Safeguard Fires 2 Officials, Scales Back Expansion Plans

In a management shake-up and retrenchment following an estimated 47% drop in quarterly earnings, Safeguard Health Enterprises Inc. has ousted two top officers and scaled back expansion plans for its wholly owned subsidiary, Community Dental Centers Inc.

The head of Community Dental Centers, Robert K. Mehlman, “terminated his position” because the unit--which operates 35 offices in California and Washington state--posted a sizable loss during the quarter, according to Safeguard President Steven J. Baileys.

And Safeguard’s chief financial officer, Stefan J. Dietrich, lost his job for failing to implement critical changes in the company’s accounting department, officials said.

Safeguard, an Anaheim-based prepaid dental-plan operator, will not release final results for its first quarter until May, but company officials said Wednesday that they anticipate net earnings of about 5 cents a share, or $399,750, contrasted with 10 cents a share, or $762,000, a year ago.

Community Dental Centers accounted for 12% of Safeguard’s $50 million in revenue in 1985, said Ronald I. Brendzel, Safeguard’s vice president and general counsel. Safeguard reported net earnings of $3.4 million last year.

Costs of Expansion

Baileys said one reason for the decline in first-quarter earnings this year is a loss taken by the dental center subsidiary because of the costs of expanding nationally. The company has opened 14 facilities in the past nine months, including five in Washington, said Brendzel.

But Baileys said Safeguard would complete only five more dental centers through 1986, largely because of the subsidiary’s first-quarter losses.

Baileys said Safeguard still is in the midst of a management reorganization and will not make decisions on additional expansion moves until it is completed. Currently, Baileys is running the dental center subsidiary, and Brendzel has taken over Dietrich’s financial post.

Brendzel said Dietrich had been expected “to implement a number of things that publicly held companies must have” but did not do so and failed to create an “effective” accounting department.

Problems Not Fundamental

Randy Huyser, a health-care analyst with Montgomery Securities Inc. in San Francisco, said Safeguard’s problems are not “fundamental” and are mainly a function of too much growth too fast.

“The major thing that’s causing the earnings decline is this Community Dental Centers business,” Huyser said. “The dental centers have expanded so quickly that it got away from them a little bit. They’re losing money on it, and I would call that significant. But (the centers) are still less than 20% of their revenues.”

The management reorganization was described by Baileys as a means of establishing better “cost controls.” Huyser said he believes that the move is a sound step.

“Basically, what they’ve got to do is control (the centers) they have better before going on more of an expansion pace,” Huyser said. “Because of the early success with the clinics, they thought they could handle more growth than they can. It’s a good decision to hold back until they get their act together. They just had too many irons in the fire.”

More Subscribers Seen

Baileys said the company expects the number of subscribers to its dental plans--including employees of the State of California and the University of California system--to increase in 1986 to 850,000 from 700,000.

“Our revenues really come from membership,” Baileys said, “and the company will continue to be good as long as our membership continues to grow.”

Huyser said the dental centers are essential to Safeguard’s strategy of landing big contracts because to get those contracts “you’ve got to have providers in a lot of areas where there may not be existing dental capacity.”

Originally, Huyser said, Safeguard followed that strategy and built centers where there was less competition, so employees of companies that joined the prepaid dental program had an incentive to join. Now, however, the company is opening centers in more competitive areas and is not seeing immediate returns, Huyser said.

“But the concept of those clinics is good, and (Safeguard) isn’t shutting down any of them,” Huyser added, “which is indicative that it isn’t really a fundamental problem.”