<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 June 30, 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 Identification No.)
of incorporation)
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 June 30, 1996, was 4,708,999 shares (not including 3,274,788
shares of common stock held in treasury).
Page 1 of 11
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
INFORMATION INCLUDED IN REPORT
<TABLE>
<CAPTION>
Page
----
<C> <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 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 10
SIGNATURES 11
</TABLE>
Page 2 of 11
<PAGE>
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>
June 30, December 31,
1996 1995
----------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 6 $ 506
Investment securities available sale, at estimated fair value 8,924 14,038
Investment securities held to maturity, at cost 3,583 202
Accounts and notes receivable, net of allowances of
$209 in 1996 and $260 in 1995 5,468 4,344
Income taxes receivable - 45
Prepaid expenses and other 1,295 1,181
Deferred income taxes 262 262
-------- --------
Total current assets 19,538 20,578
-------- --------
Property and equipment, net 14,341 13,055
Investment securities held to maturity, at cost 4,327 4,073
Other assets 231 226
Intangibles, net of accumulated amortization of
$1,429 in 1996 and $1,384 in 1995 573 411
-------- --------
Total assets $ 39,010 $ 38,343
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,325 $ 3,683
Reserves for incurred but not reported claims 1,353 2,063
Income taxes payable 781 -
Deferred revenue 302 195
-------- --------
Total current liabilities 4,761 5,941
-------- --------
Deferred income taxes 519 473
Stockholders' equity
Common stock $.01 par value; 30,000,000 shares authorized;
4,709,000 and 4,695,000 shares outstanding, stated at 21,134 21,092
Preferred stock - $.01 par value; 1,000,000 shares authorized;
0 shares outstanding - -
Retained earnings 30,800 29,113
Net unrealized loss on investment securities available for sale (81) (153)
Treasury stock, at cost (18,123) (18,123)
-------- --------
Total stockholders' equity 33,730 31,929
-------- --------
Total liabilities and stockholders' equity $ 39,010 $ 38,343
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 3 of 11
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(000's omitted, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
------------------ -----------------
1996 1995 1996 1995
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Health care revenues $22,375 $20,042 $44,276 $39,465
------- ------- ------- -------
Expenses:
Health care services 17,576 16,142 35,011 31,614
Selling, general and administrative 3,588 3,247 7,055 6,596
------- ------- ------- -------
Total expenses 21,164 19,389 42,066 38,210
------- ------- ------- -------
Operating income 1,211 653 2,210 1,255
Other income, net 318 251 538 443
------- ------- ------- -------
Income before income taxes 1,529 904 2,748 1,698
Provision for income taxes 602 354 1,061 663
------- ------- ------- -------
Net income $ 927 $ 550 $ 1,687 $ 1,035
======= ======= ======= =======
Net income per common share and common
share equivalent:
Primary and fully diluted $ .19 $ .12 $ .34 $ .22
======= ======= ======= =======
Weighted average common shares and
equivalents outstanding 4,937 4,668 4,936 4,691
======= ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 4 of 11
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(000's omitted)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------
1996 1995
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,687 $ 1,035
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 911 776
Deferred income taxes (benefit) 46 (35)
Changes in assets and liabilities:
Accounts receivable, net (1,124) (280)
Income taxes receivable 45 255
Prepaid expenses and other (114) 65
Accounts payable and accrued expenses (1,358) 1,294
Reserves for incurred but not reported claims (710) 104
Income taxes payable 781 126
Deferred revenue 107 41
------- -------
Net cash provided by operating activities 271 3,381
------- -------
Cash flows from investing activities:
Purchase of investments available for sale (8,485) (1,598)
Proceeds from sales/maturity of investments available for sale 9,908 1,450
Purchase of investments held to maturity (4,040) (1,305)
Proceeds from maturity of investments held to maturity 4,168 874
Additions to property and equipment (2,157) (1,660)
Other activity, net (207) (31)
------- -------
Net cash provided by (used in) investing activities (813) (2,270)
------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options 42 -
------- -------
Net cash provided by financing activities 42 -
------- -------
Net (decrease) increase in cash (500) 1,111
Cash at beginning of period 506 503
------- -------
Cash at end of period $ 6 $ 1,614
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 5 of 11
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF REPORTING
- ---------------------------
The accompanying unaudited Consolidated Financial Statements of Safeguard Health
Enterprises, Inc. and subsidiaries (the "Company") for the quarter ended June
30, 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 June 30, 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 June
30, 1996 and 1995 were computed by dividing net income by 4,935,890 and
4,691,279 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 11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the attached
consolidated financial statements and notes thereto.
<TABLE>
<CAPTION>
1996 versus 1995
Six months ended
June 30,
---------------------------
Increase/ Percent
(Decrease) Change
Results of operations (000's omitted)
- ----------------------------------------------------------------------
<S> <C> <C>
Health Care Revenues
Managed care revenues $ 511 1.4
Indemnity revenues 4,300 193.2
------ -----
Total Health Care Revenues $4,811 12.2
- ----------------------------------------------------------------------
Health Care Expenses
Managed care expenses $ 0 0
Indemnity expenses 3,397 178.3
------ -----
Total Health Care Expenses $3,397 10.7
- ----------------------------------------------------------------------
Total Selling, General and $ 459 7.0
Administrative Expenses
- ----------------------------------------------------------------------
Other Income, Net $ 95 21.4
- ----------------------------------------------------------------------
Net Income $ 652 63.0
- ----------------------------------------------------------------------
</TABLE>
1996 Versus 1995
- ----------------
Health care revenues grew to a six month record of $44,286, a 12.2% change on a
65,000 membership increase over the corresponding period in the prior year. This
membership change represented an increase of 8.7%, for a total membership of
808,000. Increases in revenue and membership was primarily due to growth in the
Company's indemnity insurance subsidiary. Increases also resulted from sales to
new small and mid-size clients and price increases to renewing clients. Revenue
in the Company's dental office subsidiary remained essentially unchanged.
Health care expenses increased primarily due to increased indemnity benefits
paid, which are related to increased premium revenue. Management continued
selected purging of less profitable clients based on actuarial reviews of plan
designs and utilization. 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. These increases were
offset somewhat by a much lower growth in general and administrative expenses
due to increased operating efficiencies on an increased revenue base. Health
care expenses within the Company's dental office subsidiary remained essentially
the same. Other income increased due to a higher effective rate of return on
the Company's investments. Net income increased due to the above factors.
Page 7 of 11
<PAGE>
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
Six months ended
June 30,
---------------------------------------------------
- ---------------------------------------- 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 $37,750 85.3 $37,239 94.4
Indemnity revenues 6,526 14.7 2,226 5.6
------- ----- ------- -----
Total Health Care Revenues $44,276 100.0 $39,465 100.0
- ----------------------------------------------------------------------------------------------
Health Care Expenses
Managed care expenses $29,709 78.7 $29,709 79.8
Indemnity expenses 5,302 81.2 1,905 85.6
------- ----- ------- -----
Total Health Care Expenses $35,011 79.1 $31,614 80.1
- ----------------------------------------------------------------------------------------------
Total Selling, General and
Administrative Expenses $ 7,055 15.9 $ 6,596 16.7
- ----------------------------------------------------------------------------------------------
</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 June 30, 1996, the current ratio was 4.1 to 1.0. The Company's net worth was
$33.7 million compared to $28.7 million a year earlier. The Company had $16.8
million of cash and investments as of June 30, 1996 compared to $17.0 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.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
The statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations concerning any future premium
pricing levels, future dental health care expense levels, the Company's ability
to control health care, selling, general and administrative expenses, and all
other statements that are not historical facts, are forward looking statements.
Actual results may differ materially from those projected in the forward looking
statements, if any, which statements involve risks and uncertainties. The
Company's ability to expand is affected by competition not only in benefit
program choices, but also the number of dental plan competitors in the markets
in which the Company operates. Certain large employer groups and other
purchasers of commercial dental health care services, continue to demand minimal
premium rate increases, while limiting the number of choices offered to
employees. In addition, securing cost effective contracts with dentists may
become more difficult in part due to the increased competition among dental
plans for dentist contracts. The Company's profitability depends, in part, on
its ability to maintain effective control over health care costs, while
providing members with quality dental care. Factors
Page 8 of 11
<PAGE>
such as levels of utilization of dental health care services, new technologies,
specialists costs, and numerous other external influences may effect the
Company's operating results. The Company's expectations for the future are
based on current information and evaluation of external influences. Changes in
any one factor could materially impact the Company's expectations relating to
premium rates, benefit plans offered, membership growth, the percentage of
health care expenses, and as a result, profitability and therefore, effect the
forward looking statements which may be included in these reports. In addition,
past financial performance is not necessarily a reliable indicator of future
performance. An investor should not use historical performance alone to
anticipate future results or future period trends.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in litigation arising in the normal course
of business. In the opinion of management, the defense costs and/or
ultimate outcome of such litigation is covered by insurance or will
not have material effect on the Company's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders (the "Annual Meeting") of the
Company was held on May 22, 1996, at the Company's Executive Offices
in Anaheim, California. The following matters were addressed at the
meeting:
1. ELECTION OF DIRECTORS
Steven J. Baileys, D.D.S., and George H. Stevens were duly elected to
the Board of Directors as Class III Directors at the Annual Meeting
for a three (3) year term. Ronald I. Brendzel, J.D., William E.
McKenna, Michael M. Mann, Ph.D., and Bradford M. Boyd, D.D.S., are
directors whose terms of office continued after the Annual Meeting.
The votes of holders of 4,376,627 shares of the Company's common stock
were cast "FOR" the election of the two directors of the Company, and
the votes of holders of 293,500 shares of common stock were cast to
"WITHHOLD" the election of the two directors of the Company. The votes
"FOR" represents approximately 94% of all shares of common stock
outstanding and entitled to vote at the Annual Meeting, and of all
shares voting at the Annual Meeting, respectively.
2. PROPOSAL TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION
REGARDING WHO MAY CALL A SPECIAL MEETING OF STOCKHOLDERS.
This Proposal sought approval of an Amendment to the Company's
Certificate of Incorporation which would have eliminated the ability
of holders of not less than 10% of the Corporation's outstanding
voting securities to call a special meeting of Stockholders. The
Company's current Certificate of Incorporation provides that special
meetings of Stockholders of the Company may be called at any time by
the Chairman, by an Executive Committee, if any, or by holders of not
less that 10% of the Corporation's outstanding voting securities. An
affirmative vote of at least 66 2/3% of the outstanding shares of
common stock entitled to vote at the Annual Meeting, was required to
approve this Proposal.
The votes of the holders of 2,838,478 shares of common stock were cast
"FOR" the Proposal to amend the Company's Certificate of Incorporation
regarding who may call a special meeting of the Stockholders, the
votes of holders of 1,500,191 shares of common stock were cast
"AGAINST," and the holders of 201 shares of common stock "ABSTAINED"
from voting. The votes "FOR" represents 60.3% of all shares of common
stock outstanding and entitled to vote at the Annual Meeting, and
65.4% of all shares voting at the Annual Meeting, respectively. As a
result, the Proposal to approve an Amendment to the Company's
Certificate of Incorporation regarding who may call a special meeting
of the Stockholders, did not pass.
Page 9 of 11
<PAGE>
3. PROPOSAL TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION
REGARDING STOCKHOLDER APPROVAL OF AN AMENDMENT TO THE COMPANY'S
CERTIFICATE OF INCORPORATION TO INCREASE THE VOTE REQUIRED TO
OBTAIN STOCKHOLDER APPROVAL OF ANY MERGER OR SALE OF THE COMPANY.
This Proposal provided for a new article which would require an
affirmative vote of not less than 66 2/3% of the outstanding voting
stock of the Company, for the approval or authorization of any merger
or consolidation of the Company, or for the sale, lease, exchange, or
other disposition of all, or substantially all of the assets of the
Company, to any other corporation, person, or other entity. This
provision, however, would not be applicable in the event that the
Company's Board of Directors approved a proposed transaction in a
resolution adopted by at least 80% of the members of the Board of
Directors. An affirmative vote of the majority of the outstanding
shares of common stock of the Company entitled to vote at the Annual
Meeting, was required to approve this Proposal.
The votes of holders of 2,481,405 shares of common stock were cast
"FOR" the Proposal to Amend the Company's Certificate of Incorporation
regarding stockholder approval, the votes of holders of 1,477,034
shares of common stock were cast "AGAINST" and the holders of 101
shares of common stock "ABSTAINED" from voting. The votes "FOR"
represents 52.7% of all shares of common stock outstanding and
entitled to vote at the Annual Meeting, and 62.7% of all shares voting
at the Annual Meeting, respectively. The vote in favor of an Amendment
to the Company's Certificate of Incorporation regarding stockholder
approval constituted a majority of the shares of common stock voted
for this Proposal, which therefore was approved.
ITEM 5. OTHER INFORMATION
On July 11, 1996, the Company announced a major expansion with the
signing of a letter of intent to acquire all the issued and
outstanding shares of First American Dental Benefits, Inc., dba
American Dental Corporation, a privately held dental managed care
company based in Dallas, Texas, and an affiliated marketing entity.
The acquisition is expected to be completed within 45 days of the
announcement date. It is anticipated that the acquisition will add
approximately 200,000 members to the Company's existing 808,000 member
base. The cash transaction is subject to the satisfaction of certain
conditions, including negotiation and execution of a definitive
purchase agreement. Terms were not disclosed.
A subsequent filing of a Form 8-K will be provided to the Securities
and Exchange Commission upon execution of the definitive purchase
agreement.
Page 10 of 11
<PAGE>
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 12th of August, 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 11 of 11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996
<CASH> 6 6
<SECURITIES> 11,798 12,507
<RECEIVABLES> 6,858 5,677
<ALLOWANCES> 238 209
<INVENTORY> 0 0
<CURRENT-ASSETS> 19,841 19,538
<PP&E> 26,273 27,588
<DEPRECIATION> 12,795 13,247
<TOTAL-ASSETS> 38,004 39,010
<CURRENT-LIABILITIES> 4,758 4,761
<BONDS> 0 0
0 0
0 0
<COMMON> 21,119 21,134
<OTHER-SE> 11,632 12,596
<TOTAL-LIABILITY-AND-EQUITY> 38,004 39,010
<SALES> 21,901 44,276
<TOTAL-REVENUES> 21,901 44,276
<CGS> 17,435 35,011
<TOTAL-COSTS> 17,435 35,011
<OTHER-EXPENSES> 3,467 7,055
<LOSS-PROVISION> (220) (538)
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 1,219 2,748
<INCOME-TAX> 459 1,061
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 760 1,687
<EPS-PRIMARY> .16 .34
<EPS-DILUTED> .16 .34
</TABLE>
