors may use multiple sources for identifying and
evaluating nominees for directors, including referrals from the Company's
current directors and management as well as input from third parties, including
executive search firms retained by the Board. The independent directors will
obtain background information about candidates, which may include information
from directors' and officers' questionnaires and background and reference
checks, and will then interview qualified candidates. The Company's other
directors will also have an opportunity to meet and interview qualified
candidates. The independent directors will then determine, based on the
background information and the information obtained in the interviews, whether
to recommend to the Board of Directors that a candidate be nominated to the
Board.
Shareholder Nominations
It is the policy of the Board of Directors and the independent
directors not to consider candidates recommended by shareholders. The Board of
Directors believes that, based on the independent directors' knowledge of the
Company's corporate governance principles and the needs and qualifications of
the Board at any given time, the independent directors are best equipped to
select nominees that will result in a well-qualified and well-rounded board of
directors. Accordingly, it is the policy of the independent directors not to
accept unsolicited nominations from shareholders.
REPORT OF AUDIT COMMITTEE
The following report of the Audit Committee shall not be deemed
incorporated by reference by any general statement incorporating this Proxy
Statement into any other filing under the Securities Act of 1933 or under the
Securities Exchange Act of 1934, except to the extent the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under such Acts.
BriteSmile's Audit Committee (referred to as "we" and "us") during 2004
was composed of Gerald Poch, Bradford Peters and Tim Pierce, all independent
directors of the Company. The Committee operates under a written charter adopted
by the Board of Directors. The Committee assists the directors in fulfilling
their responsibility to our shareholders, potential shareholders and the
investment community relating to accounting and financial reporting practices.
6
We meet with management periodically to consider the adequacy of the
Company's internal controls and the objectivity of its financial reporting. We
discuss these matters with the Company's independent auditors and with
appropriate Company financial personnel.
As needed, we meet privately with both the independent auditors and the
appropriate Company financial personnel, each of whom has unrestricted access to
the members of the Committee. We also recommend to the Board of Directors the
appointment of the independent auditors and review periodically their
performance and independence from management.
The directors who serve on the committee are all "independent" for
purposes of Rule 4200(a)(15) of listing standards of the Nasdaq Small Cap
Market. That is, the Board of Directors has determined that none of us has a
relationship to the Company that might interfere with our independence from the
Company and its management.
Management has primary responsibility for the Company's financial
statements and the overall reporting process, including the Company's system of
internal controls. The independent auditors audit the annual financial
statements prepared by management, express an opinion as to whether those
financial statements fairly present the financial position, results of
operations and cash flows of the Company in conformity with auditing standards
generally accepted in the United States of America, and discuss with us any
issues they believe should be raised with the Committee.
This year, we reviewed the Company's audited financial statements and
met with both management and Deloitte & Touche LLP, the Company's independent
auditors for the 52 weeks ended December 25, 2004, to discuss those financial
statements. Management has represented to us that the financial statements were
prepared in accordance with auditing standards generally accepted in the United
States of America.
We have received from and discussed with Deloitte & Touche the written
disclosure as required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees). These items relate to that
firm's independence from the Company. We also discussed with Deloitte & Touche
any matters required to be discussed by Statement on Auditing Standards No. 61
(Communication with Audit Committees).
Based on these reviews and discussions, we recommended to the Board of
Directors that the Company's audited consolidated financial statements be
included in the Company's Annual Report on Form 10-K for the 52 weeks ended
December 25, 2004.
Members of the 2004 Audit Committee
Gerald Poch
Bradford Peters
Tim Pierce
Audit Fees for Fiscal 2003 and 2004
Aggregate fees billed to the Company and its subsidiaries for 2004 and
2003 by the Company's independent auditor and principal accounting firm,
Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their
respective affiliates, are as follows:
2004 2003
---- ----
Audit Fees (1) $ 334,399 $ 358,952
Audit-Related Fees $ 0 $ 0
Tax Fees (2) $ 137,225 $ 148,793
All Other Fees $ 42,510 $ 45,350
(1) 2004 Audit fees estimated and to be finalized.
(2) Includes fees for tax advice and tax return assistance in 2003 and
2004.
The Audit Committee has considered and determined that the provision of the
non-audit services noted in the foregoing table is compatible with maintaining
Deloitte & Touche's independence. Prior to the performance of any services, the
Audit Committee approves all audit and non-audit related services to be provided
by the Company's independent auditor and the fees to be paid therefore. Although
the Sarbanes-Oxley Act of 2002 permits the Audit Committee to pre-approve some
7
types or categories of services to be provided by the auditors, it is the
current practice of the Audit Committee to specifically approve all services
provided by the auditors in advance, rather than to pre-approve, generally, any
type of service.
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES/CONSULTANTS
The following sets forth the name, age and position of each director
and executive officer of the Company as of the date of this Report. Biographical
information regarding Gregg Coccari, Julian Feneley and Eric Montgomery, each of
whom currently also serves as a director of the Company, is included in this
Proxy Statement under "Proposal 1 - Election of Directors." Biographical
information regarding the other executive officers follows below.
NAME AGE CURRENT POSITION(S) (1)
---- --- -----------------------
Gregg Coccari.................... 52 Chief Executive Officer and Director
Julian Feneley................... 40 President and Director
Paul Dawson...................... 50 Chief Executive Officer of BriteSmile International Limited
Ken Czaja........................ 55 Executive Vice President, Chief Financial Officer and Secretary
Stephen Miller................... 57 Executive Vice-President, Development and Real Estate
Robert Sieban.................... 36 Executive Vice-President, BriteSmile Whitening Centers
R. Eric Montgomery............... 50 Director, Director of BriteSmile Development Inc., President of
Oraceutical LLC, consultant to the Company
Nhat Ngo......................... 32 Executive Vice President, Business Development and General Counsel
(1) All directors serve for one year and until their successors are elected and
qualified. All officers serve at the pleasure of the Board of Directors.
There are no family relationships between any of the officers and
directors.
Paul Dawson
Mr. Dawson, prior to joining the Company's subsidiary, BriteSmile
International as its Chief Executive Officer in April 1999, was Chief Executive
Officer of Camus International, a global marketer of luxury goods. During his
nine-year tenure with Camus, he spearheaded an aggressive worldwide market
expansion program of the company's premium cognac market. Prior to Camus, Mr.
Dawson held the position of Engagement Manager at McKinsey & Company, an
international consulting firm. While at McKinsey, he advised a broad range of
multinational consumer companies on international expansion strategies. Mr.
Dawson has lived and worked in the United States, Europe, Asia and the Middle
East. He holds Masters degrees from Cambridge University and University of
California at Berkeley, and an MBA from Stanford University.
Ken Czaja
Mr. Czaja was appointed Chief Financial Officer and Secretary of
BriteSmile in May 2004. He brings to the Company a wealth of finance management
experience spanning small and large public global technology companies. Prior to
joining the Company, Mr. Czaja was CFO of PerkinElmer's OptoElectronics Group.
Before PerkinElmer, he was CFO of BrightStar, a small publicly traded services
firm specializing in Information Technology solutions. Prior to BrightStar, Mr.
Czaja was CFO of IntelliCorp, a publicly traded software firm, and before that,
Vice President of Finance for Wyse Technology, a mid-size computer terminal and
monitor company. He began his career progressing through numerous financial
management positions at Xerox Corporation. Mr. Czaja received a B.S. degree in
physics from Columbia University and a Masters degree in industrial management
from Georgia Institute of Technology.
8
Stephen Miller
Prior to his appointment as Executive Vice President of Development and
Real Estate in 2004, Stephen Miller was Executive Vice President, Manufacturing
and Distribution of the Company since October 2000. Prior to joining BriteSmile
in May 1999 as its Executive Vice President, Real Estate and Construction, Mr.
Miller was for 11 years Vice President of Facility Development for DFS. While at
DFS, Mr. Miller was responsible for the development of the flagship retail
gallerias, high-end boutiques, duty free stores and entertainment complexes in
the U.S., Oceania and the Pacific. Prior to DFS, Mr. Miller was Senior Vice
President of Commercial and Industrial Development for Castle and Cooke, Inc.
where for 17 years he was responsible for commercial, industrial and retail
development for Hawaii's second largest private landowner.
Robert Sieban
Effective June 1, 2003, Robert Sieban joined BriteSmile as Executive
Vice President, BriteSmile Whitening Centers. A veteran of the retail industry,
Mr. Sieban is responsible for BriteSmile's Center Division. Mr. Sieban is also
responsible for retail sales of BriteSmile's expanding proprietary oral care
products. Mr. Sieban comes to BriteSmile with over 10 years retail experience
including his most recent position as Senior Vice President of Retail Stores for
Illuminations and positions at Pier 1 Imports and Sunglass Hut International.
Nhat H. Ngo
In November 2004, Nhat Ngo was appointed Executive Vice President,
Business Development & Planning and General Counsel. Mr. Ngo was named the Chief
Operating Officer of BriteSmile Development, Inc., the Company's subsidiary, in
April 2003 to oversee BriteSmile Development's research and development efforts
and to manage its intellectual property portfolio. Prior to joining the Company
in June 1999 as Director of Sales, Mr. Ngo practiced law at Shaw Pittman in
Washington DC. Mr. Ngo served as Vice President, National Sales Director for the
Company from 2000 to 2003, having executed an aggressive sales campaign to
expand the dental distribution channel, and was promoted to Vice President of
Business Development & Planning in March 2003. He graduated with a B.S. degree
in business from the University of Virginia McIntire School of Commerce and J.D.
degree from the University of Virginia School of Law.
9
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of the record date, April
15, 2005, regarding beneficial stock ownership of (i) all persons known to the
Company to be beneficial owners of more than 5% of the outstanding common stock
(the only class of stock of the Company); (ii) each director, the Chief
Executive Officer, and the four highest paid executives of the Company other
than the CEO, and (iii) all officers and directors of the Company as a group.
Each of the persons in the table below has sole voting power and sole
dispositive power as to all of the shares shown as beneficially owned by them,
except as otherwise indicated.
Number of Shares Percent of
Beneficially Owned Outstanding
Name and Address (1) Shares (2)
----------------
Executive Officers and Directors
Anthony M. Pilaro............................................. 5,165,089(3) 45.92%
Gregg Coccari................................................. 410,000(4) 3.81%
Julian Feneley................................................ 10,085(5) *
Paul Dawson................................................... 81,336(6) *
Kenneth Czaja................................................. 30,000(7) *
Nhat Ngo...................................................... 33,506(8) *
Robert Sieban................................................. 24,750(9) *
Stephen Miller................................................ 43,205(10) *
Gerald A. Poch................................................ 818,637(11) 7.66%
R. Eric Montgomery............................................ 373,924(12) 3.51%
Bradford Peters............................................... 692,435(13) 6.47%
Harry Thompson................................................ 24,660(14) *
Peter Schechter............................................... 21,125(15) *
L. Tim Pierce................................................. 14,335(16) *
All Officers and Directors as a Group (13 persons)............ 7,743,087 65.18%
5% Beneficial Owners
LCO Investments Limited......................................... 5,165,089(3) 45.92%
Pequot Capital Management, Inc.................................. 818,637(17) 7.66%
Titab, LLC...................................................... 692,435(13) 6.47%
MicroCapital LLC................................................ 1,426,143(18) 13.45%
* Constitutes less than 1%.
(1) Includes options or warrants to purchase shares which are presently
exercisable or exercisable within 60 days of April 15, 2005.
(2) All percentages are calculated based upon the total number of shares
outstanding of 10,602,677 shares of the Company as of March 14, 2005, plus
the number of options or warrants presently exercisable or exercisable
within 60 days of April 15, 2005 by the named security holder.
(3) Includes 2,988,678 shares owned of record and beneficially by LCO
Investments Limited ("LCO"), 318,170 shares held indirectly through CAP
Properties Limited, a subsidiary of LCO and acting general partner of
Excimer Vision Leasing LP, 249,818 shares held directly through P de P Tech
Limited ("PdeP"), an affiliate of LCO, 4,500 shares held by AMP Trust, of
which Mr. Pilaro is a beneficiary, 533,335 shares held by LCP II Trust, of
which Mr. Pilaro's ex-wife is a beneficiary, 166,668 shares held by ACP II
Trust, of which one of Mr. Pilaro's adult sons not living in Mr. Pilaro's
household is a beneficiary, 166,668 shares held by CAP II Trust, of which
one of Mr. Pilaro's adult sons not living in Mr. Pilaro's household is a
beneficiary, 32,136 shares owned beneficially by CAP Advisers Limited
("CAP"), acting as co-trustee of various trusts, 7,500 shares held of record
by the CAP Charitable Foundation, 52,053 shares held of record and
beneficially by CAP, 11,670 warrants to purchase shares at $30.00 per share
held by LCO, 45,354 warrants to purchase shares at $7.61 held by LCO,
333,333 warrants to purchase shares at $6.00 per share held by LCO, 61,470
warrants to purchase shares at $2.40 per share held by LCO, 3,335 warrants
to purchase shares at $30 per share held by PdeP, 131,462 shares issuable
upon conversion of Senior Convertible Notes held by LCO, 43,821 shares
10
issuable upon conversion of Senior Convertible Notes that may be acquired
upon exercise of Additional Investment Rights held by LCO, and 15,118
warrants to purchase shares at $7.61 per share that may be acquired upon
exercise of Additional Investment Rights held by LCO. LCO is a wholly owned
subsidiary of the ERSE Trust. CAP Advisers Limited is a co-trustee of the
ERSE Trust. Mr. Pilaro, a director of the Company, is Chairman of CAP. Mr.
Pilaro disclaims beneficial ownership of the shares held by LCO, CAP
Properties Limited, P de P Tech Limited, AMP Trust, LCP II Trust, ACP II
Trust, CAP II Trust, the CAP Charitable Foundation, and CAP Advisers Limited
and the trusts indicated above of which CAP is co-trustee. Mr. Pilaro's
address is 36 Fitzwilliam Place, Dublin 2, Ireland. LCO's address is 7 New
Street, St. Peter Port, Guernsey, Channel Islands.
(4) Includes 240,000 shares owned of record, of which 160,000 are subject to
forfeiture until January 9, 2007 and 80,000 are subject to forfeiture until
January 9, 2007, and options to purchase 170,000 shares at $6.30 per share.
(5) Includes 3,585 shares owned of record, and options to purchase 3,500
shares at $12.75 per share, and 3,000 shares at $6.53 per share.
(6) Includes 33,334 shares owned beneficially and options to purchase 45,002
shares at $4.31 per share, and 3000 shares at $6.53 per share. Mr. Dawson's
address is 36 Fitzwilliam Place, Dublin 2, Ireland.
(7) Includes options to purchase 30,000 shares at $10.50 per share.
(8) Includes options to purchase 29,172 shares at $4.31, 3334 shares at
$10.50, and 1000 shares at $8.30 per share.
(9) Includes options to purchase 18,750 shares at $6.72 and 6,000 shares at
$9.72 per share. (10) Includes 1,370 shares owned beneficially, options to
purchase 31,668 shares at $16.50 per share, and
options to purchase 9,167 shares at $4.31 per share, and 1,000 shares
at $8.40 per share. (11) Includes 368,610 shares and warrants to purchase
29,759 shares at $30.00 per share held of record by
Pequot Private Equity Fund II, L.P., 184,308 shares and warrants to
purchase 14,880 shares at $30.00 per share held of record by Pequot
Partners Fund, L.P., 184,305 shares and warrants to purchase 14,880
shares at $30.00 per share held of record by Pequot International Fund,
Inc., 3,333 shares held of record by Pequot Scout Fund, L.P., (Pequot
Private Equity Fund II, L.P., Pequot Partners Fund, L.P., Pequot
International Fund, Inc. and Pequot Scout Fund, L.P. are referred to
collectively as the "Pequot Funds"). Includes options held by Mr. Poch
to purchase 3,335 shares at $55.50 per share, 5,892 shares at $30.00
per share, 3,335 shares at $1.98 per share, 3,500 shares at $10.86 per
share and 2,500 shares at $5.41 per share. Mr. Poch is a Managing
Director of Pequot Capital Management, Inc., which holds voting and
dispositive power for all shares held of record by the Pequot Funds and
may be deemed to beneficially own the shares held by the Pequot Funds.
Mr. Poch disclaims beneficial ownership of the shares held of record by
the Pequot Funds, except to the extent of his pecuniary interest
therein.
(12) Includes 322,387 shares owned beneficially, options to purchase 5,532
shares at $29.63 per share, 3,335 shares at $30.00 per share, 3,335
shares at $1.98 per share, 3,500 shares at $10.86 per share, 33,335
shares at $22.50 per share, and 2,500 shares at $5.41 per share.
(13) Includes 600,765 shares owned of record and beneficially, warrants to
purchase 60,342 shares at $2.40 per share, warrants to purchase 6,668
shares at $30.00 per share and options to purchase 3,655 shares at
$15.00 per share, 3,335 shares at $56.25 per share, 3,335 shares at
$1.98 per share, 3,335 shares at $30.00 per share and 3,500 shares at
$10.86 per share and 7,500 shares at $5.41 per share. Mr. Peters' and
Titab, LLC's address is 622 Third Avenue, 38th Floor, New York, New
York 10017.
(14) Includes options to purchase 3,335 shares at $56.25 per share, options
to purchase 3,655 shares at $15.00 per share, options to purchase 3,335
shares at $30.00 per share, options to purchase 3,335 shares at $1.98
per share, options to purchase 3,500 shares at $10.86 per share, and
options to purchase 7500 shares at $5.41 per share.
(15) Includes 5,120 shares owned beneficially in a Revocable Living Trust,
options to purchase 3,335 shares at $67.50 per share, options to
purchase 3,335 shares at $30.00 per share, options to purchase 3,335
shares at $1.98 per share, options to purchase 3,500 shares at $10.86
per share, and options to purchase 2500 shares at $5.41 per share. Mr.
Schechter's address is ? Chlopak, Leonard, Schechter & Assoc. 3021 O
Street, N.W., Washington, D.C. 20007.
11
(16) Includes options to purchase 3,335 shares at $1.98 per share, options
to purchase 3,500 shares at $10.86 per share, and options to purchase
7,500 shares at $5.41 per share. Mr. Pierce's address is ? SBI and
Company, 2625 E. Cottonwood Pkwy, Ste. 480, Salt Lake City, UT 84042.
(17) Includes 368,610 shares and warrants to purchase 29,755 shares at
$30.00 per share held of record by Pequot Private Equity Fund II, L.P.,
184,308 shares and warrants to purchase 14,878 shares at $30.00 per
share held of record by Pequot Partners Fund, L.P., 184,305 shares and
warrants to purchase 14,878 shares at $30.00 per share held of record
by Pequot International Fund, Inc., 3,333 shares held of record by
Pequot Scout Fund, L.P. Pequot Capital's address is 500 Nyala Farm
Road, Westport, CT 06880.
(18) Based on Schedule 13G and Form 3 filings with the SEC. Ian Ellis'
address is ? Microcapital LLC, 410 Jessie Street, Suite 1002, San
Francisco, CA 94103.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers, directors and persons who beneficially own more than 10
percent of a registered class of the Company's equity securities to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than 10 percent shareholders are
required by regulation of the Securities and Exchange Commission to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely upon the Company's review of the copies of such forms
furnished to it during the year ended December 25, 2004, and representations
made by certain persons subject to this obligation that such filings were not
required to be made, the Company believes that all reports required to be filed
by these individuals and persons under Section 16(a) were filed in a timely
manner, except as follows:
1. Form 4 report of Eric Montgomery filed January 20, 2004 to report a
transaction dated December 29, 2003. 2. Form 3 report of Julian Feneley filed
March 16, 2004 to report Dr. Feneley's becoming a reporting person
on December 17, 2003.
3. Form 4 report of Julian Feneley filed March 17, 2004 to report a transaction
dated April 20, 2003. 4. Form 4 report of Eric Montgomery filed September 13,
2004 to report a transaction dated September 9,
2003.
5. Form 4 report of Adam Flint filed October 1, 2004 to report a transaction
dated September 2, 2003. 6. Form 3 report of Robert Sieban filed October 5, 2004
to report Mr. Sieban's becoming a reporting person
on June 3, 2003.
7. Form 4 report of Robert Sieban filed October 5, 2004 to report a transaction
dated September 2, 2003. 8. Form 4 report of Paul Dawson filed February 7, 2005
to report a transaction dated December 14, 2004. 9. Form 4 report of Julian
Feneley filed February 8, 2005 to report a transaction dated December 14, 2004.
10. Form 4 reports of Ian Ellis filed June 14, 2004, July 23, 2004, December 22,
2004 and December 28, 2004
to report transactions dated June 9, 2004, July 20, 2004, December
17, 2004 and December 22, 2004, respectively.
Except as disclosed, the Company is not aware of any transactions in its
outstanding securities by or on behalf of any director, executive officer or 10
percent holder, which would require the filing of any report pursuant to Section
16(a) during the year ended December 25, 2004, that has not been filed with the
Securities and Exchange Commission.
12
EXECUTIVE COMPENSATION
The following Summary Compensation Table shows compensation paid by the
Company for services rendered during 2002, 2003 and 2004 to each person who
served as the Company's Chief Executive Officer during 2004, and to the
Company's four most highly compensated executive officers during 2004 in
addition to the Chief Executive Officers.
Long-Term
Annual Compensation Compensation
------------------------------ ---------------
Name and Principal Position Period Salary Bonus Securities Other
Underlying
Options
---------------------------------------------------- -------------- -------------- --------------- ---------------
John L. Reed (1)....................... 2004 $ 91,887 - 35,000 -
Chief Executive Officer 2003 239,636 - 41,667 -
2002 225,000 - - -
Bruce Fleming (2)...................... 2004 $ 397,479 $75,000 - -
Chief Executive Officer 2003 350,000 233,333 166,667 -
2002 175,000 - - -
Anthony Pilaro (3)..................... 2004 - - - -
Chief Executive Officer 2003 - - - -
2002 - - - -
Julian Feneley (4)..................... 2004 $ 216,923 - 18,500 $67,200 (5)
President 2003 - - - -
2002 - - - -
Paul Dawson............................ 2004 $265,596 $54,870 15,000 -
CEO, BriteSmile International Ltd. 2003 210,000 44,370 55,002 -
2002 191,667 - - -
Robert Sieban (6)...................... 2004 $ 207,692 $37,500 6,000 -
Executive Vice President 2003 107,692 - 31,250 -
BriteSmile Centers 2002 - - - -
Stephen Miller......................... 2004 $ 174,115 - 5,000 -
Executive Vice President 2003 150,000 - 9,167 -
Development and Real Estate 2002 150,000 - - -
(1) Mr. Reed served as Chief Executive Officer of the Company from June
1999 until April 2004.
(2) Mr. Fleming served as Chief Executive Officer of the Company from
April 2004 until August 2004.
(3) Mr. Pilaro served as Acting Chief Executive from August 2004 until
January 2005 without compensation.
(4) Dr. Feneley joined the Company in February 2004.
(5) Represents a housing allowance paid to Dr. Feneley by a related party.
(6) Mr. Sieban joined the Company in June, 2003.
13
OPTION/SAR GRANTS IN 2004
The following table lists individual grants of stock options made
during the Company's last completed year as compensation for services rendered
as an officer of the Company:
Individual Grants
-------------------------------------------------------------
Name Number of % of Total Exercise or Expiration Potential Realizable Value at
Securities Options/SARs
Underlying Granted to Assumed Annual Rates of Stock
Options/SARs Employees in Base Price Price Appreciation for Option
Granted FY 2004 ($/Share) Date Term (5)
------------------------------------------------------------------------------------------------------------------------
5% 10%
------------------------------------------------------------------------------------------------------------------------
John L. Reed.............. 35,000 (1) 15.7% $12.30 3/31/2007 $67,857.56 $142,495.50
Julian Feneley............ 3,500 (2) 1.6% 12.75 3/17/2014 28,064.42 71,120.76
15,000 (3) 6.7% 6.53 12/14/2014 61,600.23 156,107.07
Paul Dawson............... 15,000 (3) 6.7% 6.53 12/14/2014 61,600.23 156,107.07
Robert Sieban............. 6,000 (1) 2.7% 9.72 9/2/2014 36,677.13 92,947.06
Stephen Miller............ 5,000 (4) 2.3% 8.40 11/2/2014 26,413.57 66,937.18
(1) The option was fully exercisable on the grant date.
(2) The option became fully exercisable on September 17, 2004.
(3) The option becomes exercisable in five substantially equal annual
installments beginning on December 14, 2004.
(4) The option becomes exercisable in five substantially equal annual
installments beginning on November 2, 2004.
(5) The assigned rates of growth were selected by the SEC for illustrative
purposes only and are not intended to predict or forecast further
stock prices.
AGGREGATED OPTION EXERCISES IN LAST YEAR
AND DECEMBER 25, 2004 OPTION VALUES
Shares Number of Securities Value of Unexercised
Acquired on Value Underlying Unexercised In the Money Options at
Name Exercise (#) Realized ($) (1) Options at December 25, 2004 December 25, 2004 (2)
---- ------------ ----------------
Exercisable Unexercisable Exercisable Unexercisable
John L. Reed.......... - - 193,334 - $ 63,001 -
Bruce Fleming......... - - 100,000 - - -
Anthony Pilaro........ - - - - - -
Julian Feneley........ - - 6,500 55,167 - $79,859
Paul Dawson........... 10,000 $9,500 48,002 41,998 85,054 55,496
Robert Sieban......... - - 18,500 56,500 - 69,838
Stephen Miller........ - - 41,835 4,000 17,326 -
(1) Represents the amount realized upon sale of the underlying securities
minus the exercise price.
(2) Potential unrealized value is calculated as the fair market value at
December 23, 2004 ($6.20 per share), less the option exercise price,
times the number of shares.
Employment Contracts and Termination of Employment Arrangements
Certain of the Company's executive officers whose compensation is
required to be reported in the Summary Compensation Table are parties to written
employment agreements with the Company as follows:
Gregg Coccari
The Company entered into an employment agreement with Gregg Coccari on
January 9, 2005. The term of the employment agreement is five years, and the
term automatically extends for successive one-year periods unless either party
gives notice at least ninety days before the expiration of the employment term.
The Company pays Mr. Coccari an annual base salary of $350,000. In addition, Mr.
Coccari is eligible for incentive bonuses if certain targets are met. Mr.
Coccari was also granted 240,000 shares of restricted common stock, 80,000
shares of which vested upon grant, and 80,000 additional shares of which will
vest on each of the first and second anniversaries of the commencement of Mr.
14
Coccari's employment, provided that he continues his employment. In addition,
Mr. Coccari received options to purchase 600,000 shares of the Company's common
stock. Options to purchase 120,000 shares vested on the date of the agreement;
the remaining 480,000 options vest in equal monthly installments over four
years. Under the agreement, Mr. Coccari will perform his duties at the Company's
corporate headquarters in Walnut Creek, California. Mr. Coccari's employment
agreement provides the Mr. Coccari will receive a lump sum payment in an amount
equal to twelve months of his base salary plus his targeted bonus for such year
in the event that his employment is terminated without Cause (as defined
therein), and that if such termination without Cause occurs in contemplation of
or within one year following a Change in Control of the Company (as defined
therein), then Mr. Coccari will receive a lump sum payment in an amount equal to
two times Mr. Coccari's base salary plus targeted bonus.
Paul Dawson
BriteSmile International, Ltd. entered into an employment agreement
with Paul Dawson on April 19, 1999. Under the terms of the agreement, Mr. Dawson
has served as Chief Executive Officer of BriteSmile International, a
wholly-owned subsidiary of the Company. The Company pays Mr. Dawson
(euro)210,000 per year for his services. Mr. Dawson is eligible for a bonus
based on the number of paid teeth whitening procedures performed in a designated
international area. The bonus will be paid in cash and common stock of the
Company. In addition, Mr. Dawson received options to purchase 50,000 shares of
the Company's common stock at the closing price on the date of the agreement.
Options to purchase 16,667 shares vested on the date of the agreement. The
remaining 33,333 options vested in equal installments over five years.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The members of the Company's Compensation Committee during fiscal 2004
were Bradford Peters, Peter Schechter and Harry Thompson. No member of the
Company's Compensation Committee is a current or former officer or employee of
the Company or any of its subsidiaries, and no director or executive officer is
a director or executive officer of any other corporation that has a director or
executive officer who is also a director of the Company.
REPORT OF THE COMPENSATION COMMITTEE OF THE
BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
Preliminary Note: Notwithstanding anything to the contrary set forth in any of
the previous filings made by the Company under the Securities Act or the 1934
Act that might incorporate future filings, including, but not limited to, the
Company's Annual Report on Form 10-K for the 52 weeks ended December 25, 2004,
in whole or in part, the following Executive Compensation Report and the Stock
Performance Graph appearing herein shall not be deemed to be incorporated by
reference into any such future filings.
The Compensation Committee of the Board establishes and recommends
executive compensation levels to the Board of Directors. The Committee during
2004 consisted of Peter Schechter, Bradford Peters and Harry Thompson. This
Compensation Report discusses the Company's compensation policies and the basis
for the compensation paid to its executive officers (including the Named
Executive Officers), during the 52 weeks ended December 25, 2004.
The Committee is currently responsible for setting the Company's
policies regarding compensation and benefits, and administering the Company's
employee stock option and stock purchase plans. In particular, the Committee
evaluates the performance of management and determines the compensation and
benefits of executive officers.
15
Compensation Policy
The Committee's policy with respect to executive compensation has been
designed to:
o Adequately and fairly compensate executive officers in relation to
their responsibilities, capabilities and contributions to the Company
and in a manner that is commensurate with compensation paid by
companies of comparable size or within the Company's industry;
o Reward executive officers for the achievement of key operating
objectives and for the enhancement of the long-term value of the
Company; and
o Use equity-based incentives designed to motivate executives to focus
on long-term strategic objectives, to align the interests of
management and the stockholders, and to provide opportunities for
management to share in the benefits that they achieve for the
Company's stockholders.
The components of compensation paid to executive officers consist of:
(a) base salary, (b) incentive compensation in the form of stock options awarded
by the Company under the Company's Stock Option Plan, and (c) certain other
benefits.
Components of Compensation
The primary components of compensation paid to executive officers and
senior management personnel, and the relationship of these components of
compensation to the Company's performance, are discussed below:
o Base Salary. The Committee periodically reviews and approves the base
salary paid to executive officers and members of the Company's senior
management team. Adjustments to base salaries are determined based
upon a number of factors, including the Company's performance (to the
extent such performance can fairly be attributed or related to each
executive's performance), as well as the nature of each executive's
responsibilities, capabilities and contributions. In addition, the
Committee periodically reviews the base salaries of senior management
personnel in an attempt to ascertain whether those salaries fairly
reflect job responsibilities and prevailing market conditions and
rates of pay. The Committee believes that base salaries for the
Company's executive officers have historically been reasonable, when
considered together with other elements of compensation (such as stock
options and the bonus plans) in relation to the Company's size and
performance and in comparison with the compensation paid by similarly
sized companies or companies within the Company's industry.
o Incentive Compensation. As discussed above, a substantial portion of
each executive officer's compensation package is in the form of
incentive compensation designed to reward the achievement of key
operating objectives and long-term increases in shareholder value. The
Committee believes that the stock options granted under the Stock
Option Plan reward executive officers only to the extent that
shareholders have benefited from increases in the value of the common
stock. In establishing the size of an executive' opportunity for
incentive compensation, including bonus and stock options, the
Committee takes into account, in addition to general comparative
information, the individual performance of the executive and the
financial performance and strategic achievements of the Company during
the prior year, the executive's level of responsibility and potential
to influence or contribute to the Company's operations and direction,
and the quality of the executive's long-term strategic decisions made
during the year. The Committee generally does not base its
considerations on any single performance factor, nor does it
specifically assign relative weights to factors, but rather considers
a mix of factors and evaluates Company and individual performance
against that mix. To the extent that qualitative factors are involved
in the determination, the Committee must necessarily make a subjective
assessment of performance.
o Other Benefits. The Company maintains certain other plans and
arrangements for the benefit of its executive officers and members of
16
senior management. The Company believes these benefits are reasonable
in relation to the executive compensation practices of other similarly
sized companies or companies within the Company's industry.
Conclusion
The Committee believes that its policies further the shareholders'
interests because a significant part of executive compensation is based upon the
Company achieving its financial and other goals and objectives. At the same
time, the Committee believes that its policies encourage responsible management
of the Company in the short-term. The Committee regularly considers executive
compensation issues so that its practices are as effective as possible in
furthering shareholder interests.
The Committee bases its review on the experience of its own members, on
information requested from management personnel, and on discussions with and
information compiled by various independent consultants retained by the Company.
Respectfully submitted,
2004 Compensation Committee:
Peter Schechter
Bradford Peters
Harry Thompson
17
STOCK PERFORMANCE GRAPH
The following graph compares the yearly cumulative total returns from
the Company's common stock, the Total Return Index for the Nasdaq Stock Market,
and an industry graph for public companies engaged in the Medical Appliances and
Equipment line of business, as such industry information is monitored by Media
General Financial Services, Richmond Virginia.
[OBJECT OMITTED]
1999 2000 2001 2002 2003 2004
------- ------- -------- ---------- -------- -------
BriteSmile, Inc. 100.00 31.92 55.04 4.09 21.33 11.73
Medical Appliances/Equip. 100.00 144.26 137.29 130.09 165.88 188.32
Nasdaq Market Index 100.00 62.85 50.10 34.95 52.55 56.97
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Acquisition of Certain Human Oral Care Intellectual Property
In July 2003, BriteSmile Development Inc. ("BDI") entered into an Asset
Purchase Agreement (the "Purchase Agreement") with R. Eric Montgomery and
certain entities owned and controlled by him. Mr. Montgomery is a member of the
Board of Directors of the Company. He is also the founding Manager and President
of Oraceutical, LLC ("Oraceutical") and Oraceutical Innovative Properties
("OIP"), which have provided consulting services to the Company in the field of
human oral care. Pursuant to the Purchase Agreement, as subsequently amended in
November 2003, BDI acquired intellectual property consisting primarily of
18
certain United States and foreign patents, patent applications, continuations,
continuations-in-part, trade secrets, technologies, know-how, trademarks and
trade names relating to human oral care for a purchase price of $6.4 million,
plus a 50% participation interest in third party royalties and infringement
recoveries relating to the intellectual property acquired. A portion of the
purchase price included an obligation of the Company to pay $0.8 million to a
third party in $0.2 million quarterly installments beginning February 2004.
These payments were completed and the obligation was paid in full by December
2004.
Financing Arrangements for the Acquisition of Certain Human Oral Care
Intellectual Property
To finance a portion of the purchase price of the purchase of the human
oral care intellectual property described above, LCO Investments Limited ("LCO")
loaned $2.0 million to BDI under the terms of a promissory note due in May 2008.
LCO also received warrants to purchase 333,335 shares of common stock of the
Company at an exercise price of $6.00 per share in consideration of its
agreement to make the loans to BDI. In addition, the Company guaranteed BDI's
obligations under the promissory notes issued to LCO. The shares of common stock
underlying the warrants granted to LCO are subject to certain limited
"piggyback" registration rights in the event of future registered public
offerings of common stock sold by the Company. LCO is a major shareholder of the
Company. LCO is a wholly owned subsidiary of the ERSE Trust. CAP Advisers
Limited ("CAP") is a co-trustee of the ERSE Trust. Mr. Pilaro, a director and
Chairman of the Board of the Company, is Chairman of CAP.
Consulting Agreements with Oraceutical
In July 2003, BDI entered into a consulting agreement with OIP. R. Eric
Montgomery, a director of the Company, is the founding Manager and President of
OIP, which replaced a consulting agreement with Oraceutical that was terminated
in connection with the acquisition of the human oral care intellectual property
described above. BDI's consulting agreement with OIP provides for a five-year
term at a rate of $180,000 per year. Under the consulting agreement, Eric
Montgomery agreed to consult exclusively for BDI and the Company in the field of
human oral care. BDI will own all new intellectual property relating to human
oral care arising from work under the consulting agreement.
Fulfillment Services Agreement with Oraceutical
In 2004, the Company entered into an agreement with Oraceutical to
outsource the Company's whitening component and product fulfillment services to
Oraceutical beginning in 2005.
Repayment of November 2003 LCO Bridge Loan
In November 2003, the Company borrowed $2.0 million from LCO for
general working capital purposes. This bridge loan was repaid in full (with
accrued interest) and terminated on January 5, 2004 using proceeds from the $8.5
million private placement that closed in January 2004.
LCO Properties Sublease
On December 1, 1999, the Company, as sublessee, entered into an
Agreement of Sublease with LCO Properties, Inc., a Delaware corporation, as
lessor. LCO Properties, Inc. is affiliated with LCO, a major shareholder of the
Company. The Sublease covers approximately 4,821 square feet of space located in
New York City for one of the Company's teeth whitening Centers. The term of the
sublease is ten years with initial lease payments of $402,000 per year, subject
to increase in the event of increases in the rent payable under the primary
lease for the property between LCO Properties, Inc. and its lessor.
Harry Thompson Consulting Agreement
In August 1999, Harry Thompson, a member of the Company's Board of
Directors, agreed to provide marketing consulting services to the Company. In
consideration for Mr. Thompson's services to the Company, and pursuant to a
letter agreement dated August 17, 1999, LCO granted to Mr. Thompson the right to
purchase from LCO up to 16,668 shares of common stock of the Company at a price
of $9.00 per share. The option to purchase from LCO expired on August 31, 2004.
19
Public Relations Services Agreement
On April 7, 1999, the Company entered into a Letter Agreement with
Chlopak, Leonard, Schechter and Associates ("CLS"), a public relations firm in
Washington, D.C, pursuant to which CLS provided public relations advice and
served as communications counselors to the Company during 2003 for consideration
of $18,000 per month, plus expenses, from January to March and of $22,500 per
month, plus expenses, for the remainder of 2004. This relationship was
terminated as of February, 2005. Peter Schechter, a member of the Company's
Board of Directors, is one of three managing partners of CLS.
EVL Lease Agreement
The Company is party to an equipment lease in the amount of $15 million
with Excimer Vision Leasing L.P. ("EVL"), pursuant to which the Company leases
3,000 BS3000 whitening devices. Under the terms of the lease, the Company pays
(i) a fixed monthly payment of principal and interest of $75,000 and (ii)
variable rent payments equal to $25 per LATW procedure on the leased whitening
devices. Rental expense related to variable rent was $2.22 million, $2.22
million and $2.15 million for 2004, 2003 and 2002, respectively. In December
2003, the lease agreement was amended to provide that both the fixed and
variable rent portion of the monthly payment due beginning November 1, 2003
would be deferred and paid to EVL on February 15, 2005, with interest payable on
the deferred amount at a rate equal to LIBOR, plus 250 basis points. Prepayment
of these amounts in full or in part can be made without penalty. In August 2004,
the lease agreement was further amended to provide that the total rents deferred
under the November 2003 lease amendment would be deferred further and due as
follows: $1.0 million on February 15, 2005, which payment has been made; $1.0 on
February 15, 2006; and the remaining balance on February 15, 2007. As of
December 25, 2004, the unpaid variable rent was $2.5 million. Mr. Pilaro, the
Company's Chairman, serves as Chairman of EVL, and an affiliate of LCO owns 70%
of EVL.
EVL Loan Agreement
On March 1, 2001, the Company borrowed $2.5 million from EVL for
general working capital. The loan matures on May 10, 2006 and may be prepaid at
any time without penalty. Payments under the loan consist of fixed payments of
interest, variable payments of principal and interest and a final payment of
principal. For 2004, 2003, and 2002, variable payments totaled $568,000,
$718,000, and $717,000, respectively. This loan was repaid in full in August
2004.
CAP America Trust Center Loan
In May 2003, the Company borrowed $2.5 million from CAP America Trust,
of which $0.8 million was available for working capital expenditures and $1.7
million was available for specific revenue generating initiatives to be agreed
and defined by the Company and CAP America Trust. Interest on the loan is fixed
at 6%, payable monthly, with CAP America Trust having the right to reset the
interest rate to 200 basis points over 1-year LIBOR upon 30 days notice to the
Company. A variable fee payment based on the number of teeth whitening
procedures performed at Company-run teeth whitening Centers will commence on May
11, 2006 and continue until May 10, 2011. Variable fees will be due within 40
days after the end of the month in which the procedures are performed, except
for fees due for April/May 2011, which will be due on the maturity date. As of
December 25, 2004, $1.6 million has been drawn on the loan. CAP, identified
above, is a co-trustee of CAP America Trust.
McKinsey & Company Study
During 2004, CAP commissioned and paid for a marketing study related to
the Company performed by management consulting firm. The cost of the study was
recorded by the Company as an expense and an increase to Additional Paid-in
Capital.
December 2004 Convertible Notes, Warrants and Additional Investment Rights
In December 2004, the Company issued $12 million in Notes, and related
Warrants and Rights to six investors. Among the investors, LCO purchased $1.0
million of the Notes, Warrants and Rights. The Notes are repayable in 36 equal
monthly installments commencing in June 2006, and bear interest at an annual
rate equal to the greater of 5% or six-month LIBOR as of 2 business days prior
to the start of each quarterly interest period plus 3% with a maximum interest
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rate of 8% per annum. Principal and interest on the Notes is payable, at the
option of the Company, in cash or shares of the Company's common stock, subject
to certain limitations. The Notes are convertible into shares of the Company's
common stock at a per share conversion price of $7.61, subject to adjustment
from time to time upon the occurrence of certain other events described in the
Notes, including future issuances of common stock for consideration less than
the conversion price then in effect, stock splits or reverse stock splits, and
the occurrence of certain major corporate events such as mergers, sale of
assets, tender offers or exchange offers. The Warrants have a term of five years
and an exercise price of $7.61 per share, subject to adjustment upon certain
events specified in the Warrant, including the subsequent issuance by the
Company of shares of its common stock at prices lower than the original Warrant
exercise price. The Rights provide to the Investors the right to purchase
additional Notes and additional Warrants. The Rights are exercisable at any time
prior to the 180th trading day following the closing date of the transaction.
(See Proposal 4 - Ratification and Approval of Note, Warrant and Additional
Investment Rights Issuance.)
Housing Allowance for Dr. Feneley
Since May 2004, Cap provided a housing allowance to Dr. Feneley. The sum of
the payments, $67,000, was recorded by the Company as an expense and an increase
to Additional Paid-in Capital.
PROPOSAL 2 -- APPROVAL OF OPTION PLAN AMENDMENT
Effective March 9, 2005, the Company's Board of Directors adopted an
amendment (the "Option Plan Amendment") to the Company's Revised 1997 Stock
Option and Incentive Plan (the "Plan"). Pursuant to the Option Plan Amendment,
the aggregate number of shares of common stock of the Company available for
issuance under the Plan was increased from 1,500,000 shares to 1,900,000 shares.
The additional shares will be used for normal corporate purposes, including
grants to new and current officers, employees, directors and agents.
At the Annual Meeting, the Company's shareholders will be asked to
ratify and approve the Option Plan Amendment in the form of Exhibit A to this
Proxy Statement, and the Board of Directors is soliciting the enclosed proxy as
to that decision. The Shareholders are not being asked to approve the Plan in
its entirety, but are only being asked to approve the Option Plan Amendment.
The Plan permits the award of incentive stock options to key employees,
and permits the award of non-qualified stock options, stock appreciation rights,
cash and stock bonuses, and other incentive grants to key employees, directors,
officers, agents and consultants who have important relationships with the
Company or its subsidiaries. Presently there are over 95 employees who are
eligible to participate in the Plan. The Plan was initially adopted by the Board
of Directors effective as of January 31, 1997. Subsequently, the Plan was
amended by action of the directors and shareholders of the Company, resulting in
the current number of shares available under the Plan of 1,500,000.
The principal provisions of the Plan are summarized below. A copy of
the Option Plan Amendment is attached to this Proxy Statement as Exhibit A. The
summary that follows is not intended to be complete and reference should be made
to the Plan for a complete statement of its terms and provisions.
Administration
The Plan is administered by the Board of Directors of the Company, or a
Committee appointed by the Board consisting solely of two or more non-employee
directors. The Board has directed that the Compensation Committee will act as
the "Plan Committee". The Plan Committee will determine and designate the
individuals and classes of individuals to whom awards under the Plan should be
made and the amount, terms and conditions of the awards. The Plan Committee may
adopt and amend rules relating to the administration of the Plan. The Plan is
intended to comply with, and will be administered in accordance with, Rule 16b-3
adopted under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), and the regulations thereto.
21
Eligibility
Awards under the Plan may be made to directors, officers, or key
employees of the Company and its subsidiaries, and to nonemployee agents,
consultants, advisors, and other persons whom the Plan Committee believes have
made or will make an important contribution to the Company or any subsidiary
thereof, subject to Section 422 of the Code, which limits the grant of
"Incentive Stock Options" to executive officers and other senior managerial and
professional employees.
Shares Available
If the Option Plan Amendment is approved by the shareholders at the
Annual Meeting and subject to adjustment as provided in the Plan, and as amended
to date, a maximum of 1,900,000 shares of the Company's common stock is reserved
for issuance thereunder. If an option or stock appreciation right granted under
the Plan expires or is terminated or canceled, the unissued shares subject to
such option or stock appreciation right are again available under the Plan. In
addition, if shares sold or awarded as a bonus under the Plan are forfeited to
the Company or repurchased by the Company, the number of shares forfeited or
repurchased are again available under the Plan. In the absence of an effective
registration statement under the Securities Act of 1933, as amended (the "Act"),
all shares granted under the Plan will be restricted as to subsequent resales or
transfer, pursuant to Rule 144 under the Act.
Term
Unless earlier terminated by the Plan Committee, the Plan will continue
in effect until the earlier of: (i) January 31, 2007, and (ii) the date on which
all shares available for issuance under the Plan have been issued and all
restrictions on such shares have lapsed. Options or awards outstanding at the
date of the Plan termination will not be cancelled or otherwise affected by
termination of the Plan. The Plan Committee may suspend or terminate the Plan at
any time except with respect to options, and shares subject to restrictions,
then outstanding under the Plan.
Stock Option Grants
The Plan Committee may grant Incentive Stock Options ("ISOs") and
Non-Statutory Stock Options ("NSOs") under the Plan. With respect to each option
grant, the Plan Committee will determine the number of shares subject to the
option, the option price, the period of the option, the time or times at which
the option may be exercised (including whether the option will be subject to any
vesting requirements and whether there will be any conditions precedent to
exercise of the option), and the other terms and conditions of the option. The
Plan specifies, however, that 6 months must elapse from the date of grant of the
options to the date of disposition by the option holder of the shares of common
stock underlying the option. Unless otherwise provided in the option grant
agreement, options granted under the plan expire six months after the
termination of the option holder's employment for reasons other than permanent
disability, retirement, death, or termination for cause.
ISOs are subject to special terms and conditions. The aggregate fair
market value, on the date of the grant, of the common stock for which an ISO is
exercisable for the first time by the optionee during any calendar year may not
exceed $100,000. An ISO may not be granted to an employee who possesses more
than 10% of the total voting power of the Company's stock unless the option
price is at least 110% of the fair market value of the common stock subject to
the option on the date it is granted, and the option is not exercisable for 5
years after the date of grant. No ISO may be exercisable after 10 years from the
date of grant. The option price may not be less than 100% of the fair market
value of the common stock covered by the option at the date of grant.
In connection with the grant of NSOs or ISOs, the Plan Committee may
issue "Reload Options", which allow employees to receive options to purchase
that number of shares that shall equal (i) the number of shares of common stock
used to exercise underlying NSOs or ISOs, and (ii) the number of shares of
common stock used to satisfy any tax withholding requirement incident to the
exercise of the underlying NSOs or ISOs.
Unless provided otherwise by the Plan Committee in connection with a
particular option grant, no vested option may be exercised unless at the time of
such exercise the holder of such option is employed by or in the service of the
Company or any subsidiary thereof, within three (3) years following termination
of employment by reason of death, retirement, or disability, and within six (6)
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months following termination for any other reason, except for cause, in which
case all unexercised options shall terminate forthwith. No shares may be issued
pursuant to the exercise of an option until full payment therefor has been made.
Upon the exercise of an option, the number of shares reserved for issuance under
the Plan will be reduced by the number of shares issued upon exercise of the
option.
Stock Appreciation Rights
Two types of Stock Appreciation Rights ("SARs") may be granted under
the Plan: "Alternate SARs" and "Limited Rights." Alternate SARs are granted
concurrently with or subsequent to stock options, and permit the option holder
to be paid, in common stock, the excess of the fair market value of each share
of common stock underlying the stock option at the date of exercise of the
Alternate SARs over the fair market value of each share of common stock
underlying the option at the grant date. The exercise of Alternate SARs shall be
in lieu of the exercise of the stock option underlying the SARs, and upon such
exercise a corresponding number of stock options shall be canceled. Alternate
SARs are exercisable upon the same terms and conditions as are applicable to the
options underlying them. Upon the exercise of an Alternate SAR, the number of
shares reserved for issuance under the Plan will be reduced by the number of
shares issued.
Limited Rights may be issued concurrently with or subsequent to the
award of any stock option or Alternate SAR under the Plan. Limited Rights allow
the holder thereof to be paid appreciation on the stock option or the amount of
appreciation receivable upon exercise of an Alternate SAR in cash and in lieu of
exercising such options or rights. Limited Rights are exercisable only to the
same extent and subject to the same conditions and within the same time periods
as the stock options or Alternate SARs underlying such Limited Rights; provided,
however, that Limited Rights may not be exercised under any circumstances until
the expiration of 6 months following the date of grant. Limited Rights are
exercisable in full for a period of seven months following a change in control
of the Company. Upon the exercise of Limited Rights, the stock options or
Alternate SARs underlying such Limited Rights shall terminate. Cash payments
upon the exercise of Limited Rights will not reduce the number of shares of
common stock reserved for issuance under the Plan. No SARs have been granted
under the Plan.
Stock Bonus Awards
The Plan Committee may award shares of common stock as a stock bonus
under the Plan. The Plan Committee may determine the recipients of the awards,
the number of shares to be awarded, and the time of the award. Stock received as
a stock bonus is subject to the terms, conditions, and restrictions determined
by the Plan Committee at the time the stock is awarded. No stock bonus awards
have been granted under the Plan.
Cash Bonus Rights
The Plan Committee may grant cash bonus rights under the Plan either
outright or in connection with (i) options granted or previously granted, (ii)
SARs granted or previously granted, (iii) stock bonuses awarded or previously
awarded, and (iv) shares issued under the Plan. Bonus rights granted in
connection with options entitle the optionee to a cash bonus if and when the
related option is exercised. The amount of the bonus is determined by
multiplying the excess of the total fair market value of the shares acquired
upon the exercise over the total option price for the shares by the applicable
bonus percentage. Bonus rights granted in connection with an SAR entitle the
holder to a cash bonus when the SAR is exercised, that is determined by
multiplying the amount received upon exercise of the SAR by the applicable bonus
percentage. Bonus rights granted in connection with stock bonuses entitle the
recipient to a cash bonus, in an amount determined by the Plan Committee, either
at the time the stock bonus is awarded or upon the lapse of any restrictions to
which the stock is subject. No bonus rights have been granted under the Plan.
Non-Assignability of Plan Awards
No award under the Plan shall be assignable or transferable by the
recipient thereof, except by will or the laws of descent or pursuant to a
qualified domestic relations order as defined in the Code.
23
Changes in Capital Structure
The Plan provides that if the outstanding common stock of the Company
is increased or decreased or changed into or exchanged for a different number or
kind of shares or other securities of the Company or of another corporation by
reason of any recapitalization, stock split or certain other transactions,
appropriate adjustment will be made by the Plan Committee in the number and kind
of shares available for grants under the Plan. In addition, the Plan Committee
will make appropriate adjustments in the number and kind of shares as to which
outstanding options will be exercisable. In the event of a merger, consolidation
or other fundamental corporate transformation, the Board may, in its sole
discretion, permit outstanding options to remain in effect in accordance with
their terms; to be converted into options to purchase stock in the surviving or
acquiring corporation in the transaction; or to be exercised, to the extent then
exercisable, during a period prior to the consummation of the transaction
established by the Plan Committee or as may otherwise be provided in the Plan.
Tax Consequences
The following description addresses the federal income tax consequences
of the Plan. Although the Company believes the following statements are correct
based on existing provisions of the Code and legislative history and
administrative and judicial interpretations thereof, no assurance can be given
that changes will not occur which would modify such statements. Also, such
statements are intended only to provide basic information. Each Plan participant
should consult his or her own tax advisor concerning the tax consequences of
participation in the Plan because individual financial and federal tax
situations may vary, and state and local tax considerations may be significant.
Certain options authorized to be granted under the Plan are intended to
qualify as ISOs for federal income tax purposes. Under federal income tax law
currently in effect, the optionee will recognize no income upon grant or
exercise of the ISO. If an employee exercises an ISO and does not dispose of any
of the option shares within two years following the date of grant and within one
year following the date of exercise, then any gain realized upon subsequent
disposition of the shares will be treated as income from the sale or exchange of
a capital asset held for more than one year. If an employee disposes of shares
acquired upon exercise of an ISO before the expiration of either the one-year
holding period or the two-year waiting period, any amount realized will be
taxable as ordinary compensation income in the year of such disqualifying
disposition to the extent that the lesser of the fair market value of the shares
on the exercise date or the fair market value on the date of disposition exceeds
the exercise price. The Company will not be allowed any deduction for federal
income tax purposes at either the time of the grant or the exercise of an ISO.
Upon any disqualifying disposition by an employee, the Company will generally be
entitled to a deduction to the extent the employee realized ordinary income.
Certain options authorized to be granted under the Plan will be treated
as NSOs for federal income tax purposes. Under federal income tax law presently
in effect, no income is realized by the grantee of an NSO until the option is
exercised. When the NSO is exercised, the optionee will realize ordinary
compensation income, and the Company will generally be entitled to a deduction,
in the amount by which the market value of the shares subject to the option at
the time of exercise exceeds the exercise price. Upon the sale of shares
acquired upon exercise of an NSO, the excess of the amount realized from the
sale over the market value of the shares on the date of exercise will be
taxable.
An employee who receives stock in connection with the performance of
services will generally realize income at the time of receipt unless the shares
are not substantially vested for purposes of Section 83 of the Code and no
election under Section 83(b) of the Code is filed within 30 days after the
original transfer. The Company generally will be entitled to a tax deduction in
the amount includable as income by the employee at the same time or times as the
employee recognizes income with respect to the shares. The Company is required
to withhold employment taxes on the amount of the income the employee
recognizes. A participant who receives a cash bonus right under the Plan
generally will recognize income equal to the amount of any cash bonus paid at
the time of receipt of the bonus, and the Company generally will be entitled to
a deduction equal to the income recognized by the participant.
Section 162(m) of the Code limits to $1 million per person the amount
the Company may deduct for compensation paid to any of its most highly
compensated officers in any year after 1993. Under proposed regulations,
compensation received through the exercise of an option or SAR will not be
24
subject to the $1 million limit if the option or SAR and the plan pursuant to
which it is granted meet certain requirements. The currently applicable
requirements are that the option or SAR be granted by a committee of at least
two disinterested directors and that the exercise price of the option or the SAR
be not less than fair market value of the common stock on the date of grant.
Accordingly, the Company believes compensation received on exercise of options
and SARs granted under the Plan in compliance with the above requirements will
not be subject to the $1 million deduction limit.
Amendments to Plan
The Plan Committee may at any time and from time to time terminate or
modify or amend the Plan in any respect, including in response to changes in
securities, tax or other laws or rules, regulations or regulatory
interpretations thereof applicable to the Plan or to comply with stock exchange
rules or requirements.
New Plan Benefits
The following awards have been granted to the Named Executive Officers
and to the Company's other executive officers, the shares underlying a portion
of which are being made available under the Option Plan Amendment.
Executive Officer Stock Options
----------------- -------------
Gregg Coccari................................. -
Julian Feneley................................ 43,167
Paul Dawson................................... 29,998
Robert Sieban................................. 37,750
Stephen Miller................................ -
Executive Group............................... 141,743
Non - Executive Director Group................ -
Non - Executive Officer Employee Group........ -
Other awards to be issued pursuant to the Plan, as amended by the
Option Plan Amendment, and the value of the awards to the participants will
depend on the Plan Committee's actions and the fair market value of the
Company's Common Stock at various future dates. Therefore, except as stated
above, the Company cannot determine the benefits that its directors, executive
officers and other employees will receive in the future if the Option Plan
Amendment is approved.
Equity Compensation Plan Information (as of March 26, 2006):
Number of Securities
remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
Plan category warrants, and rights warrants, and rights reflected in Column (a))
------------------------------------------------------------ -------------------------- ------------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders
(the Revised 1997 Stock Option 1,500,000 $11.15 -0-
Plan)
Equity compensation plans not
approved by security holders
(Agreements outside the 1997
Option Plan) 706,672 $11.09 -0-
--------------------------- -------------------------- ------------------------------
Total 2,206,672
THE BOARD RECOMMENDS SHAREHOLDER APPROVAL OF THE AMENDMENT TO THE 1997
STOCK OPTION PLAN IN THE FORM ATTACHED TO THIS PROXY STATEMENT AS EXHIBIT
A.
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PROPOSAL 3 -- APPROVAL OF CHARTER AMENDMENT
The Charter Amendment
At the Annual Meeting, shareholders will be asked to consider and
approve an amendment to the Company's Articles of Incorporation in the form of
Articles of Restatement of Articles of Incorporation attached to this Proxy
Statement as Exhibit B to create 5,000,000 shares of "blank check" preferred
stock of the Company. The Board of Directors has approved, and recommends that
shareholders approve, the Charter Amendment.
Purpose of the Amendment
The purpose of the Charter Amendment is to provide the Company with
increased financial flexibility in meeting future capital requirements by
providing another type of security in addition to its shares of common stock, as
it will allow shares of preferred stock to be available for issuance from time
to time for such consideration and with such features as are determined by the
Board of Directors for any proper corporate purpose. It is anticipated that such
purposes may include, among others, issuances for cash as a means of raising
capital if and when necessary and issuance as part or full consideration in
acquisitions of other business or assets.
Terms of Blank Check Preferred Stock
The Charter Amendment will authorize and create 5,000,000 shares of
"blank check" preferred stock. The following summary of the Charter Amendment
and its impact on the Company does not purport to be complete and is qualified
in its entirety by reference to the proposed Charter Amendment as set forth in
Exhibit B.
The term "blank check" refers to preferred stock, the creation and
issuance of which is authorized in advance by the shareholders of the Company
and the terms, rights and features of which are determined by the board of
directors of the Company upon issuance. The authorization of the blank check
preferred stock would permit the board of directors to authorize and issue
preferred stock from time to time in one or more series.
Subject to the provisions of the Company's Amended and Restated
Articles of Incorporation, as amended by the Charter Amendment, and the
limitations prescribed by law, the board of directors would be expressly
authorized, in its discretion, to adopt resolutions to issue shares, to fix the
number of shares and to change the number of shares constituting any series, and
to provide for or change the voting powers, designations, preferences and
relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights (including
whether the dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions), redemption prices, conversion rights and
liquidation preferences of the shares constituting any series of the preferred
stock, in each case without any further action or vote by the shareholders. The
board of directors would be required to make any determination to issue shares
of preferred stock based on its judgment as to the best interests of the Company
and its shareholders. The Charter Amendment will give the board of directors
flexibility, without further shareholder action, to issue preferred stock on
such terms and conditions as the board of directors deems to be in the best
interests of the Company and its shareholders.
Any issuance of preferred stock with voting rights could, under certain
circumstances, have the effect of delaying or preventing a change in control of
the Company by increasing the number of outstanding shares entitled to vote and
by increasing the number of votes required to approve a change in control of the
Company. Shares of voting or convertible preferred stock could be issued, or
rights to purchase such shares could be issued, to render more difficult or
discourage an attempt to obtain control of the Company by means of a tender
offer, proxy contest, merger or otherwise. The ability of the board of directors
to issue such additional shares of preferred stock, with the rights and
preferences it deems advisable, could discourage an attempt by a party to
acquire control of the Company by tender offer or other means. Such issuances
could therefore deprive shareholders of benefits that could result from such an
attempt, such as the realization of a premium over the market price that such an
attempt could cause. Moreover, the issuance of such additional shares of
preferred stock to persons friendly to the board of directors could make it more
difficult to remove incumbent managers and directors from office even if such
change were to be favorable to shareholders generally.
While the Charter Amendment may have anti-takeover ramifications, the
board of directors believes that the financial flexibility offered by the
amendment outweighs any disadvantages. To the extent that the Charter Amendment
26
may have anti-takeover effects, it may encourage persons seeking to acquire the
Company to negotiate directly with the board of directors enabling the board of
directors to consider the proposed transaction in a manner that best serves the
shareholders' interests.
The terms of any preferred stock issued by the Board of Directors have
not been determined at this time and will not be until issuance. Holders of
common stock, however, would likely be junior to the holders of the preferred
stock in the event of a liquidation, dissolution or winding up of the Company
and distribution of the Company's assets and/or the payment of dividends.
THE CHARTER AMENDMENT MEANS THAT THE COMPANY WILL HAVE SHARES OF
PREFERRED STOCK AVAILABLE FOR ISSUANCE. SHAREHOLDERS DO NOT HAVE ANY PREEMPTIVE
OR SIMILAR RIGHTS TO SUBSCRIBE FOR OR PURCHASE ANY SHARES OF PREFERRED STOCK
THAT MAY BE ISSUED IN THE FUTURE, AND THEREFORE, FUTURE ISSUANCES OF PREFERRED
STOCK MAY, DEPENDING ON THE CIRCUMSTANCES, HAVE A DILUTIVE EFFECT ON THE
EARNINGS PER SHARE, VOTING POWER AND OTHER INTERESTS OF THE EXISTING
SHAREHOLDERS.
No Dissenters' Rights
Under the laws of the State of Utah, the Company's shareholders are not
entitled to dissenters' rights with respect to the Charter Amendment, and the
Company will not independently provide shareholders with any such right.
THE BOARD RECOMMENDS SHAREHOLDER APPROVAL OF THE CHARTER AMENDMENT IN THE
FORM OF ARTICLES OF RESTATEMENT OF ARTICLES OF INCORPORATION ATTACHED TO
THIS PROXY STATEMENT AS EXHIBIT B.
PROPOSAL 4--RATIFICATION AND APPROVAL OF NOTE, WARRANT AND
ADDITIONAL INVESTMENT RIGHTS ISSUANCE
THE SHAREHOLDERS ARE BEING ASKED TO RATIFY AND APPROVE THE ISSUANCE BY
THE COMPANY OF (A) SENIOR CONVERTIBLE NOTES OF THE COMPANY, WHICH ARE
CONVERTIBLE INTO AN AGGREGATE OF 1,577,545 SHARES OF THE COMPANY'S COMMON STOCK,
(B) WARRANTS TO PURCHASE UP TO AN AGGREGATE OF 544,253 SHARES OF THE COMPANY'S
COMMON STOCK, (C) ADDITIONAL INVESTMENT RIGHTS TO PURCHASE ADDITIONAL SENIOR
CONVERTIBLE NOTES AND WARRANTS THAT WOULD BE CONVERTIBLE OR EXERCISABLE FOR UP
TO AN AGGREGATE OF 707,266 ADDITIONAL SHARES OF THE COMPANY'S COMMON STOCK AND
(D) WARRANTS TO PURCAHSE 28,291 SHARES OF COMMON STOCK THE COMPANY GRANTED TO
ITS PLACEMENT AGENT IN THE TRANSACTION.
THE TERMS OF THE NOTES AND WARRANTS PROVIDE THAT PRINCIPAL AND INTEREST
ON THE NOTES MAY BE PAYABLE IN SHARES OF THE COMPANY'S COMMON STOCK AND THAT THE
CONVERSION RATIO OF THE NOTES AND THE EXERCISE PRICE OF THE WARRANTS WILL BE
ADJUSTED IF SPECIFIED EVENTS OCCUR. IF INTEREST AND/OR PRINCIPAL ON THE NOTES IS
PAID IN SHARES OF COMMON STOCK AND/OR AN ADJUSTMENT OCCURS AND THE NOTES ARE
CONVERTED AND THE WARRANTS ARE EXERCISED, THE COMPANY MAY ISSUE MORE THAN 20% OF
THE TOTAL NUMBER OF SHARES OF THE COMPANY'S COMMON STOCK ISSUED AND OUTSTANDING
PRIOR TO THE COMMENCEMENT OF THE TRANSACTION.
The Note and Warrant Offering
On December 16, 2004, the Company completed the issuance and sale of
(a) Senior Convertible Notes of the Company due in five years (the "Notes") in
the aggregate principal amount of $12,000,000, which are convertible into an
aggregate of 1,577,545 shares of the Company's common stock, (b) warrants to
purchase up to an aggregate of 544,253 shares of the Company's common stock (the
"Warrants") and (c) Additional Investment Rights (the "Rights") to purchase
additional Notes and Warrants, which would be convertible or exercisable for up
27
to an aggregate of 707,266 additional shares of the Company's common stock. The
issuance of the Notes, Warrants and Rights occurred pursuant to a Securities
Purchase Agreement ("Purchase Agreement") with six investors ("Investors"), one
of whom had previously been affiliated with the Company, its executive officers
and directors.
Five of the Investors, who purchased a total of $11,000,000 principal
amount of the Notes, were unaffiliated with the Company prior to their
investment. LCO Investments Limited, a principal stockholder of the Company
affiliated with Anthony Pilaro, Chairman of the Company's Board of Directors,
purchased an aggregate amount of $1,000,000 of the Notes.
Warrants to purchase 28,291 shares of the Company's common stock were
also issued to the placement agent in the transaction.
Terms and Conditions of the Notes
The principal amount of the Notes is payable by the Company in 36 equal
monthly installments commencing on June 16, 2006. The Notes bear interest on the
unpaid principal balance at the rate per annum equal to the greater of 5% or
six-month LIBOR as of 2 business days prior to the start of each quarterly
interest period, plus 3%, with a maximum interest rate of 8% per annum. Interest
on the Notes is payable on the last day of March, June, September and December
during the term of the Notes.
Principal and Interest on the Notes is payable, at the option of the
Company, in cash or shares of the Company's common stock; however, the Company
may not pay principal or interest by issuing shares of common stock unless (1)
the number of shares of common stock offered for payment does not exceed the
cumulative share volume for the 20 trading days prior to the later of the date
the Company has elected to make the payment in shares of common stock or 30 days
prior to the applicable payment date and (2) each of the following conditions
are then satisfied with respect to all shares of common stock then issuable upon
conversion of all outstanding Notes:
o the number of authorized but unissued and otherwise unreserved shares
of common stock is sufficient for such issuance;
o the common stock is registered for resale by, and may be sold by, the
holder pursuant to an effective registration statement or pursuant to
Rule 144(k) under the Securities Act of 1933, as amended, without
volume limitations;
o the common stock is listed or quoted (and is not suspended from
trading) on the New York Stock Exchange, the American Stock Exchange,
the Nasdaq National Market or the Nasdaq SmallCap Market and the
shares to be issued in such payment are approved for listing upon
issuance;
o the issuance would be permitted in full without violating the
restrictions on conversion described below or the rules or regulations
of any trading market;
o the Company is not then involved in bankruptcy proceedings in
violation of the Note or Purchase Agreement;
o the Company is not in default with respect to any material obligation
under the Note or any other transaction document entered into in
connection with the financing transaction; and
o no public announcement of a pending or proposed change of control
transaction has occurred that has not been consummated.
Under the terms of the Notes, if the Company is required to pay
interest in cash on any interest payment date but fails to do so, the Investor
holding the Note may (but is not required to) treat such interest as if it had
been added to the principal amount of the Investor's Note as of the interest
payment date or accept any number of shares of common stock in lieu of the
interest payment. The value of the Company's common stock that is used to pay
principal or interest under the Notes will be 93% of the volume weighted average
trading price for the Company's common stock for the 20 trading days prior to
the applicable payment date.
28
The Company must deliver written notice to the applicable Investor
indicating the manner in which it intends to pay interest and principal at least
30 days prior to each interest payment date or principal payment date, as
applicable (but the Company may indicate in the notice that its election will
continue for subsequent payment dates until revised). If the Company fails to
timely provide written notice, it will be deemed to have elected to make the
applicable payment in cash.
The Notes are convertible into shares of the Company's common stock at
a per share conversion price of $7.61, which is 115% of $6.61, the volume
weighted average trading price of the Company's common stock during the ten
trading day period immediately prior to December 16, 2004, the closing date of
the transaction. On December 16, 2004, the closing sales price of the Company's
common stock as quoted on Nasdaq was $6.75.
The conversion price of the Notes is subject to adjustment downward
from time to time if the Company issues shares of common stock or rights,
warrants, options or other securities or debt convertible, exercisable or
exchangeable for shares of common stock at any time while a Note is outstanding
and unpaid at a purchase price less than the conversion price then in effect, in
which case the conversion price then in effect will be reduced to the purchase
price received by the Company in the issuance. The conversion price is also
subject to adjustment from time to time upon the occurrence of certain other
events described in the Notes and Warrants, including, stock splits or reverse
stock splits, and the occurrence of certain major corporate events such as
mergers, sale of assets, tender offers or exchange offers.
Notwithstanding the foregoing, the Notes limit the number of shares of
common stock that may be issued upon conversion of any Note to the extent
necessary to insure that, following such conversion, the total number of shares
of common stock beneficially held by such Investors, individually, would not
exceed 4.999% of the total number of issued and outstanding shares of common
stock of the company.
Pursuant to the Purchase Agreement, the Company also agreed to register
with the Securities and Exchange Commission, within 45 days after the closing
date of the transaction, the shares of common stock underlying the conversion
of, or issuable as payment of principal or interest in connection with, the
Notes, Warrants and Rights for resale under the Securities Act of 1933, as
amended. The Company has filed the Registration Statement. The Registration
Statement was declared effective by the Securities and Exchange Commission in
February 2005.
Terms and Conditions of the Warrants
Each Investor and the placement agent in the transaction also received
Warrants to purchase shares of common stock of the Company. Pursuant to the
Purchase Agreement, the number of shares of common stock issuable upon the
exercise of the Investors' Warrants was 544,253 at the closing of the
transaction. The placement agent received Warrants to purchase 28,291 shares of
common stock.
The Warrants have a term of five years and an exercise price of $7.61
per share. The exercise price of the Warrants equals 115% of the volume weighted
average trading price of the Company's common stock during the ten trading day
period immediately prior to December 16, 2004, the closing date of the
transaction. The exercise price of the Warrants is subject to adjustment upon
certain events specified in the Warrant, including the subsequent issuance by
the Company of shares of its common stock at prices lower than the original
Warrant exercise price.
Terms and Conditions of the Additional Investment Rights
In connection with the issuance of the Notes and the Warrants, the
Investors also received the Rights. The Rights provide to the Investors the
right to purchase additional Notes up to an aggregate principal amount of
$4,000,000, which would convert into up to an additional 525,848 shares of
common stock, and additional Warrants to purchase up to an additional 181,418
shares of common stock. The Rights were issued to the Investors pro rata in
accordance with the principal amount of each Investor's Note. The Rights are
exercisable at any time prior to the 180th trading day following the closing
date of the transaction by delivery of an exercise notice and payment of the
principal amount of the additional Notes being purchased.
Copies of the Purchase Agreement, together with the form of Notes,
Warrants and Rights issued to the Investors, are included as exhibits to the
Company's Current Report on Form 8-K filed with the Commission on December 21,
2004.
29
As of the date of this Proxy Statement, none of the Notes has been
converted into shares of common stock, none of the Warrants has been exercised
and none of the Rights have been exercised for additional Notes or Warrants.
Use of Proceeds
The Company has used and intends to use the net proceeds from the Note,
Warrant and Right Offering to fund ongoing business expansion, including the
establishment of additional Whitening Centers and Associated Centers, and other
general working capital purposes.
Interest of Certain Persons in Matters Acted Upon
One of the six investors in the Notes, Warrants and Rights was LCO
Investments Limited, which currently owns approximately 48.7% of the Company's
outstanding common stock. Anthony Pilaro, Chairman of the Company's Board of
Directors, is the Chairman of CAP Advisors Limited, which is a co-trustee of the
ERSE Trust. LCO is a wholly owned subsidiary of the ERSE Trust.
Nasdaq Shareholder Approval Requirement
The Company's common stock is quoted on the Nasdaq Small Cap Market.
Because of that listing, the Company is contractually obligated to comply with
applicable rules of the Nasdaq Stock Market. Nasdaq Stock Market Rule
4350(i)(1)(D) requires shareholder approval for the issuance of shares of common
stock in a transaction or series of transactions involving, among other types of
transactions, the sale or issuance by the issuer of common stock (or securities
convertible into or exercisable for common stock) equal to 20% or more of the
common stock or 20% or more of the voting power outstanding before the issuance
for less than the greater of book or market value of the stock. The conversion
of all or substantially all of the aggregate amount of the Notes, or the payment
of the principal and interest on the Notes in the form of shares of common stock
of the Company, together with the issuance of the shares of common stock
issuable upon exercise of the Warrants, would result in the issuance by the
Company of more than 20% of the common stock outstanding before the Purchase
Agreement was executed.
In view of the perceived advantages to the Company and its shareholders
of proceeding with the Note and Warrant Issuance, the Board did not propose that
approval of the Note and Warrant Issuance be submitted to a vote by shareholders
unaffiliated with the Company. The Nasdaq Market Rules which require shareholder
approval of the potential issuance of the common stock underlying the Notes and
Warrants do not require submission of the matter to a vote of disinterested
shareholders only. Neither is a vote of disinterested minority shareholders
required by the Company's Articles or Bylaws, nor by the Utah Business
Corporations Act. The directors believe that the terms of the Note and Warrant
Issuance are fair to the Company and its shareholders, and are in keeping with
the directors' fiduciary obligations to the Company's minority shareholders.
In recognition of the forgoing requirements of the Nasdaq Stock Market,
the Company agreed under the Purchase Agreement that the Board of Directors
would recommend that the shareholders approve the sale of the Notes and the
related transactions to the extent such transactions have been entered into with
officers and directors of the Company or their affiliates, and to the extent
that such transactions, upon conversion of the Notes, or the payment of the
principal and interest on the Notes in the form of shares of common stock of the
Company, and exercise of the Warrants, will result in the issuance of more than
20% of the common stock outstanding immediately prior to such series of
transactions, potentially at a price which may be below the then current market
price at the time of conversion or exercise.
THE BOARD RECOMMENDS SHAREHOLDER RATIFICATION AND APPROVAL OF THE ISSUANCE
OF THE NOTES, WARRANTS AND ADDITIONAL INVESTMENT RIGHTS.
30
PROPOSAL 5 -- APPROVAL OF INDEPENDENT AUDITORS
The Audit Committee of the Board of Directors of the Company has
selected the accounting firm of Deloitte & Touche, LLP ("Deloitte") as the
independent auditors for the Company for the 52 weeks ending December 31, 2005.
At the Annual Meeting, shareholders will be asked to ratify the
selection by the Audit Committee of the Board of Directors of Deloitte as the
Company's independent public accountants for the 2005 fiscal year. A
representative of Deloitte is expected to attend the Annual Meeting and will
have an opportunity to make a statement if they desire to do so, and will be
available to answer appropriate questions from shareholders.
THE BOARD RECOMMENDS SHAREHOLDER APPROVAL OF THE SELECTION OF AUDITORS.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors of the
Company does not intend to present, and has not been informed that any other
person intends to present, a matter for action at the 2005 Annual Meeting other
than as set forth herein and in the Notice of Annual Meeting. If any other
matter properly comes before the meeting, it is intended that the holders of
proxies will act in accordance with their best judgment.
The accompanying proxy is being solicited on behalf of the Board of
Directors of the Company. In addition to the solicitation of proxies by mail,
certain of the officers and employees of the Company, without extra
compensation, may solicit proxies personally or by telephone, and, if deemed
necessary, third party solicitation agents may be engaged by the Company to
solicit proxies by means of telephone, facsimile or telegram, although no such
third party has been engaged by the Company as of the date hereof. The Company
will also request brokerage houses, nominees, custodians and fiduciaries to
forward soliciting materials to the beneficial owners of common stock held of
record and will reimburse such persons for forwarding such material. The cost of
this solicitation of proxies will be borne by the Company.
ANNUAL REPORT
COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 25, 2004 (INCLUDING FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES) FILED WITH THE SECURITIES AND EXCHANGE COMMISSION MAY BE OBTAINED
WITHOUT CHARGE BY WRITING TO THE COMPANY - ATTENTION: KEN CZAJA, SECRETARY, 490
North Wiget Lane, Walnut Creek, California 94598. A request for a copy of the
Company's Annual Report on Form 10-K must set forth a good-faith representation
that the requesting party was either a holder of record or a beneficial owner of
common stock of the Company on April 15, 2005. Exhibits to the Form 10-K, if
any, will be mailed upon similar request and payment of specified fees to cover
the costs of copying and mailing such materials.
A copy of the Company's 2005 Annual Report to Shareholders is being
mailed with this Proxy Statement, but is not deemed a part of the proxy
soliciting material.
SHAREHOLDER PROPOSALS
Any shareholder proposal intended to be considered for inclusion in the
proxy statement for presentation in connection with the 2006 Annual Meeting of
Shareholders must be received by the Company by December 15, 2005. The proposal
must be in accordance with the provisions of Rule 14a-8 promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of 1934.
The Company suggests that any such request be submitted by certified mail,
return receipt requested. The Board of Directors will review any proposal which
is timely received, and determine whether it is a proper proposal to present at
the 2006 Annual Meeting.
31
MATERIAL INCORPORATED BY REFERENCE
The following financial and other information is incorporated by
reference to the following sections of the Annual Report on Form 10-K of the
Company for the 52 weeks ended December 25, 2004, as filed with the Securities
and Exchange Commission: Item 8, the Company's Consolidated Financial Statements
and associated notes; and Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations.
The enclosed Proxy is furnished for you to specify your choices with
respect to the matters referred to in the accompanying notice and described in
this Proxy Statement. If you wish to vote in accordance with the Board's
recommendations, merely sign, date and return the Proxy in the enclosed envelope
which requires no postage if mailed in the United States. A prompt return of
your Proxy will be appreciated.
By Order of the Board of Directors
Walnut Creek, California Kenneth A. Czaja,
CFO and Secretary
May [___], 2005
32
A-1
AMENDMENT TO THE REVISED 1997
STOCK OPTION AND INCENTIVE PLAN OF BRITESMILE, INC.
THIS AMENDMENT TO THE REVISED 1997 STOCK OPTION AND INCENTIVE PLAN OF
BRITESMILE, INC., dated as of March 9, 2005, is made and adopted by BRITESMILE,
INC., a Utah corporation (the "Company"). Capitalized terms used but not
otherwise defined herein shall have the respective meanings ascribed to them in
the 1997 Plan (as defined below).
RECITALS
WHEREAS, the Company maintains the Revised 1997 Stock Option and
Incentive Plan (the "1997 Plan");
WHEREAS, the Company desires to amend the 1997 Plan to increase the
number of shares of common stock of the Company subject thereto;
WHEREAS, pursuant to Section 9.11 of the 1997 Plan, the 1997 Plan may
be amended by the Board;
WHEREAS, this Amendment was adopted by the Board of Directors of the
Company on March 9, 2005; and
WHEREAS, this Amendment was approved by the shareholders of the Company
on [June 23, 2005].
NOW, THEREFORE, in consideration of the foregoing, the Company hereby
amends the 1997 Plan as follows:
1. Section 1.05(a) of the 1997 Plan is hereby deleted in its entirety
and replaced with the following:
"(a) Except as may be adjusted pursuant to Section 9.12(i) below,
shares of stock which may be issued as Stock Bonuses or upon exercise
of Options or Alternate Rights under the Plan shall be authorized and
unissued or treasury shares of Common Stock of the Company ("Common
Stock"). The number of shares of Common Stock the Company shall reserve
for issuance as Stock Bonuses or upon exercise of Options or Alternate
Rights to be granted from time to time under the Plan, and the maximum
number of shares of Common Stock which may be issued under the Plan,
shall not exceed in the aggregate One Million Nine Hundred Thousand
(1,900,000) shares of Common Stock. In the absence of an effective
registration statement under the Securities Act of 1933 (the "Act"),
all Stock Bonuses, Options and Stock Appreciation Rights granted and
shares of Common Stock subject to their exercise will be restricted as
to subsequent resale or transfer, pursuant to the provisions of Rule
144 promulgated under the Act."
2. This Amendment shall be and is hereby incorporated in and forms a
part of the 1997 Plan.
3. This Amendment constitutes a new plan for purposes of incentive
stock options granted with respect to shares added to the 1997 Plan
pursuant to this Amendment and with respect to the shareholder approval
requirements under the Internal Revenue Code.
4. All other terms and provisions of the 1997 Plan shall remain
unchanged except as specifically modified herein.
5. The 1997 Plan, as amended by this Amendment, is hereby ratified and
confirmed.
ARTICLES OF RESTATEMENT
OF THE
ARTICLES OF INCORPORATION
OF
BRITESMILE, INC.
Pursuant to Sections 16-10a-123 and 16-10a-1007 of the Utah Revised
Business Corporation Act, as amended (the "Act"), BriteSmile, Inc., a Utah
corporation (the "Corporation"), adopts the following Articles of Restatement of
its Articles of Incorporation, pursuant to which the Corporation amends and
restates its Articles of Incorporation.
FIRST: The name of the Corporation is BriteSmile, Inc.
SECOND: The Corporation's Articles of Incorporation are hereby amended and
restated to read in their entirety as follows:
ARTICLE I - NAME
The name of this corporation is BriteSmile, Inc.
ARTICLE II - PURPOSES AND POWERS
The Corporation is organized to engage in any and all lawful acts,
activities, and/or pursuits for which corporations may presently or hereafter be
organized under the Utah Revised Business Corporation Act.
The Corporation shall have all powers allowed by law, including without
limitation those powers described in Section 16-10a-302 of the Utah Revised
Business Corporation Act, as amended and supplemented. The purposes stated
herein shall be construed as powers as well as purposes and the enumeration of a
specific purpose or power shall not be construed to limit or restrict the
meaning of general terms or the general powers; nor shall the expression of one
thing be deemed to exclude another not expressed, although it be of like nature.
ARTICLE III - CAPITAL STOCK
(1) The total number of shares of stock which the Corporation shall
have authority to issue shall be fifty five million (55,000,000), divided as
follows: (i) fifty million (50,000,000) shares of Common Stock with a par value
of $0.001 per share, and (ii) five million (5,000,000) shares of Preferred Stock
with a par value of $0.001 per share.
(2) The Board of Directors is hereby authorized to amend the Articles
of Incorporation to: (a) designate in whole or in part, the preferences,
limitations, and relative rights, within the limits set forth in Section
16-10a-601 and 602 of the Utah Revised Business Corporation Act, of the shares
of Preferred Stock, prior to issuance of any shares of that class, and (b)
create one or more series within the class of Preferred Stock, fix the number of
shares of each such series, and designate, in whole or part, the preferences,
limitations, and relative rights of the series, within the limits set forth in
Section 16-10a-601 and 602, all before the issuance of any shares of that
series. Without limiting the generality of the foregoing, the amendment of the
Articles of Incorporation providing for the establishment of any series of
Preferred Stock may, to the extent permitted by the Utah Revised Business
Corporation Act, provide that such series shall be superior to, rank equally
with or be junior to the Preferred Stock of any other series. Except as
otherwise expressly provided in the resolution or resolutions providing for the
establishment of any series of Preferred Stock, no vote of the holders of shares
of Preferred Stock or Common Stock shall be a prerequisite to the issuance of
any shares of any series of the Preferred Stock authorized by and complying with
the conditions of these Articles of Restatement of the Articles of
Incorporation.
(3) Shares of Preferred Stock may be issued from time to time in one or
more series, each of such series to have such terms as stated in the resolution
or resolutions providing for the establishment of such series adopted by the
Board of Directors of the Corporation as herein provided. Except as otherwise
expressly stated in the resolution or resolutions providing for the
establishment of a series of Preferred Stock, any shares of Preferred Stock
which may be redeemed, purchased or acquired by the Corporation may be reissued
except as otherwise expressly provided by law.
(4) Prior to the issuance of shares of Preferred Stock, all voting
rights of the Corporation shall be exercised by the holders of the Common Stock
and the holders of the Common Stock of the Corporation shall be entitled to
receive the net assets of the Corporation upon dissolution. All shares of the
Common Stock shall be fully paid and nonassessable. Following the issuance of
any shares of Preferred Stock, the voting rights of the Corporation, and the
parties entitled to receive the net assets of the Corporation upon dissolution,
will be as set forth in the amendment of the Articles of Incorporation providing
for the establishment of any series of Preferred Stock.
ARTICLE IV - LIMITATION OF LIABILITY
Within the meaning of and in accordance with Section 16-10a-841 of the
Utah Revised Business Corporation Act:
(1) No director of the Corporation shall be personally liable to the
Corporation or its shareholders for monetary damages for any action taken or any
failure to take any action as a director, except as provided in this Article IV.
(2) The limitation of liability contemplated in this Article IV shall
not extend to (a) the amount of a financial benefit received by a director to
which he is not entitled, (b) an intentional infliction of harm on the
Corporation or its shareholders, (c) a violation of Section 16-10a-842 of the
Utah Revised Business Corporation Act, or (d) an intentional violation of
criminal law.
(3) Any repeal or modification of this Article IV by the shareholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.
2
(4) Without limitation, this Article IV shall be applied and
interpreted, and shall be deemed to incorporate, any provision of the Utah
Revised Business Corporation Act, as the same exists or may hereafter be
amended, any provision of any act that may replace or supplement the Utah
Revised Business Corporation Act, as well as any applicable interpretation of
Utah law, so that personal liability of directors and officers of the
Corporation to the Corporation or its shareholders, or to any third person,
shall be eliminated or limited to the fullest extent as from time to time
permitted by Utah law.
ARTICLE V - ACTION BY SHAREHOLDER CONSENT
Within the meaning of and in accordance with Sections 16-10a-704 and
1704(4) of the Utah Revised Business Corporation Act, and subject to the
qualifications and limitations thereof, and of any applicable rules of any
exchange or market on which the Company's shares may be traded:
Any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if one or
more consents in writing, setting forth the action so taken, shall be signed by
the holders of outstanding shares having not less than the minimum number of
votes that would be necessary to authorize or take the action at a meeting at
which all shares entitled to vote thereon were present and voted.
THIRD: These Restated Articles of Incorporation were recommended to the
shareholders by the Board of Directors pursuant to a resolution of the Board of
Directors dated as of March 9, 2005 and adopted by the holders of a majority of
the Company's issued and outstanding shares of Common Stock at a meeting of the
shareholders duly held on [June 23, 2005].
FOURTH: The number of shares of Common Stock of the Corporation
outstanding and entitled to vote thereon at the time of such adoption was
_______________, with ___________ shares voting in favor of the Restated
Articles of Incorporation, which number of votes was sufficient for approval by
the shareholders of the Corporation.
DATED the [23rd day of June, 2005].
BRITESMILE, INC.
By: __________________________
Ken Czaja, CFO and Secretary
3
AMENDED AUDIT COMMITTEE CHARTER
OF THE BOARD OF DIRECTORS OF
BRITESMILE, INC.
Organization
There shall be a committee of the board of directors (the "Board") of
BriteSmile, Inc. (the "Company") to be known as the Audit Committee. The purpose
of the Audit Committee is to monitor (1) the integrity of the financial
statements of the Company, (2) the independent auditor's qualifications and
independence, (3) the performance of the Company's internal audit function and
independent auditors, and (4) the compliance by the Company with legal and
regulatory requirements, including disclosure of financial and related party
matters contained in the Company's periodic reports filed under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
The Audit Committee shall prepare the Audit Committee reports required by the
rules of the Securities and Exchange Commission (the "Commission") to be
included in the Company's annual proxy statement.
Membership
The members of the Audit Committee shall be elected by the Board and shall be
composed of no fewer than three (3) members. Audit Committee members may be
replaced by the Board. Each member of the Audit Committee shall meet the
independence requirements of The Nasdaq Stock Exchange, Section 10A(m)(3) of the
Exchange Act and the rules and regulations of the Commission. At least one (1)
member of the Audit Committee shall be a financial expert as defined by the
Commission.
Meetings
The Audit Committee shall meet as often as it determines, but not less
frequently than quarterly. Members of the Audit Committee may participate in
person or via telephone. The Audit Committee shall meet periodically with
management, the internal auditors and the independent auditor in separate
executive sessions. The Audit Committee may request any officer or employee of
the Company or the Company's outside counsel or independent auditor to attend a
meeting of the Committee or to meet with any members of, or consultants to, the
Committee.
The meetings of the Audit Committee shall include the following:
o At least once each fiscal year prior to the release of the Company's
Annual Report on Form 10-K, the Audit Committee will meet separately
with (a) management of the Company, (b) the Company's principal
accounting officer, and (c) the independent accountants of the Company
outside the presence of management, to review and discuss the annual
audited financial statements, and recommend to the Board whether the
audited financial statements should be included in the Company's Form
10-K.
o At least once each fiscal quarter, the Audit Committee will meet with
(a) the independent accountants of the Company and management to
review the Company's financial statements (the Audit Committee will
determine, in the exercise of its discretion, whether to meet with the
independent accountants outside the presence of management, and the
Chair of the Audit Committee may represent the entire Committee for
purposes of these meetings); (b) the Chief Executive Officer of the
Company; (c) the Chief Financial Officer of the Company or, in the
absence of the Chief Financial Officer, with the principle accounting
officer of the Company; and (d) the Chief Operating Officer of the
Company, to review and discuss the Company's quarterly financial
statements to be included in its Form 10-Q, including the results of
the independent auditor's review of the quarterly financial
statements.
Authority and Responsibilities
The Audit Committee shall have the sole authority to appoint or replace the
independent auditor of the Company (subject to shareholder ratification). The
Audit Committee shall be directly responsible for the compensation and oversight
of the work of the independent auditor and the resolution of any disagreements
between management and the independent auditor regarding financial reporting.
The independent auditor shall report directly to the Audit Committee.
The Audit Committee shall preapprove all auditing services and permitted
non-audit services, as well as the fees and terms of such services, to be
performed for the Company by the independent auditor, subject to the de minimus
exceptions for certain non-audit services described in Section 10A(i)(1)(B) of
the Exchange Act which are approved by the Audit Committee prior to the
completion of the audit.
The Audit Committee may form and delegate authority to subcommittees consisting
of one (1) or more members when appropriate, including the authority to grant
preapprovals of audit and permitted non-audit services, provided that decisions
of such subcommittee to grant preapprovals shall be presented to the full Audit
Committee at its next regular or special meeting.
The Audit Committee shall have the authority, to the extent it deems necessary
or appropriate, to retain independent legal, accounting or other advisors and to
compensate them as it may determine. The Company shall provide for appropriate
funding, as determined by the Audit Committee, for payment of compensation to
the independent auditor and to any advisors employed by the Audit Committee for
services provided to the Company or the committee.
The Audit Committee shall make regular reports to the Board. The Audit Committee
shall review and evaluate the adequacy of this Charter annually and recommend
any proposed changes to the Board for approval. The Audit Committee shall
annually review the committee's own performance in light of this Charter.
In carrying out its responsibilities, the Audit Committee shall maintain
flexible policies and procedures in order to best react to changing conditions
and to ensure the Board and shareholders that the corporate accounting and
reporting practices of the Company are in accordance with all applicable
requirements and are of the highest quality.
To the extent deemed necessary or appropriate, the Audit Committee shall:
Financial Statement and Disclosure Matters
1. Review and discuss with management and the independent auditor
the annual audited financial statements, including disclosures
made in management's discussion and analysis, contained in the
annual report to shareholders, and recommend to the board of
directors whether the audited financial statements should be
included in the Company's Form 10-K.
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2. Review and discuss with management and the independent auditor
the Company's quarterly financial statements prior to the
filing of the Company's quarterly reports on Form 10-Q,
including the results of the independent auditor's review of
the quarterly financial statements.
3. Discuss with management and the independent auditor
significant reporting issues and judgments made in connection
with the preparation of the financial statements of the
Company, including any significant changes in the Company's
selection or application of accounting principles, any major
issues as to the adequacy and effectiveness of the accounting
and financial controls of the Company, and any recommendations
for or specific steps adopted in light of material control
deficiencies or the improvement of such internal control
procedures or particular areas where new or more detailed
controls or procedures are desirable. Particular emphasis
should be given to the adequacy of such internal controls to
expose any payments, transactions or procedures that might be
deemed illegal or otherwise improper.
4. Review and discuss quarterly reports from the independent
auditor on:
a. All critical accounting policies and practices to be used.
b. All alternative treatments of financial information within
generally accepted accounting principles that have been
discussed with management, ramifications of the use of such
alternative disclosures and treatments, and the treatment
preferred by the independent auditor.
c. Other material written communication between the independent
auditor and management, such as any management letter or
schedule of unadjusted differences.
5. Discuss with management the Company's earnings press releases,
including the use of "pro forma" or "adjusted" non-GAAP
information, as well as financial statement data, financial
information and earnings guidance provided to analysts and
rating agencies, which may consist of general discussion of
the types of information to be disclosed and the types of
presentations to be made in such press releases or other
disclosures.
6. Discuss with management and the independent auditor the effect
of regulatory and accounting initiatives as well as
off-balance sheet structures, if any, on the Company's
financial statements.
7. Discuss with management the Company's major financial risk
exposures and the steps management has taken to monitor and
control such exposures, including the Company's risk
assessment and risk management policies.
8. Discuss with the independent auditor the matters required to
be discussed by Statement on Auditing Standards No. 61
relating to the conduct of the audit, including any
difficulties encountered in the course of the audit work, any
restrictions on the scope of activities or access to requested
information, and any significant disagreements with
management.
9. Review disclosures made to the Audit Committee by the
Company's Chief Executive Officer and Chief Financial Officer
during the certification process for the Form 10-K and Form
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10-Q about any significant deficiencies in the design or
operation of internal controls or material weaknesses of such
disclosures and any fraud involving management or other
employees who have a significant role in the Company's
internal controls.
Oversight of Independent Auditor
10. Review and evaluate the lead partner of the independent
auditor team.
11. Obtain and review a report from the independent auditor at
least annually regarding (a) the independent auditor's
internal quality-control procedures, (b) any material issues
raised by the most recent internal quality-control review, or
peer review, of the firm, or by any inquiry or investigation
by governmental or professional authorities within the
preceding five years respecting one or more independent audits
carried out by the firm, (c) any steps taken to deal with any
such issues, and (d) all relationships between the independent
auditor and the Company.
12. Evaluate the qualifications, performance and independence of
the independent auditor, including considering whether the
auditor's quality controls are adequate and the provision of
permitted non-audit services is compatible with maintaining
the auditor's independence, and taking into account the
opinions of management and internal auditors. The Audit
Committee shall present its conclusions with respect to the
independent auditor to the Board.
13. Ensure the rotation of the lead or coordinating audit partner
having primary responsibility for the audit and the audit
partner responsible for reviewing the audit as required by
law. Consider whether, in order to assure continuing auditor
independence, it is appropriate to adopt a policy of rotating
the independent auditing firm on a regular basis.
14. Recommend to the Board policies for the hiring by the Company
of employees or former employees of the independent auditor
who participated in any capacity in the audit of the Company.
15. Discuss with the national office of the independent auditor
issues on which it was consulted by the Company's audit team
and matters of audit quality and consistency.
16. Meet with the independent auditor prior to the audit to
discuss the planning and staffing of the audit.
Oversight of Internal Audit Function
17. Review the appointment and replacement of the senior internal
audit executive of the Company (when such function exists
within the Company).
18. Review the significant reports to management prepared by the
internal auditing department and management's responses to
such reports.
19. Discuss with the independent auditor and management the
internal audit department's responsibilities, budget and
staffing and any recommended changes in the planned scope of
the internal audit.
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Compliance and Disclosure
20. Obtain from the independent auditor any information identified
with respect to Section 10A(b) of the Exchange Act.
21. Obtain reports from management and the Company's senior
internal auditing executive (when such function exists within
the Company) that the Company is in conformity with applicable
legal requirements and the Company's Code of Business Conduct
and Ethics. Advise the Board with respect to the adequacy of
the Company's policies and procedures regarding compliance
with applicable laws and regulations and with the Company's
Code of Business Conduce and Ethics.
22. Establish procedures for the receipt, retention and treatment
of complaints received by the Company regarding accounting,
internal accounting controls or auditing matters, and the
confidential, anonymous submission by employees of concerns
regarding questionable accounting or auditing matters.
23. Review reports and disclosures of insider and affiliated party
transactions. Prior to any event involving a related party
transaction, review and approve such transaction, or notify
and request action on the related party transaction by the
Board.
24. Notify all employees annually of the procedures established
for complaints received about accounting, internal controls or
auditing matters, as well as confidential, anonymous
submission by employees of the corporation regarding
accounting or auditing matters.
25. Investigate any matter brought to its attention within the
scope of its duties, with the power to retain outside counsel
for this purpose if, in its judgment, that is appropriate.
26. Discuss with management and the independent auditor any
correspondence with regulators or governmental agencies and
any published reports which raise material issues regarding
the Company's financial statements or accounting policies.
27. Discuss with the Company's legal counsel any legal matters
that may have a material impact on the financial statements or
the compliance policies of the Company.
Limitation of Audit Committee's Role
While the Audit Committee has the responsibilities and powers contained in this
Charter, it is not the duty of the Audit Committee to plan or conduct audits or
to determine that the Company's financial statements and disclosures are
complete and accurate and are in accordance with GAAP and applicable rules and
regulations. These are the responsibilities of management and the independent
auditor.
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