<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-12050
SAFEGUARD HEALTH ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1528581
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
505 NORTH EUCLID STREET
ANAHEIM, CALIFORNIA 92801
(Address of principal executive offices)
(Zip Code)
(714) 778-1005
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of registrant's common stock, par value $.01
per share, at March 31, 1996, was 4,705,806 shares (not including 3,274,788
shares of common stock held in treasury).
Page 1 of 9
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SAFEGUARD HEALTH ENTERPRISES, INC.
AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
INFORMATION INCLUDED IN REPORT
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Position 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 2. Changes in Securities 9
Item 3. Default Upon Senior Securities 9
Item 4. Other Information 9
Item 5. Exhibits and Reports 9
SIGNATURES 9
</TABLE>
Page 2 of 9
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
SAFEGUARD HEALTH ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(000's OMITTED, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 6 $ 506
Investment securities available for
sale, at estimated fair value 7,978 14,038
Investment securities held to
maturity, at cost 3,820 202
Accounts and notes receivable, net
of allowances of $238 in 1996 and
$260 in 1995 6,620 4,344
Income taxes receivable - 45
Prepaid expenses and other 1,155 1,181
Deferred income taxes 262 262
-------- --------
Total current assets 19,841 20,578
-------- --------
Property and equipment, net 13,478 13,055
Investment securities held to
maturity, at cost 4,071 4,073
Other assets 226 226
Intangibles, net of accumulated
amortization of $1,406 in 1996 and
$1,384 in 1995 388 411
-------- --------
$ 38,004 $ 38,343
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,224 $ 3,683
Reserves for incurred but not
reported claims 1,746 2,063
Income taxes payable 413 -
Deferred revenue 375 195
-------- --------
Total current liabilities 4,758 5,941
-------- --------
Deferred income taxes 495 473
Stockholders' equity
Common stock $.01 par value;
30,000,000 shares authorized;
4,706,000 and 4,695,000 shares
outstanding, stated at 21,119 21,092
Preferred stock - $.01 par value;
1,000,000 shares authorized;
0 shares outstanding - -
Retained earnings 29,873 29,113
Net unrealized loss on investment
securities available for sale (118) (153)
Treasury stock, at cost (18,123) (18,123)
-------- --------
Total stockholders'
equity 32,751 31,929
-------- --------
$ 38,004 $ 38,343
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 3 of 9
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SAFEGUARD HEALTH ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(000's OMITTED, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
<S> <C> <C>
1996 1995
------- -------
Health care revenues $21,901 $19,423
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Expenses:
Health care services 17,435 15,472
Selling, general and administrative 3,467 3,349
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Total expenses 20,902 18,821
------- -------
Operating income 999 602
Other income, net 220 192
------- -------
Income before income taxes 1,219 794
Provision for income taxes 459 309
------- -------
Net income $ 760 $ 485
======= =======
Net income per common share and common
share equivalent:
Primary and fully diluted $.16 $.10
======= =======
Weighted average common shares and
equivalents outstanding 4,889 4,656
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 4 of 9
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SAFEGUARD HEALTH ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's OMITTED)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
(Unaudited)
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 760 $ 485
Adjustments to reconcile net income
to net cash provided
by (used in) operating activities:
Depreciation and amortization 443 378
Deferred income taxes (benefit) 22 (25)
Change in assets and liabilities:
Accounts receivable, net (2,276) 100
Income taxes receivable 45 255
Prepaid expenses and other 26 (37)
Accounts payable and accrued expenses (1,459) (554)
Reserves for incurred but not reported claims (317) 90
Income taxes payable 413 57
Deferred revenue 180 (38)
------- -------
Net cash provided by (used in) operating activities (2,163) 711
Cash flows from investing activities:
Purchase of investments available for sale (1,222) (648)
Proceeds from sales/maturity of investments available
for sale 2,826 949
Purchase of investments held to maturity (3,274) (145)
Proceeds from maturity of investments held to maturity 4,149 -
Additions to property and equipment (843) (694)
Other activity, net - (35)
------- -------
Net cash provided by (used in) investing activities 1,636 (573)
------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options 27 -
------- -------
Net cash provided by financing activities 27 -
------- -------
Net decrease in cash (500) 138
Cash at beginning of period 506 503
------- -------
Cash at end of period $ 6 $ 641
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 5 of 9
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SAFEGUARD HEALTH ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF REPORTING
- ---------------------------
The accompanying unaudited Consolidated Financial Statements of Safeguard Health
Enterprises, Inc. and subsidiaries (the "Company") for the quarter ended March
31, 1996, have been prepared in accordance with generally accepted accounting
principles applicable to interim periods, and reflect all adjustments which are,
in the opinion of management, necessary for a fair presentation of results for
the interim periods. The statements have been prepared in accordance with the
regulations of the Securities and Exchange Commission, but omit certain
information and footnote disclosures necessary to present the statements in
accordance with generally accepted accounting principles. This information
should be read in conjunction with the Consolidated Financial Statements and
Notes including Significant Accounting Policies, contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995. Management
believes that the disclosures herein are adequate to make the information
presented not misleading.
NOTE 2: STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
- ----------------------------------------------------
Since October 1986, the Company's Board of Directors has, at various times,
authorized the repurchase of up to 4,510,888 shares of its common stock through
open market or private transactions. As of March 31, 1996, a total of
3,819,088 shares had been acquired at an average cost of $5.54 per share. All
shares acquired prior to August 24, 1987, have been retired as required by
California law. All shares acquired after the August 24, 1987 reincorporation
in Delaware are being held as treasury stock. Earnings per share for the
periods ended March 31, 1996 and 1995 were computed by dividing net income by
4,888,672 and 4,655,866 shares, respectively, which was the weighted average
number of outstanding common shares and common share equivalents (stock options)
during the respective periods.
NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS
- -----------------------------------------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which will be effective for the Company beginning January 1,
1996. SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to
its stock-based compensation awards to employees and will disclose the required
pro forma effect on net income and earnings per share.
Page 6 of 9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
1996 Versus 1995
Three months ended
March 31,
-----------------------------
Increase/ Percent
(Decrease) Change
Results of operations (000's omitted)
- ------------------------------------------------------------------------
<S> <C> <C>
Health Care Revenues
Managed care revenues $ 317 1.7
Indemnity revenues 2,161 238.3
Total Health Care Revenues $2,478 12.8
- ------------------------------------------------------------------------
Health Care Expenses
Managed care expenses $ 197 1.3
Indemnity expenses 1,766 237.0
Total Health Care Expenses $1,963 12.7
- ------------------------------------------------------------------------
Total Selling, General and $ 118 3.5
Administrative Expenses
- ------------------------------------------------------------------------
Other Income, Net $ 28 14.6
- ------------------------------------------------------------------------
Net Income $ 275 56.7
- ------------------------------------------------------------------------
</TABLE>
1996 Versus 1995
- ----------------
Health care revenues increased as a result of sales to new small and mid-size
clients, increased revenue from the Company's indemnity insurance subsidiary,
and price increases to clients renewing with the Company during the quarter.
Revenue in the Company's dental office subsidiary remained essentially the same.
Membership enrollment increased to 778,000 from 740,000 primarily from sales to
new small and mid-size group clients and an increase in the number of persons
covered under various dental indemnity insurance products offered by the
Company's insurance subsidiary.
Health care expense increased primarily due to increased capitation, as well as
increased indemnity benefits paid to insureds, both directly related to
increased premium revenue. Health care expenses within the Company's dental
office subsidiary as percentage of revenue, declined slightly due to lower costs
associated with the operation of such facilities. General and administrative
expenses declined slightly, and as a percentage of revenue increased at a lower
rate due to increased operating efficiencies. Selling expenses increased
primarily due to higher costs in the distribution of the Company's products
through insurance related sources, and increased sales and marketing staff
expenses. Other income increased slightly due to a higher effective rate of
return on the Company's investments. Net income increased due to the above
factors.
Page 7 of 9
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Business Segment Information
- ----------------------------
The Company is engaged primarily in two distinct businesses; the operation of
managed care dental programs and the operation of dental indemnity insurance
programs.
<TABLE>
<CAPTION>
1996 Versus 1995
Three months ended
March 31,
---------------------------------------------
1996 Percent of 1995 Percent of
Results of operations (000's omitted) Amount Revenue Amount Revenue
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Health Care Revenues
Managed care revenues $18,833 86.0 $18,516 95.3
Indemnity revenues 3,068 14.0 907 4.7
Total Health Care Revenues $21,901 100.0 $19,423 100.0
- ----------------------------------------------------------------------------------------
Health Care Expenses
Managed care expenses $14,924 79.2 $14,727 79.5
Indemnity expenses 2,511 81.8 745 82.1
Total Health Care Expenses $17,435 79.6 $15,472 79.7
- -------------------------------------------------------------------------------------
Total Selling, General and $ 3,467 15.8 $ 3,349 17.2
Administrative Expenses
- -------------------------------------------------------------------------------------
</TABLE>
Liquidity and Capital Resources
- -------------------------------
The Company's business has not been capital intensive. The Company's
operational cash requirements have been met principally from operating cash flow
and this is expected to continue.
At March 31, 1996, the current ratio was 4.2 to 1.0. The Company's net worth
was $32.8 million compared to $27.9 million a year earlier. The Company had
$15.9 million of cash and investments as of March 31, 1996 compared to $15.2
million a year earlier. The Company believes that income from operations,
together with the existing cash and investments on hand, and other available
sources of financing, should be adequate to meet operating capital needs for the
foreseeable future.
Impact of Inflation
- -------------------
Management believes that the Company's operations are not materially affected by
inflation. The Company believes that a majority of its costs are capitated or
fixed in nature and are directly related to membership levels, and therefore
related to premium levels.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in litigation arising in the normal course
of business. In the opinion of management, the defense costs and/or
ultimate outcome of such litigation is covered by insurance or will
not have material effect on the Company's financial position or
results of operations.
Page 8 of 9
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ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. OTHER INFORMATION
None
ITEM 5. EXHIBITS AND REPORTS
There were no reports on Form 8-K filed by the Company during the
quarter ended March 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) or the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Anaheim,
State of California, on the 14th of May, 1996.
SAFEGUARD HEALTH ENTERPRISES, INC.
By /s/ STEVEN J. BAILEYS, D.D.S.
------------------------------------------
STEVEN J. BAILEYS, D.D.S.,
Chairman, President and
Chief Executive Officer
By /s/ THOMAS C. TEKULVE
------------------------------------------
THOMAS C. TEKULVE,
Vice President and Chief Financial Officer
Page 9 of 9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 6
<SECURITIES> 11,798
<RECEIVABLES> 6,858
<ALLOWANCES> 238
<INVENTORY> 0
<CURRENT-ASSETS> 19,841
<PP&E> 26,273
<DEPRECIATION> 12,795
<TOTAL-ASSETS> 38,004
<CURRENT-LIABILITIES> 4,758
<BONDS> 0
0
0
<COMMON> 21,119
<OTHER-SE> 11,632
<TOTAL-LIABILITY-AND-EQUITY> 38,004
<SALES> 21,901
<TOTAL-REVENUES> 21,901
<CGS> 17,435
<TOTAL-COSTS> 17,435
<OTHER-EXPENSES> 3,467
<LOSS-PROVISION> (220)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,219
<INCOME-TAX> 459
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 760
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
