<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 September 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
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 September 30, 1996, was 4,714,999 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 SEPTEMBER 30, 1996
INFORMATION INCLUDED IN REPORT
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 3
Consolidated Statements of Financial Position 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 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>
September 30, December 31,
1996 1995
-------------- -------------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash $ 239 $ 506
Investment securities available for
sale, at estimated fair value 8,989 14,038
Investment securities held to
maturity, at cost 207 202
Accounts and notes receivable, net
of allowances of
$394 in 1996 and $260 in 1995 4,119 3,258
Income taxes receivable - 45
Prepaid expenses and other 515 519
Deferred income taxes 262 262
Net assets of discontinued operations 2,901 1,748
-------------- -------------
Total current assets 17,232 20,578
-------------- -------------
Property and equipment, net 14,918 13,055
Investment securities held to
maturity, at cost 5,410 4,073
Notes receivable - long-term 2,000 -
Other assets 229 226
Intangibles, net of accumulated
amortization of
$1,471 in 1996 and $1,384 in 1995 474 411
Goodwill 21,494 -
Covenant not to compete 3,576 -
-------------- -------------
Total assets $ 65,333 $ 38,343
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,442 $ -
Accounts payable and accrued expenses 4,215 3,683
Reserves for incurred but not
reported claims 1,742 2,063
Income taxes payable 404 -
Deferred revenue 127 195
-------------- -------------
Total current liabilities 8,930 5,941
-------------- -------------
Long-term debt 20,134 -
Deferred income taxes 1,264 473
Stockholders' equity
Common stock $.01 par value;
30,000,000 shares authorized;
4,715,000 and 4,695,000 shares
outstanding, stated at 21,303 21,092
Preferred stock - $.01 par value;
1,000,000 shares authorized;
0 shares outstanding - -
Retained earnings 31,916 29,113
Net unrealized loss on investment
securities available for sale (91) (153)
Treasury stock, at cost (18,123) (18,123)
-------------- -------------
Total stockholders' 35,005 31,929
equity -------------- -------------
Total liabilities and $ 65,333 $ 38,343
stockholders' equity ============== =============
</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 Nine months ended
September 30 September 30
-------------------- -------------------
1996 1995 1996 1995
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Health care revenues $19,543 $17,383 $57,122 $49,359
------- ------- ------- -------
Expenses:
Health care services 14,176 12,752 42,474 36,145
Selling, general and administrative 3,869 3,476 10,924 10,072
------- ------- ------- -------
Total expenses 18,045 16,228 53,398 46,217
------- ------- ------- -------
Operating income 1,498 1,155 3,724 3,142
Other income, net 170 403 708 846
------- ------- ------- -------
Income before income taxes 1,668 1,558 4,432 3,988
Provision for income taxes 651 561 1,718 1,510
------- ------- ------- -------
Income from continuing operations 1,017 997 2,714 2,478
------- ------- ------- -------
Discontinued operations, net of tax:
Income (loss) from dental operations
to be disposed of (net of income tax
benefits of $643 and $649 in 1996
and $222 and $507 in 1995) (1,030) (348) (1,040) (794)
Gain on disposal of dental practices
(net of income taxes of $721) 1,129 - 1,129 -
------- ------- ------- -------
Income (loss) from discontinued
operations 99 (348) 89 (794)
------- ------- ------- -------
Net income $ 1,116 $ 649 $ 2,803 $ 1,684
======= ======= ======= =======
Earnings per share:
Primary and fully diluted
Income from continuing operations $ 0.21 $ 0.21 $ 0.55 $ 0.52
Income (loss) from discontinued
operations 0.02 (0.07) 0.02 (0.17)
------- ------- ------- -------
Net income $ 0.23 $ 0.14 $ 0.57 $ 0.35
======= ======= ======= =======
</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>
Nine months ended
September 30,
-------------------
<S> <C> <C>
1996 1995
-------- -------
Cash flows from operating activities:
Net income $ 2,803 $ 1,684
Adjustments to reconcile net income
to net cash provided
by operating activities:
Depreciation and amortization 1,458 1,194
Deferred income taxes 791 123
Gain on sale of dental offices (1,850) -
Changes in assets and liabilities:
Accounts receivable, net (2,014) (1,318)
Income taxes receivable 45 255
Prepaid expenses and
other 4 199
Current portion of
long-term debt 2,442 -
Accounts payable and
accrued expenses 532 217
Reserves for incurred
but not reported claims (321) 224
Income taxes payable 404 170
Deferred revenue (68) (150)
-------- -------
Net cash provided
by operating
activities 4,226 2,598
-------- -------
Cash flows from investing activities:
Purchase of investments available
for sale (9,160) (3,508)
Proceeds from sales/maturity of
investments available for sale 12,488 2,652
Purchase of investments held to
maturity (7,771) (1,458)
Proceeds from maturity of
investments held to maturity 8,211 874
Additions to property and equipment (3,394) (2,431)
Purchase of goodwill (21,494) -
Purchase of covenant not to compete (3,576) -
Other activity, net (142) (43)
-------- -------
Net cash provided
by (used in)
investing
activities (24,838) (3,914)
--------
Cash flows from financing activities:
Proceeds from exercise of stock 211 819
options
Proceeds from long-term debt 20,134 -
-------- -------
Net cash provided
by financing
activities 20,345 819
-------- -------
Net decrease in cash (267) (497)
Cash at beginning of period 506 503
-------- -------
Cash at end of period $ 239 $ 6
======== =======
</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
September 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.
As described in Note 4 herein, the Operating Results for the Quarter ended
September 30, 1996 and the year ended December 31, 1995, have been restated to
reflect the effect of the discontinued operation of the General Practices.
Effective September 27, 1996, the Company completed the acquisition of all of
the outstanding shares of First American Dental Benefits, Inc., dba American
Dental Corporation ("First American"), a privately held managed dental care
company based in Dallas, Texas, and a related marketing entity for total
consideration of approximately $23.5 million, consisting of cash and bank debt.
First American provides managed dental care services to approximately 175,000
members in the State of Texas, through a network of approximately 490 dental
care providers.
The acquisition was accounted for using the purchase method of accounting with
the results of operations of the businesses acquired included from the effective
date of the acquisition. The acquisition resulted in excess cost over fair
market value of net assets acquired of $21.5 million which is being amortized
over 40 years. There is no impact on the results of operations during the nine
months ended September 30, 1996, however the acquisition was included as part of
the Company's consolidated financial statements, as applicable.
Unaudited pro forma results of operations of the Company for the nine months
ended September 30, 1996, and the year ended December 31, 1995, are included
below. Such pro forma presentation, in millions, has been prepared assuming
that the acquisitions had occurred as of January 1, of each period.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
Revenues $65,037 $79,826
Net income from continuing operations 2,035 3,066
Net income from continuing operations
per common share .41 .65
Net income per common share .43 .48
</TABLE>
The pro forma results include the historical accounts of the Company, and
historical accounts of the acquired businesses and pro forma adjustments, as may
be required, including the amortization of the excess purchase price over the
fair value of the net assets acquired, the amortization for the noncompete
agreements entered into by the former owners of First American, and the
applicable income tax effects of these adjustments. The 1996 pro forma results
include the effect of audit adjustments recorded subsequent to the purchase of
First American by the Company. Substantially all of the adjustments are one-
time in nature and Management anticipates that the acquisition will be accretive
to net income for 1997. Such audit adjustments will be applied to the
applicable holdback funds maintained by the Company in connection with its
acquisition. The pro forma results of operations are not necessarily indicative
of actual results which may have occurred had the operations of the acquired
companies been combined in prior periods.
Page 6 of 11
<PAGE>
Note 2: Stockholders' Equity and Earnings Per Share
- ----------------------------------------------------
Since October 1986, the Company's Board of Directors has, at various times,
authorized the repurchase of up to 4,510,888 shares of its common stock through
open market or private transactions. As of September 30, 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 September 30, 1996 and 1995 were computed by dividing net income
by 4,958,456 and 4,777,262 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.
Note 4. Operating Results For the Quarter Ended December 30, 1996 and the year
- -------------------------------------------------------------------------------
ended December 31, 1995
- -----------------------
On October 21, 1996, the Company implemented a strategic plan to sell all of the
general dental practice owned by the Company ("General Practices"). Two of the
General Practices were sold during the third quarter. The Company anticipates
that the remaining General Practices should be sold by September 30, 1997.
One of the General Practices that was sold during the third quarter, was sold to
Boyd Professional Dental Corporation, a California corporation ("Boyd
Corporation"). Steven J. Baileys, D.D.S., an Officer and Director of the
Company and Bradford M. Boyd, D.D.S., a Director of the Company are the owners
of Boyd Corporation. The sale of such General Practice to Boyd Corporation was
unanimously approved by the Disinterested and Independent Members of the Board
of Directors of the Company, after a review by such Disinterested and
Independent Directors found the transaction to be fair to all parties involved.
The assets of the General Practices to be sold, pursuant to the Company's plan,
consist primarily of accounts receivable and supply inventories. Each General
Practice sold will also enter into a long-term contract with the Company's newly
formed practice management subsidiary, whereby the Company will provide ongoing
services to support the dentists in the operation of their practices, including
marketing and administrative support. The Company will retain the orthodontic
practice in each of the General Practices, and intends to operate the
orthodontic practice in the other dental offices as they are sold.
The Company projects a substantial gain on the disposal of the discontinued
operations, more than offsetting the net assets to be disposed of, as well as
any expected operating losses of the General Practices during the phase-out
period from October 1, 1996 through September 30, 1997. Due to the estimated
gain on the sale of these offices, actual gains will be recorded at the time of
such sales.
Operating results of the General Practices for the nine months ended September
30, 1996, are shown separately in the accompanying income statement, under the
term "Discontinued Operations". The income statement for 1995 has been restated
and operating results of the General Practices are also shown separately.
Net sales of the General Practices for the nine months ended September 30, 1995
and 1996, were $10,094 and $8,703, respectively. These amounts are not included
in the net sales in the accompanying income statements.
Page 7 of 11
<PAGE>
Assets and liabilities of the General Practices, shown at their book values, to
be disposed of consisted of the following:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
Accounts Receivable $2,239 $1,086
Supplies Inventories 662 662
------ ------
Total Assets $2,901 $1,748
</TABLE>
Net assets to be disposed of, at their book values, have been separately
classified in the accompanying balance sheet at September 30, 1996. The
December 31, 1995 balance sheet has been restated to conform with the current
year's presentation.
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
Nine months ended
September 30,
-------------------------------------
<S> <C> <C>
Increase/ Percent
Results of operations (000's omitted) (Decrease) Change
- --------------------------------------------------------------------------------
Health Care Revenues
Managed care revenues $6,740 15.3
Indemnity revenues 404 88.2
Orthodontic revenues 619 12.8
------ -----
Total Health Care Revenues $7,763 15.7
- --------------------------------------------------------------------------------
Health Care Expenses
Managed care expenses $5,443 16.8
Indemnity expenses 405 113.4
Orthodontic expenses 481 14.5
------ -----
Total Health Care Expenses $6,329 17.5
- --------------------------------------------------------------------------------
Total Selling, General and $ 852 8.5
Administrative Expenses
- --------------------------------------------------------------------------------
Other Income, Net $ (138) (16.3)
- --------------------------------------------------------------------------------
Net Income $1,119 66.4
- --------------------------------------------------------------------------------
</TABLE>
1996 Versus 1995
- ----------------
After restating the Company's financial statements to reflect the
discontinuation of the Company's dental practices (see Note 4 of the
Consolidated Financial Statements), the Company's revenues for the nine months
ended September 30, 1996, were $57,122, or a 15.7% increase on a 7.6% membership
increase over the corresponding period a year ago. This increase excluded the
membership increase due to the acquisition of First American completed on
September 27, 1996. These increases were a result from sales to new small and
mid-size clients and moderate price increases to renewing clients. The increases
in revenue also resulted from the growth in the Company's indemnity revenues of
88.2% over the comparable period a year ago.
Page 8 of 11
<PAGE>
Health care expenses for the nine months increased 17.5% primarily due to the
increased indemnity and preferred provider organization benefits paid and
incurred. These costs are directly related to increased premium revenue.
Management continued the selected purging of less profitable clients based on
actuarial reviews of plan designs and utilization. Overall selling, general and
administrative cots grew at 8.5% for the nine months, approximately half the
rate of revenue increases, bringing these costs to 19.1% of health care revenue
compared to 20.4% for the same period in 1995. Other income decreased due to
lower balances in investment securities as a result of the purchase of the
outstanding stock of First American, and other capital expenditures. Net income
increased due to the above factors.
Business Segment Information
- ----------------------------
The Company is engaged primarily in three distinct businesses; the operation of
managed care dental programs, the operation of dental indemnity insurance
programs, and the operation of orthodontic practices.
<TABLE>
<CAPTION>
1996 versus 1995
Nine months ended
September 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 $50,813 89.0 $44,073 89.3
Indemnity revenues 862 1.5 458 0.9
Orthodontic revenues 5,447 9.5 4,828 9.8
------- ------- ------- -------
Total Health Care Revenues $57,122 100.0 $49,359 100.0
- ----------------------------------------------------------------------------------------------
Health Care Expenses
Managed care expenses $37,917 74.6 $32,474 73.7
Indemnity expenses 762 88.4 357 77.9
Orthodontic revenues 3,795 69.7 3,314 68.6
------- ------- ------- -------
Total Health Care Expenses $42,474 74.4 $36,145 73.2
- ----------------------------------------------------------------------------------------------
Total Selling, General and
Administrative Expenses $10,924 19.1 $10,072 20.4
- ----------------------------------------------------------------------------------------------
</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 September 30, 1996, the current ratio was 1.93 to 1.00. The Company's net
worth was $35.0 million compared to $31.9 million a year earlier. The Company
had $14.8 million of cash and investments as of September 30, 1996 compared to
$16.3 million a year earlier. The Company also established a $30 million bank
loan during the period ended September 30, 1996, of which $19 million was used
to fund the acquisition of First American. The Company believes that income
from operations, together with the existing cash and investments on hand, its
bank loan, 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.
Page 9 of 11
<PAGE>
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
The statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations concerning any future premium
pricing levels, future dental health care expense levels, the Company's ability
to control health care, selling, general and administrative expenses, and all
other statements that are not historical facts, are forward looking statements.
Actual results may differ materially from those projected in the forward looking
statements, if any, which statements involve risks and uncertainties. The
Company's ability to expand is affected by competition not only in benefit
program choices, but also the number of dental plan competitors in the markets
in which the Company operates. Certain large employer groups and other
purchasers of commercial dental health care services, continue to demand minimal
premium rate increases, while limiting the number of choices offered to
employees. In addition, securing cost effective contracts with dentists may
become more difficult in part due to the increased competition among dental
plans for dentist contracts. The Company's profitability depends, in part, on
its ability to maintain effective control over health care costs, while
providing members with quality dental care. Factors such as levels of
utilization of dental health care services, new technologies, specialists costs,
and numerous other external influences may effect the Company's operating
results. The Company's expectations for the future are based on current
information and evaluation of external influences. Changes in any one factor
could materially impact the Company's expectations relating to premium rates,
benefit plans offered, membership growth, the percentage of health care
expenses, and as a result, profitability and therefore, effect the forward
looking statements which may be included in these reports. In addition, past
financial performance is not necessarily a reliable indicator of future
performance. An investor should not use historical performance alone to
anticipate future results or future period trends.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in litigation arising in the normal course
of business. In the opinion of management, the defense costs and/or
ultimate outcome of such litigation is covered by insurance or will
not have material effect on the Company's financial position or
results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
Reports on Form 8-K were filed with the Securities and Exchange
Commission on August 26, 1996 and October 9, 1996, respectively.
The Reports on Form 8-K mentioned in this Item 6, are hereby
incorporated herein to this Quarterly Report on Form 10Q for the
period ended September 30, 1996, as if set forth in full herein.
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 19th of November, 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
