<PAGE> 1
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 0-26688
UNITED DENTAL CARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2309712
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
14755 PRESTON ROAD, SUITE 300
DALLAS, TEXAS 75240
(Address of principal executive offices)
(Zip Code)
(214) 458-7474
(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 No xx
------ ------
The number of shares outstanding of the issuer's only class of $0.10 par value
common stock as of July 25, 1996 was 6,908,416.
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UNITED DENTAL CARE, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
o Consolidated Balance Sheets
December 31, 1995 and June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
o Consolidated Statements of Operations
Quarters ended June 30, 1995 and 1996 and
Six month periods ended June 30, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . 4
o Consolidated Statements of Cash Flows
Six month periods ended June 30, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Item 4. Submission of Matters to a Vote of Security-Holders . . . . . . . . . . . . . . . . . . . . . . . . .11
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
United Dental Care, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 46,940 $ 20,345
Premiums receivable . . . . . . . . . . . . . . . . . . . . . . . 4,757 4,387
Accrued interest and other current assets . . . . . . . . . . . . 522 861
Deferred taxes, current . . . . . . . . . . . . . . . . . . . . . 392 729
------------ -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . 52,611 26,322
Regulatory deposits . . . . . . . . . . . . . . . . . . . . . . . 3,155 3,437
Furniture and equipment, net . . . . . . . . . . . . . . . . . . 2,855 4,498
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . 27,394 41,667
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . 434 109
Deferred taxes, noncurrent . . . . . . . . . . . . . . . . . . . 139 109
------------ -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 86,588 $ 76,142
============ ===========
LIABILITIES
Accounts payable, accrued expenses and claims reserve . . . . . . $ 5,079 $ 4,123
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . 4,612 2,614
Current portion of debt . . . . . . . . . . . . . . . . . . . . . 11,913 978
Other current liabilities . . . . . . . . . . . . . . . . . . . . 115 158
------------ -----------
Total current liabilities . . . . . . . . . . . . . . . . . . 21,719 7,873
Long-term debt, net of current portion . . . . . . . . . . . . . 3,269 3,598
------------ -----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 24,988 11,471
------------ -----------
STOCKHOLDERS' EQUITY
Common stock, $.10 par value . . . . . . . . . . . . . . . . . . 690 691
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 52,086 52,100
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 8,824 11,880
------------ -----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . 61,600 64,671
------------ -----------
Total liabilities and stockholders' equity . . . . . . . . . . $ 86,588 $ 76,142
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 4
United Dental Care, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ---------------------------
1995 1996 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Managed benefits . . . . . . . . . . . . . . $ 14,741 $ 22,395 $ 29,175 $ 43,118
Indemnity . . . . . . . . . . . . . . . . . . 4,210 3,655 8,459 7,422
Interest income and other revenue . . . . . . 205 281 393 585
---------- ---------- ---------- ----------
Total revenues . . . . . . . . . . . . 19,156 26,331 38,027 51,125
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Dental services expense:
Managed benefits . . . . . . . . . . . 8,116 13,044 15,775 25,127
Indemnity . . . . . . . . . . . . . . 3,351 2,699 7,035 5,547
Sales and marketing . . . . . . . . . . . . . 2,426 2,928 5,012 5,726
General and administrative . . . . . . . . . 3,479 4,403 6,988 8,685
Depreciation and amortization . . . . . . . . 282 538 557 1,003
Interest expense. . . . . . . . . . . . . . . 294 115 609 209
---------- ---------- ---------- ----------
Total costs and expenses . . . . . . . 17,948 23,727 35,976 46,297
---------- ---------- ---------- ----------
INCOME BEFORE FEDERAL INCOME TAXES . . . . . . . 1,208 2,604 2,051 4,828
PROVISION FOR FEDERAL INCOME TAXES . . . . . . . 480 959 800 1,772
---------- ---------- ---------- ----------
NET INCOME . . . . . . . . . . . . . . . . . . . $ 728 $ 1,645 $ 1,251 $ 3,056
========== ========== ========== ==========
NET INCOME PER COMMON SHARE . . . . . . . . . . . $ 0.15 $ 0.23 $ 0.26 $ 0.42
WEIGHTED AVERAGE SHARES OUTSTANDING . . . . . . . 4,759,663 7,193,857 4,740,157 7,222,149
</TABLE>
The accompanying notes are an integral part of these financial statements.
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United Dental Care, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For Six Months Ended
June 30,
----------------------------
1995 1996
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,251 $ 3,056
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 557 1,003
Changes in operating assets and liabilities:
(Increase) decrease in premiums receivable . . . . . . . (263) 822
Decrease (increase) in accrued interest and other 47 (339)
current assets . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in accounts payable, accrued
expenses and claims reserve . . . . . . . . . . . . . 947 (1,958)
(Increase) in deferred income taxes . . . . . . . . . . ---- (190)
(Increase) decrease in other assets . . . . . . . . . . (142) 325
Increase (decrease) in unearned premiums . . . . . . . . 138 (2,152)
--------- --------
Net cash provided by operating activities . . . . . 2,535 567
INVESTING ACTIVITIES:
Purchases of furniture and equipment . . . . . . . . . . . . . . (482) (2,001)
Increase in regulatory deposits . . . . . . . . . . . . . . . . (217) (82)
Investment in new market . . . . . . . . . . . . . . . . . . . . ---- (148)
Purchase of Associated (less cash acquired) . . . . . . . . . . ---- (13,575)
--------- --------
Net cash used in investing activities . . . . . . (699) (15,806)
FINANCING ACTIVITIES:
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . 135 ----
Repayment of indebtedness . . . . . . . . . . . . . . . . . . . (1,917) (11,371)
Stock options exercised . . . . . . . . . . . . . . . . . . . . 465 15
Issuance of stock warrants . . . . . . . . . . . . . . . . . . . 80 ----
--------- --------
Net cash used in financing activities . . . . . . . (1,237) (11,356)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . 599 (26,595)
CASH AND CASH EQUIVALENTS:
Beginning of period 8,821 46,940
--------- --------
End of period $ 9,420 $ 20,345
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 460 $ 175
========= ========
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 901 $ 1,972
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 6
United Dental Care, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The financial statements included herein have been prepared by the
Registrant, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and
footnote disclosures normally required under generally accepted
accounting principles have been omitted pursuant to such rules and
regulations. It is suggested that these financial statements be read
in conjunction with the consolidated financial statements and the
notes thereto contained in the Company's Annual Report on Form 10-K.
However, this information reflects all adjustments (consisting solely
of normal recurring adjustments) that are, in the opinion of
management, necessary for a fair statement of the results of the
interim periods. The results of operations for the quarter and the
year-to-date are not necessarily indicative of the results to be
expected for the full year.
2. Acquisitions
Effective November 1, 1995, the Company completed the acquisition of
all of the outstanding capital stock of U.S. Dental Management, Inc.
("US Dental") for $12.6 million, composed of $1.3 million in cash at
the closing, principal payments totaling $1.0 million over the
three-year period beginning November 30, 1995 and an additional
payment of $10.3 million in January 1996. US Dental was a managed
dental benefits company that operated prepaid dental plans in four
states with approximately 165,000 members at October 31, 1995.
Effective February 1, 1996, the Company completed the acquisition of
all of the outstanding capital stock of Associated Health Plans, Inc.
and Associated Companies, Inc. (collectively, "Associated") for $15.0
million. Associated was a managed dental benefits company that
operated prepaid dental plans in Arizona with approximately 220,000
members at January 31, 1996.
3. Stockholders' Equity
In September 1995, the Company completed an initial public offering of
2,375,000 shares of its common stock for $22.00 per share (the
"Offering"), resulting in net proceeds of approximately $48.0 million.
The Company used approximately $10.0 million of such proceeds for the
repayment of all outstanding bank indebtedness, which had been
incurred in 1994 to finance the acquisition of International Dental
Health, Inc. ("IDH"), and $0.7 million for the regular annual payment
of the deferred purchase price of IDH.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached
consolidated financial statements and notes thereto.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages of
revenues represented by the items reflected in the Company's consolidated
statements of operations:
<TABLE>
<CAPTION>
For Three Months Ended For Six Months Ended
June 30, June 30,
-------------------------- -----------------------
1995 1996 1995 1996
------- ------ ------ ------
<S> <C> <C> <C> <C>
REVENUES:
Premiums earned:
Managed benefits . . . . . . . . . . . 77.0% 85.0% 76.7% 84.3%
Indemnity . . . . . . . . . . . . . . . 22.0 13.9 22.2 14.5
Interest and other revenue . . . . . . 1.0 1.1 1.1 1.2
------- ------ ------ ------
Total Revenues . . . . . . . . . 100.0 100.0 100.0 100.0
------- ------ ------ ------
EXPENSES:
Dental services:
Managed benefits . . . . . . . . . . 42.4 49.5 41.5 49.1
Indemnity . . . . . . . . . . . . . 17.5 10.3 18.5 10.9
------- ------ ------ ------
Subtotal . . . . . . . . . . . . 59.9 59.8 60.0 60.0
------- ------ ------ ------
Sales and marketing expenses . . . . . 12.6 11.1 13.2 11.2
General and administrative expenses . . 18.2 16.7 18.4 17.0
Depreciation and amortization . . . . . 1.5 2.0 1.4 2.0
Interest expense . . . . . . . . . . . 1.5 0.5 1.6 0.4
------- ------ ------ ------
Total expenses . . . . . . . . . 93.7 90.1 94.6 90.6
------- ------ ------ ------
Net income before Federal income taxes . . . 6.3 9.9 5.4 9.4
Federal income taxes . . . . . . . . . . . . 2.5 3.7 2.1 3.4
------- ------ ------ ------
Net income . . . . . . . . . . . . . . . . . 3.8% 6.2% 3.3% 6.0%
======= ====== ====== ======
</TABLE>
Comparison of Second Quarter of 1996 to Second Quarter of 1995
Revenues. Revenues for the quarter ended June 30, 1996, increased by $7.1
million, or 37.0% to $26.3 million from $19.2 million in the comparable quarter
of 1995. Managed benefits revenues became a more significant portion of
revenues increasing $7.7 million to $22.4 million, representing 85% of
revenues, as compared to $14.7 million (77% of revenues) in 1995. The increase
in managed benefits premium revenues was primarily a result of an increase in
the number of members rather than price increases. The Company had 1,099,508
members (excluding indemnity membership) at June 30, 1996 as compared to
679,702 at June 30, 1995. During the three months ended June 30, 1996, total
membership decreased from 1,177,886 at March 31, 1996, to 1,175,180 at June 30,
1996. The change for the comparable period from March 31, 1995 to June 30,
1995 was from 773,775 to 772,824. Historically, the Company's rate of premium
increases on its managed benefits products has been less than the rate of
increase in the cost of dental services in general. Indemnity revenues
declined from $4.2 million (22.0% of revenues) to $3.7 million (13.9% of
revenues) largely due to the termination in December, 1995 of a large New
Mexico group of approximately 14,000 members. Interest income and other
revenue increased $0.1 million.
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<PAGE> 8
Dental Services. Dental services expenses increased $4.2 million, or 36.5% to
$15.7 million in 1996 from $11.5 million in 1995 primarily due to the increase
in membership discussed above. A major change in revenue mix caused total
dental services as a percentage of revenue to remain essentially unchanged at
59.8% in 1996 (as compared to 59.9% in 1995), although the component costs
changed significantly.
Managed Benefits:
Dental service expenses for the Company's managed benefits plans,
which consist primarily of capitation payments to general dentists,
increased to 58.2% of managed benefits revenues in 1996, from 55.1% in
1995, primarily due to the effect of the higher dental services
expense ratio in the managed dental benefits business that the Company
acquired through US Dental and Associated. The managed benefits plans
offered by US Dental and Associated historically were sold at lower
premium levels than the Company's pre-existing managed benefits plans,
thereby resulting in the payment to general dentists of a relatively
higher percentage of premiums. It is management's intention to
increase premiums over the next several years, as market conditions
permit, thereby increasing revenues. In most markets, this will allow
the Company to increase the amounts paid to general dentists through
capitation payments improving the economics for managed care general
dentists. Management expects these actions to result in the
percentage of dental services expenses for all of its managed dental
benefits plans relative to managed benefits revenues declining below
the percentage experienced in the second quarter of 1996.
Indemnity:
Claims expense for the indemnity business in the second quarter of
1996 was 73.8% of indemnity revenues, down from 79.6% in the
comparable quarter of 1995. This improvement is due to the late 1995
termination of the large New Mexico group that had a loss ratio in
excess of 93% and to price increases on the remaining business.
Sales and Marketing. Sales and marketing expenses increased $0.5 million, or
20.8% to $2.9 million in 1996 from $2.4 million in 1995. Sales and marketing
expenses as a percentage of revenue declined to 11.1% in 1996 from 12.6% in
1995. A portion of the sales and marketing costs, such as base salaries of
field sales personnel is fixed so that the expenses as a percentage of revenues
decline as revenues increase.
General and Administrative. General and administrative expenses increased $0.9
million, or 25.7%, to $4.4 million in 1996 from $3.5 million in 1995. The
decrease in general and administrative expenses as a percentage of revenues
from 18.2 % in 1995 to 16.7% in 1996 was primarily attributable to the largely
fixed nature of such costs, which generally do not vary in the short term
relative to changes in revenue.
Depreciation and Amortization. Depreciation and amortization expenses
increased $0.2 million, 66.7%, to $0.5 million in 1996 from $0.3 million in
1995. Most of this increase was the result of amortization of the goodwill and
the consulting and non-competition agreements attributable to the acquisitions
of US Dental and Associated.
Interest. Interest expense decreased to $0.1 million in 1996 from $0.3 million
in 1995. The 1996 interest expense was composed of the imputed interest on the
consulting and non-competition agreements incurred to finance the Company's
acquisitions. The weighted average interest rate on these agreements during
the second quarter of 1996 was 7.9%. This weighted average interest rate also
includes the fees for letters of credit related to the agreements.
Taxes. The average tax rate was 36.8% and 39.7% in 1996 and 1995,
respectively. The lower tax rate in 1996 was largely the result of the $0.2
million tax exempt interest income earned on cash balances. During the
comparable period in 1995, the interest income was fully taxable. The average
tax rate was greater than the statutory Federal tax rate of 34%, primarily as
the result of the non-deductibility of the amortization of goodwill incurred in
the Company's acquisitions.
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<PAGE> 9
Comparison of First Six Months of 1996 to First Six Months of 1995
Revenues. Managed benefits revenues increased by $13.9 million, or 47.6% to
$43.1 million in 1996 from $29.2 million in 1995. Interest income and other
revenue increased $0.2 million. The increase in premium revenues was primarily
a result of an increase in the number of members. During the first six months
of 1996, managed benefits membership increased from 861,051 at December 31,
1995 to 1,099,508 at June 30, 1996, including an increase of approximately
220,000 members from the Associated acquisition. The increase in the
comparable period in 1995 was from 740,984 to 772,824. Indemnity revenues
declined from $8.5 million (22.2% of revenues) to $7.4 million (14.5% of
revenues) largely due to the termination of a large New Mexico group in
December 1995.
Dental Services. Dental services expenses increased $7.9 million, or 25.6% to
$30.7 million in 1996 from $22.8 million in 1995, primarily due to the increase
in membership discussed above. Total dental services as a percentage of
premium revenues remained relatively unchanged at 60.7% of premiums (60.6% in
1995). Dental service expenses for the Company's managed benefits plans, which
consist primarily of capitation payments to general dentists, increased to
58.3% of managed benefits revenues in 1996, from 54.1% in 1995. The managed
benefits plans offered by US Dental and Associated historically were sold at
lower premium levels than the Company's pre-existing managed benefits plans,
thereby resulting in the payment to general dentists of a relatively higher
percentage of premiums. Claims expense for the indemnity business was 74.7% of
indemnity revenues. See above discussion for additional information concerning
trends in dental expenses.
Sales and Marketing. Sales and marketing expenses increased $0.7 million, or
14.0% to $5.7 million in 1996 from $5.0 million in 1995. Sales and marketing
expenses as a percentage of revenue declined to 11.2% in 1996 from 13.2% in
1995. This decrease was largely attributable to the increase in the percentage
of revenues from managed dental benefits plans relative to indemnity plans in
1996 as compared to 1995. Since the indemnity business generates a higher per
member per month revenue than is generated by the managed dental benefits
plans, and a portion of the sales and marketing costs, such as base salaries
and printing costs, are fixed, the expenses as a percentage of revenues
decline. In addition, the commissions paid on the indemnity business are
lower as a percentage of revenues than those paid on the managed dental
benefits plans.
General and Administrative. General and administrative expenses increased $1.7
million, or 24.3%, to $8.7 million in 1996 from $7.0 million in 1995. The
decline in general and administrative expenses as a percentage of revenues to
17.0% in 1996 from 18.4% in 1995 was primarily attributable to efficiencies
achieved through the consolidation of executive staffs and accounting
departments due to the acquisition of IDH, US Dental and Associated. In
addition, there was a decrease in premium taxes as a percentage of revenue
because the Company now generates a greater percentage of its revenues in
states that have lower premium taxes.
Depreciation and Amortization. Depreciation and amortization expenses
increased $0.4 million, or 66.7%, to $1.0 million in 1996 from $0.6 million in
1995. This increase was the result of amortization of the goodwill and
consulting and non- competition agreements attributable to the acquisitions of
US Dental and Associated.
Interest. Interest expense decreased to $0.2 million in 1996 from $0.6 million
in 1995. The 1996 interest expense was composed of the imputed interest on the
agreements incurred to finance the Company's acquisitions. The weighted
average interest rate on these agreements during the first six months of 1996
was 7.9%. This weighted average interest rate also includes the fees for
letters of credit related to the agreements.
Taxes. The average tax rate was 36.7% and 39.0% in 1996 and 1995,
respectively. The lower tax rate in 1996 was largely the result of the $0.4
million tax exempt interest income earned on cash balances. During the
comparable period in 1995, the Company did not have significant cash balances
and interest income was fully
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<PAGE> 10
taxable. The average tax rate was higher than the statutory Federal tax rate
of 34%, primarily as the result of the non-deductibility of the amortization of
goodwill.
LIQUIDITY AND CAPITAL RESOURCES
The Company's historical operating cash requirements have been more than met
through cash provided by operations. Net cash provided by operating activities
was $0.6 million for the six months ended June 30, 1996, composed of $1.3
million in cash provided by operating activities in the first quarter of 1996
partially offset by the use of $0.7 million in the second quarter. The second
quarter's use of cash was a result of (i) a change to earlier capitation
payments to certain network dentists that resulted in a one-time increase in
cash outflow and (ii) a change to later collection of prepaid revenues from
certain groups that resulted in a one-time decrease in cash flows. Both
changes were instituted to provide better customer service and had no effect on
operating earnings. The decrease in unearned premiums of $2.2 million and the
decrease in accounts payable, accrued expenses and claims reserves of $2.0
million reflect this one-time impact on cash from operating activities.
The Company's primary cash need after operations is for debt service on
consulting and non-competition agreements entered into as part of the Company's
acquisitions. The principal amount of such indebtedness of the Company at June
30, 1996 was $4.6 million. The various agreements have fixed rates of interest
ranging from 5.0% to 7.5% and require aggregate payments of principal and
interest of $1.4 million per year.
In June 1995, the Company entered into a contract to acquire a new information
system to replace its existing system. The project is currently expected to
cost approximately $4.0 million and to be completed in the fourth quarter of
1996. Capital expenditures, other than the cost of the new information system,
were $0.8 million during the six months ended June 30, 1996. Such expenditures
primarily consisted of computer equipment and furniture purchased in connection
with the integration of US Dental and Associated into the Company. Capital
expenditures for the remainder of the 1996 fiscal year, excluding the costs
associated with the new information system, are expected to be approximately
$0.5 million.
Under applicable insurance laws of most states in which the Company conducts
business, the Company's subsidiary operating in the particular state is
required to maintain a minimum level of net worth and reserves. In general,
minimum capital requirements are more stringent for indemnity insurance
companies, such as United Dental Care Insurance Company ("UDCIC"). The Company
may be required from time to time to invest funds in one or more of its
subsidiaries to meet regulatory capital requirements. The implementation of
risk-based capital regulations in states having jurisdiction over UDCIC may
require that the Company increase its investment in UDCIC. However, the
Company does not believe that compliance with such regulations will adversely
affect the Company's ability to meet its operating cash requirements. The
Company believes that UDCIC will be able to satisfy such regulations without
the need for significant capital contributions by the Company. Applicable laws
generally limit the ability of the Company's subsidiaries to pay dividends to
the extent that required regulatory capital would be impaired.
Management believes that the Company's operations are not materially affected
by inflation. The Company's principal costs, such as dental services expense
and sales and marketing expenses, are largely related to membership levels and
are therefore variably related to premium revenues. Historically, the
Company's rate of premium increases has been less than the rate of increase in
the cost of dental services in general.
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<PAGE> 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 24, 1996, the Arizona Department of Insurance filed a Notice of
Administrative Hearing against the Company alleging that the Company
consummated its acquisition of Affiliated Health Plans, Inc. ("AHP") without
complying with the requirements of the Arizona Insurance Holding Company Act
(the "Act"). The Company acquired AHP in January, 1996. AHP is licensed in
Arizona as a prepaid dental plan. The Company did not make a filing under the
Act in connection with the AHP acquisition because its interpretation is that
the Act does not apply to AHP since AHP is not an "insurer" as defined by and
subject to the Act. The Notice seeks fines of up to $50,000 for each violation
against the Company and any officer or director of the Company that knowingly
violated the Act, and also seeks an Order directing compliance with the Act in
connection with the AHP acquisition. The Company has filed an answer denying
the allegations. The Company expects a determination to be made by an Arizona
administrative judge in the fourth quarter of 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to the security-holders for a vote during the
quarter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
11.* - Statement regarding computation of per share earnings.
27.* - Financial Data Schedule
- --------------------------------
* Filed herewith.
(b) No reports on Form 8-K were filed during the quarter ended June 30,
1996.
SIGNATURES
Pursuant to the requirements of 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.
UNITED DENTAL CARE, INC.
--------------------------------------
(Registrant)
Date: July 25, 1996 MARK E. PAPE
------------------ --------------------------------------
Mark E. Pape, Senior Vice President
Chief Financial Officer
11 of 11
<PAGE> 12
UNITED DENTAL CARE, INC.
INDEX OF EXHIBITS
Exhibit No.
- -----------
11. Statement regarding computation of per share earnings
27. Financial Data Schedule
<PAGE> 1
EXHIBIT 11
UNITED DENTAL CARE, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For Three Months Ended For Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1995 1996 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
I. Reported net earnings
---------------------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 728 $ 1,645 $ 1,251 $ 3,056
========== ========== ========== ==========
II. Primary earnings per share
--------------------------
A. Shares outstanding
Weighted average number of shares outstanding during
period . . . . . . . . . . . . . . . . . . . . . 4,330,943 6,908,416 4,262,560 6,905,120
Shares potentially issuable upon the assumed exercise
of stock options, net of assumed repurchase using
the Treasury Stock Method . . . . . . . . . . . . 428,720 285,441 477,597 317,029
---------- ---------- ---------- ----------
Total common shares and common equivalent shares . . 4,759,663 7,193,857 4,740,157 7,222,149
========== ========== ========== ==========
B. Computation of net earnings per share . . . . . . .
Net income . . . . . . . . . . . . . . . . . . $ 0.15 $ 0.23 $ 0.26 $ 0.42
========== ========== ========== ==========
III. Fully diluted earnings per share (see NOTE below)
-------------------------------------------------
A. Shares outstanding
Weighted average number of shares outstanding during
period . . . . . . . . . . . . . . . . . . . . . . 4,330,943 6,908,416 4,262,560 6,905,120
Shares potentially issuable upon the assumed exercise
of stock options, net of assumed repurchase using
the Treasury Stock Method . . . . . . . . . . . . . 433,844 291,201 489,381 324,225
---------- ---------- ---------- ----------
Total common shares and common equivalent shares 4,764,787 7,199,617 4,751,941 7,229,345
========== ========== ========== ==========
B. Computation of net earnings per share
Net income . . . . . . . . . . . . . . . . . . . . $ 0.15 $ 0.23 $ 0.26 $ 0.42
========== ========== ========== ==========
</TABLE>
NOTE: The amounts of per share earnings on the fully diluted basis are not
required to be presented in the consolidated statements of operations under the
provisions of Accounting Principles Board Opinion No. 15 since there is no
significant difference between primary and fully diluted earnings per share.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 20,345
<SECURITIES> 0
<RECEIVABLES> 4,387
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,322
<PP&E> 4,498
<DEPRECIATION> 0
<TOTAL-ASSETS> 76,142
<CURRENT-LIABILITIES> 7,873
<BONDS> 0
<COMMON> 691
0
0
<OTHER-SE> 63,980
<TOTAL-LIABILITY-AND-EQUITY> 76,142
<SALES> 0
<TOTAL-REVENUES> 51,125
<CGS> 0
<TOTAL-COSTS> 46,297
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 209
<INCOME-PRETAX> 4,828
<INCOME-TAX> 1,772
<INCOME-CONTINUING> 3,056
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,056
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
