<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 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 0-26688
UNITED DENTAL CARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2309712
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
14755 PRESTON ROAD, SUITE 300
DALLAS, TEXAS 75240
(Address of principal executive offices)
(Zip Code)
(972) 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 xx No
---- ----
The number of shares outstanding of the issuer's only class of $.10 par value
common stock as of November 11, 1996 was 8,908,416.
<PAGE> 2
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 September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . 3
o Consolidated Statements of Operations
Quarters ended September 30, 1995 and 1996 and
Nine month periods ended September 30, 1995 and 1996 . . . . . . . . . . . . . . . . . . . 4
o Consolidated Statements of Cash Flows
Nine month periods ended September 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
</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, September 30,
1995 1996
------------ -------------
ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . $46,940 $15,461
Premiums receivable . . . . . . . . . . . . . . . . . . . 4,757 8,317
Accrued interest and other current assets . . . . . . . . 522 1,000
Deferred taxes, current . . . . . . . . . . . . . . . . . 392 729
------- -------
Total current assets . . . . . . . . . . . . . . . . . 52,611 25,507
Regulatory deposits . . . . . . . . . . . . . . . . . . . 3,155 3,368
Furniture and equipment, net . . . . . . . . . . . . . . 2,855 5,466
Intangible assets, net . . . . . . . . . . . . . . . . . 27,394 42,356
Other assets, net . . . . . . . . . . . . . . . . . . . . 434 1,352
Deferred taxes, noncurrent . . . . . . . . . . . . . . . 139 109
------- -------
Total assets . . . . . . . . . . . . . . . . . . . . . $86,588 $78,158
======= =======
LIABILITIES
Accounts payable, accrued expenses and claims reserve . . $ 5,079 $ 4,988
Unearned premiums . . . . . . . . . . . . . . . . . . . 4,612 2,638
Current portion of debt . . . . . . . . . . . . . . . . . 11,913 978
Other current liabilities . . . . . . . . . . . . . . . . 115 109
------- -------
Total current liabilities . . . . . . . . . . . . . . 21,719 8,713
Long-term debt, net of current portion . . . . . . . . . 3,269 2,773
------- -------
Total liabilities . . . . . . . . . . . . . . . . . . 24,988 11,486
------- -------
STOCKHOLDERS' EQUITY
Common stock, $.10 par value . . . . . . . . . . . . . . 690 691
Additional paid-in capital . . . . . . . . . . . . . . . 52,086 52,225
Retained earnings . . . . . . . . . . . . . . . . . . . . 8,824 13,756
------- -------
Total stockholders' equity . . . . . . . . . . . . . . 61,600 66,672
------- -------
Total liabilities and stockholders' equity . . . . . . $86,588 $78,158
======= =======
</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 Nine Months Ended
September 30, September 30,
------------------------- ----------------------------
1995 1996 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Managed benefits . . . . . . . . . . . $ 14,870 $ 22,561 $ 44,045 $ 65,679
Indemnity . . . . . . . . . . . . . . . 4,188 3,802 12,647 11,224
Interest income and other revenue . . . 282 350 675 935
--------- --------- --------- ---------
Total revenues . . . . . . . . . 19,340 26,713 57,367 77,838
--------- --------- --------- ---------
COSTS AND EXPENSES:
Dental services expense:
Managed benefits . . . . . . . . 7,951 13,499 23,726 38,626
Indemnity . . . . . . . . . . . 3,471 2,477 10,506 8,024
Sales and marketing . . . . . . . . . . 2,298 3,195 7,310 8,921
General and administrative. . . . . . . 3,487 3,926 10,475 12,611
Depreciation and amortization . . . . . 288 562 845 1,565
Interest expense . . . . . . . . . . . 310 87 919 296
--------- --------- --------- ---------
Total costs and expenses . . . . 17,805 23,746 53,781 70,043
--------- --------- --------- ---------
INCOME BEFORE FEDERAL INCOME TAXES AND
EXTRAORDINARY CHARGE . . . . . . . . . 1,535 2,967 3,586 7,795
PROVISION FOR FEDERAL INCOME TAXES . . . . (575) (1,091) (1,375) (2,863)
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY CHARGE. . . . . 960 1,876 2,211 4,932
EXTRAORDINARY CHARGE, NET OF TAX. . . . . . (142) ---- (142) ----
--------- --------- --------- ---------
NET INCOME . . . . . . . . . . . . . . . . $ 818 $ 1,876 $ 2,069 $ 4,932
========= ========= ========= =========
PER SHARE AMOUNTS:
Income before extraordinary charge . . $ 0.19 $ 0.26 $ 0.45 $ 0.68
Extraordinary charge, net of tax . . . (0.03) ---- (0.03) ----
--------- --------- --------- ---------
Net income per common share . . $ 0.16 $ 0.26 $ 0.42 $ 0.68
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING . . . . 5,055,536 7,169,204 4,846,438 7,204,403
</TABLE>
The accompanying notes are an integral part of these financial statements.
4 of 12
<PAGE> 5
United Dental Care, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For Nine Months Ended
September 30,
--------------------------
1995 1996
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income before extraordinary charge . . . . . . . . . . . . . . $ 2,211 $ 4,932
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 845 1,565
Changes in operating assets and liabilities:
(Increase) in premiums receivable . . . . . . . . . . . . (565) (3,108)
(Increase) in accrued interest and other current assets . (99) (478)
Increase (decrease) in accounts payable, accrued expenses
and claims reserve . . . . . . . . . . . . . . . . . 1,334 (1,084)
(Increase) in deferred income taxes . . . . . . . . . . . ---- (190)
(Increase) in regulatory deposits . . . . . . . . . . . . (400) (13)
(Increase) in other assets . . . . . . . . . . . . . . . . (222) (736)
Increase (decrease) in unearned premiums . . . . . . . . . 222 (2,128)
------- -------
Net cash provided by (used in) operating activities . 3,326 (1,240)
INVESTING ACTIVITIES:
Purchases of furniture and equipment . . . . . . . . . . . . . . . (1,656) (3,186)
Investment in new market . . . . . . . . . . . . . . . . . . . . . (6) (164)
Acquisition escrow deposits . . . . . . . . . . . . . . . . . . . ---- (1,200)
Purchase of Associated (less cash acquired) . . . . . . . . . . . ---- (13,575)
------- -------
Net cash used in investing activities . . . . . . . (1,662) (18,125)
FINANCING ACTIVITIES:
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . 1,154 ----
Repayment of indebtedness . . . . . . . . . . . . . . . . . . . . (12,572) (12,254)
Extraordinary charge on early retirement of debt, net of tax . . . (142) ----
Proceeds from public offering of common stock . . . . . . . . . . 48,019 ----
Tax effect of stock options . . . . . . . . . . . . . . . . . . . 29 125
Stock options exercised . . . . . . . . . . . . . . . . . . . . . 465 15
Issuance of stock warrants . . . . . . . . . . . . . . . . . . . . 80 ----
------- -------
Net cash provided by/used in financing activities . . 37,033 (12,114)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . 38,697 (31,479)
CASH AND CASH EQUIVALENTS:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . 8,821 46,940
------- -------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . $47,518 $15,461
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 685 $ 379
======= =======
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . $ 951 $ 2,272
======= =======
</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 163,000 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.
The Company recently entered into definitive agreements to acquire
five managed dental benefits companies operating prepaid dental plans
in New Jersey, Florida, Oklahoma, Missouri, Kansas and Michigan and
having approximately 440,000 members in the aggregate at June 30,
1996. In addition, the Company recently entered into a definitive
agreement to acquire a company that operates a multi-state dental
referral plan with approximately 60,000 members. Two of these
acquisitions, the Michigan prepaid plan company and the multi-state
referral plan company, were completed subsequent to the end of the
third quarter. The remaining pending acquisitions are subject to
various conditions, including receipt of regulatory approvals.
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 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.
In October 1996, the Company completed a public offering of 2,000,000
shares of its common stock for $30.00 per share, resulting in net
proceeds of approximately $56.3 million. The Company plans to use such
proceeds to complete the previously announced acquisitions discussed
above.
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<PAGE> 7
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 Nine Months Ended
September 30, September 30,
------------------------- ---------------------
1995 1996 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
REVENUES:
Premiums earned:
Managed benefits . . . . . . . . . . . 76.9% 84.5% 76.8% 84.4%
Indemnity . . . . . . . . . . . . . . . 21.7 14.2 22.0 14.4
Interest and other revenue . . . . . . 1.4 1.3 1.2 1.2
------ ------ ------ ------
Total revenues . . . . . . . . . 100.0 100.0 100.0 100.0
------ ------ ------ ------
EXPENSES:
Dental services:
Managed benefits . . . . . . . . . . 41.1 50.5 41.4 49.6
Indemnity . . . . . . . . . . . . . 18.0 9.3 18.3 10.3
------ ------ ------ ------
Subtotal . . . . . . . . . . . . 59.1 59.8 59.7 59.9
------ ------ ------ ------
Sales and marketing expenses . . . . . 11.9 12.0 12.7 11.5
General and administrative expenses . . 18.0 14.7 18.2 16.2
Depreciation and amortization . . . . . 1.5 2.1 1.5 2.0
Interest expense. . . . . . . . . . . . 1.6 0.3 1.6 0.4
------ ------ ------ ------
Total expenses . . . . . . . . . 92.1 88.9 93.7 90.0
------ ------ ------ ------
Net income before Federal income taxes
and extraordinary charge. . . . . . . . . . 7.9 11.1 6.3 10.0
Federal income taxes. . . . . . . . . . . . . (3.0) (4.1) (2.4) (3.7)
------ ------ ------ ------
Net income before extraordinary charge . . . 4.9 7.0 3.9 6.3
Extraordinary charge, net of tax . . . . . . (0.7) ---- (0.3) ----
------ ------ ------ ------
Net income . . . . . . . . . . . . . . . . . 4.2% 7.0% 3.6 % 6.3%
====== ====== ====== ======
</TABLE>
Comparison of Third Quarter of 1996 to Third Quarter of 1995
Revenues. Revenues for the quarter ended September 30, 1996, increased by $7.4
million, or 38.3% to $26.7 million from $19.3 million in the comparable
quarter of 1995. Managed benefits revenues became a more significant portion
of revenues increasing $7.7 million to $22.6 million, representing 84.5% of
revenues, as compared to $14.9 million (76.9% 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
1,103,255 members (excluding indemnity membership) at September 30, 1996 as
compared to 690,205 at September 30, 1995. During the three months ended
September 30, 1996, total membership increased from 1,175,180 at June 30, 1996,
to 1,178,939 at September 30, 1996. The change for the comparable period from
June 30, 1995 to September 30, 1995 was from 771,714 to 780,836. 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
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<PAGE> 8
general. Indemnity revenues decreased from $4.2 million (21.7% of revenues)
to $3.8 million (14.2% 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 remained comparable.
Dental Services. Dental services expenses increased $4.6 million, or 40.4% to
$16.0 million in 1996 from $11.4 million in 1995 primarily due to the increase
in membership discussed above.
Managed Benefits:
Dental service expenses for the Company's managed benefits plans,
which consist primarily of capitation payments to general dentists,
increased to 59.8% of managed benefits revenues in 1996, from 53.5%
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 third quarter of 1996.
Indemnity:
Claims expense for the indemnity business in the third quarter of 1996
was 65.2% of indemnity revenues, down from 82.9% in the comparable
quarter of 1995. The reduced indemnity dental services expense ratio
for the third quarter of 1996 was largely due to more favorable than
expected claims experience. The Company has been increasing prices on
renewing indemnity business at a rate greater than the underlying rate
of inflation in dental expenses, resulting in improved margins. The
improvement is also partially due to the late 1995 termination of the
large New Mexico group that had a loss ratio in excess of 93%.
Sales and Marketing. Sales and marketing expenses increased $0.9 million, or
39.1% to $3.2 million in 1996 from $2.3 million in 1995. Sales and marketing
expenses as a percentage of revenue increased to 12.0% in 1996 from 11.9% in
1995.
General and Administrative. General and administrative expenses increased $0.4
million, or 11.4%, to $3.9 million in 1996 from $3.5 million in 1995. The
decrease in general and administrative expenses as a percentage of revenues
from 18.0% in 1995 to 14.7% 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 in 1996 relative to 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 $0.1 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 third 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 37.5% in 1996 and 1995,
respectively. The decreased tax rate in 1996 was largely the result of the 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 Nine Months of 1996 to First Nine Months of 1995
Revenues. Managed benefits revenues increased by $21.7 million, or 49.3% to
$65.7 million in 1996 from $44.0 million in 1995. Interest income and other
revenue increased $0.3 million. The increase in premium revenues was primarily
a result of an increase in the number of members. During the first nine months
of 1996, managed benefits membership increased from 861,051 at December 31,
1995 to 1,103,255 at September 30, 1996, including an increase of approximately
220,000 members from the Associated acquisition. The increase in the
comparable period in 1995 was from 645,818 to 690,205. Indemnity revenues
decreased from $12.5 million (22.0% of revenues) to $11.2 million (14.4% of
revenues) largely due to the termination of a large New Mexico group in
December 1995.
Dental Services. Dental services expenses increased $12.4 million, or 36.3% to
$46.6 million in 1996 from $34.2 million in 1995, primarily due to the increase
in membership discussed above. Total dental services as a percentage of
premium revenues is 60.5% of premiums (60.4% in 1995). Dental service expenses
for the Company's managed benefits plans, which consist primarily of capitation
payments to general dentists, increased $14.9 million to 58.8% of managed
benefits revenues in 1996, from 53.9% 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 71.5% of indemnity
revenues. See above discussion for additional information concerning trends in
dental expenses.
Sales and Marketing. Sales and marketing expenses increased $1.6 million, or
21.9% to $8.9 million in 1996 from $7.3 million in 1995. Sales and marketing
expenses as a percentage of revenue decreased to 11.5% in 1996 from 12.7% 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 of
direct sales personnel and printing costs, are fixed, the expenses as a
percentage of revenues decline.
General and Administrative. General and administrative expenses increased $2.1
million, or 20.0%, to $12.6 million in 1996 from $10.5 million in 1995. The
decline in general and administrative expenses as a percentage of revenues to
16.2% in 1996 from 18.2% 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 $0.8 million, or 100%, to $1.6 million in 1996 from $0.8 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 declined to $0.3 million in 1996 from $0.9 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 first nine 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 38.3% in 1996 and 1995,
respectively. The decline in 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 Company did not have significant cash balances
and the interest income of $0.2 million was fully 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.
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<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's operating cash requirements have been more than met
through cash provided by operations. However, net cash used in operating
activities was $1.2 million for the nine months ended September 30, 1996,
composed of $1.3 million in cash provided by operating activities in the first
quarter of 1996 offset by the use of $0.7 million in the second quarter and
$1.8 million in the third quarter. The second and third quarters' 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 increase
in premiums receivable of $3.1 million, the decrease in unearned premiums of
$2.1 million and the decrease in accounts payable, accrued expenses and claims
reserves of $1.1 million reflect this one-time impact on cash from operating
activities. Management believes that active management of receivables balances
will result in a significant improvement in cash receipts.
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
September 30, 1996 was $3.8 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 $4.4 million and to be completed in the second quarter of
1997. Capital expenditures, other than the cost of the new information system,
were $1.0 million during the nine months ended September 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, will not be
material.
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.
10 of 12
<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 Associated Health Plans, Inc. ("Associated") in
January 1996 without complying with the requirements of the Arizona Insurance
Holding Company Act (the "Act"). Associated is licensed in Arizona as a
prepaid dental plan organization. The Company did not make a filing under the
Act in connection with the Associated acquisition because the Company's
interpretation is that the Act does not apply to Associated since Associated is
not an "insurer" as defined by and subject to the Act. Pursuant to the notice,
the Arizona Department of Insurance seeks a fine of up to $50,000 against the
Company, a fine of up to $10,000 against an officer of the Company and an order
directing compliance with the Act in connection with the Associated
acquisition. The Arizona Department of Insurance has broad powers to seek other
remedies, including injunctive relief and license revocation. There can be no
assurance as to what relief may ultimately be sought or obtained by the Arizona
Department of Insurance. The Company has filed an answer denying the
allegations. A final determination against the Company could have a material
adverse effect on the Company.
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
<TABLE>
<S> <C><C>
10.01** - Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, Gilbert G. Finger, Patricia L.
Schubring, Edward K. Halstead, Birchtree Enterprises and Binkley & Stewart, P.C., as Sellers, and
Independent Dental Plan, Inc. dated as of June 28, 1996.
10.02** - Stock Purchase Agreement between United Dental Care, Inc., as Purchaser, and UICI, as Seller, dated as of
September 10, 1996, for all the issued and outstanding shares of capital stock of Association Dental Plan,
Inc., a District of Columbia corporation.
10.03** - Earnest Money Escrow Agreement among United Dental Care, Inc., UICI and Texas Commerce Bank National
Association, dated as of September 10, 1996, regarding the purchase of all the issued and outstanding
shares of capital stock of Association Dental Plan, Inc., a District of Columbia corporation.
10.04** - Stock Purchase Agreement between United Dental Care, Inc., as Purchaser and UICI, as Seller, dated as of
September 10, 1996, for all the issued and outstanding shares of capital stock of International Dental
Plan, Inc., a Florida corporation.
10.05** - Earnest Money Escrow Agreement among United Dental Care, Inc., UICI and Texas Commerce Bank National
Association, dated as of September 10, 1996, regarding the purchase of all the issued and outstanding
shares of capital stock of International Dental Plan, Inc., a Florida corporation.
10.06** - Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and UICI, United Management &
Consulting, Inc., United Management & Consulting Retirement Plan and Marie C. Montgomery Revocable Trust
U/T/A March 23, 1992, as Seller, dated as of September 10, 1996, for the purchase of 90% of the issued and
outstanding shares of capital stock of United Dental Care, Inc., an Oklahoma corporation.
10.07** - Earnest Money Escrow Agreement amount United Dental Care, Inc., UICI, United Management & Consulting, Inc.,
United Management & Consulting Retirement Plan, Marie C. Montgomery Revocable Trust U/T/A March 23, 1992
and Texas Commerce Bank National Association , as Escrow Agent, dated as of September 10, 1996, regarding
the purchase of 90% of the issued and outstanding shares of capital stock of United Dental Care, Inc., an
Oklahoma corporation.
10.08** - Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and John E. Carlin, Ph.D., Frank J.
Schloegel, III, J. Dennis Dlabal, D.D.S., The John E. Carlin Charitable Remainder Unitrust, UID June 28,
1996, The Frank J. Schloegel Charitable Remainder Unitrust I, UID July 12, 1996, The Frank J. Schloegel
Charitable Remainder Unitrust II, UID July 12, 1996, The J. Dennis Dlabal Charitable Remainder Trust, UID
September 5, 1996, as Sellers, and Kansas City Dental Care, Inc., dated as of September 11, 1996.
</TABLE>
11 of 12
<PAGE> 12
<TABLE>
<S> <C><C>
10.09** - Earnest Money Escrow Agreement among United Dental Care, Inc., John E. Carlin Ph.D., Frank J. Schloegel,
III, J. Dennis Dlabal, D.D.S., The John E. Carlin Charitable Remainder Unitrust, UID June 28, 1996, The
Frank J. Schloegel Charitable Remainder Unitrust I, UID July 12, 1996, The Frank J. Schloegel Charitable
Remainder Unitrust II, UID July 12, 1996, The J. Dennis Dlabal Charitable Remainder Trust, UID September 5,
1996 and UMB Bank, N.A., as Escrow Agent, dated as of September 11, 1996.
10.10** - Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and Frank A. Pettisani, D.D.S., Lisa
M. Mazzone, Frank A. Pettisani, Jr., D.D.S., Charles A. Costa and Donna Costa, as Sellers, and OraCare
Consultants, Inc., dated as of September 5, 1996.
10.11** - Earnest Money Escrow Agreement among United Dental Care, Inc., Frank A. Pettisani, D.D.S., Lisa M. Mazzone,
Frank A. Pettisani, Jr., D.D.S., Charles A. Costa, and Donna Costa and Prudential Securities, as Escrow
Agent, dated as of September 5, 1996.
10.12** - Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and Frank A. Pettisani, D.D.S., as
Seller, and OraCare Dental Associates, P.A., dated as of September 5, 1996.
10.13** - Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and Frank A. Pettisani, D.D.S.,
Frank A. Pettisani, Jr., D.D.S., Charles A. Costa and Donna Costa, as Sellers, and OraCare DPO, Inc., dated
as of September 5, 1996.
10.14** - Employment Agreement dated as of May 13, 1996, between United Dental Care, Inc. and William H. Wilcox.
10.15** - Employment Agreement dated as of June 1, 1996 between United Dental Care, Inc. and Mark E. Pape.
10.16** - Employment Agreement dated as of June 1, 1996 between United Dental Care, Inc. and Peter R. Barnett, D.M.D.
10.17*** - Commitment Letter dated as of September 27 1996 between United Dental Care, Inc. and NationsBank of Texas,
N.A. relating to $50 million revolving line of credit.
11.* - Statement regarding computation of per share earnings.
27* - Financial Data Schedule
</TABLE>
- ------------------
* Filed herewith.
** Filed as an Exhibit to the Form S-1 Registration Statement filed with
the commission on September 20, 1996 (Registration No. 333-12425).
*** Filed on October 1, 1996 as an Exhibit to Amendment No. 1 to the Form
S-1 Registration Statement filed with the commission on September 20,
1996 (Registration No. 333-12425).
(b) No reports on Form 8-K were filed during the quarter ended September 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: 11/13/96 MARK E. PAPE
--------------- ---------------------------------------------
Mark E. Pape, Senior Vice President
Chief Financial Officer
12 of 12
<PAGE> 13
UNITED DENTAL CARE, INC.
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C>
10.01 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, Gilbert G. Finger, Patricia L.
Schubring, Edward K. Halstead, Birchtree Enterprises and Binkley & Stewart, P.C., as Sellers, and Independent
Dental Plan, Inc. dated as of June 28, 1996.
10.02 Stock Purchase Agreement between United Dental Care, Inc., as Purchaser, and UICI, as Seller, dated as of
September 10, 1996, for all the issued and outstanding shares of capital stock of Association Dental Plan,
Inc., a District of Columbia corporation.
10.03 Earnest Money Escrow Agreement among United Dental Care, Inc., UICI and Texas Commerce Bank National
Association, dated as of September 10, 1996, regarding the purchase of all the issued and outstanding shares
of capital stock of Association Dental Plan, Inc., a District of Columbia corporation.
10.04 Stock Purchase Agreement between United Dental Care, Inc., as Purchaser and UICI, as Seller, dated as of
September 10, 1996, for all the issued and outstanding shares of capital stock of International Dental Plan,
Inc., a Florida corporation.
10.05 Earnest Money Escrow Agreement among United Dental Care, Inc., UICI and Texas Commerce Bank National
Association, dated as of September 10, 1996, regarding the purchase of all the issued and outstanding shares
of capital stock of International Dental Plan, Inc., a Florida corporation.
10.06 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and UICI, United Management &
Consulting, Inc., United Management & Consulting Retirement Plan and Marie C. Montgomery Revocable Trust U/T/A
March 23, 1992, as Seller, dated as of September 10, 1996, for the purchase of 90% of the issued and
outstanding shares of capital stock of United Dental Care, Inc., an Oklahoma corporation.
10.07 Earnest Money Escrow Agreement amount United Dental Care, Inc., UICI, United Management & Consulting, Inc.,
United Management & Consulting Retirement Plan, Marie C. Montgomery Revocable Trust U/T/A March 23, 1992 and
Texas Commerce Bank National Association , as Escrow Agent, dated as of September 10, 1996, regarding the
purchase of 90% of the issued and outstanding shares of capital stock of United Dental Care, Inc., an Oklahoma
corporation.
10.08 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and John E. Carlin, Ph.D., Frank J.
Schloegel, III, J. Dennis Dlabal, D.D.S., The John E. Carlin Charitable Remainder Unitrust, UID June 28, 1996,
The Frank J. Schloegel Charitable Remainder Unitrust I, UID July 12, 1996, The Frank J. Schloegel Charitable
Remainder Unitrust II, UID July 12, 1996, The J. Dennis Dlabal Charitable Remainder Trust, UID September 5,
1996, as Sellers, and Kansas City Dental Care, Inc., dated as of September 11, 1996.
10.09 Earnest Money Escrow Agreement among United Dental Care, Inc., John E. Carlin Ph.D., Frank J. Schloegel, III,
J. Dennis Dlabal, D.D.S., The John E. Carlin Charitable Remainder Unitrust, UID June 28, 1996, The Frank J.
Schloegel Charitable Remainder Unitrust I, UID July 12, 1996, The Frank J. Schloegel Charitable Remainder
Unitrust II, UID July 12, 1996, The J. Dennis Dlabal Charitable Remainder Trust, UID September 5, 1996 and UMB
Bank, N.A., as Escrow Agent, dated as of September 11, 1996.
</TABLE>
<PAGE> 14
<TABLE>
<S> <C>
10.10 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and Frank A. Pettisani, D.D.S., Lisa M.
Mazzone, Frank A. Pettisani, Jr., D.D.S., Charles A. Costa and Donna Costa, as Sellers, and OraCare
Consultants, Inc., dated as of September 5, 1996.
10.11 Earnest Money Escrow Agreement among United Dental Care, Inc., Frank A. Pettisani, D.D.S., Lisa M. Mazzone,
Frank A. Pettisani, Jr., D.D.S., Charles A. Costa, and Donna Costa and Prudential Securities, as Escrow Agent,
dated as of September 5, 1996.
10.12 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and Frank A. Pettisani, D.D.S., as
Seller, and OraCare Dental Associates, P.A., dated as of September 5, 1996.
10.13 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and Frank A. Pettisani, D.D.S., Frank
A. Pettisani, Jr., D.D.S., Charles A. Costa and Donna Costa, as Sellers, and OraCare DPO, Inc., dated as of
September 5, 1996.
10.14 Employment Agreement dated as of May 13, 1996, between United Dental Care, Inc. and William H. Wilcox.
10.15 Employment Agreement dated as of June 1, 1996 between United Dental Care, Inc. and Mark E. Pape.
10.16 Employment Agreement dated as of June 1, 1996 between United Dental Care, Inc. and Peter R. Barnett, D.M.D.
10.17 Commitment Letter dated as of September 27, 1996 between United Dental Care, Inc. and NationsBank of Texas,
N.A. relating to $50 million revolving line of credit.
11. Statement regarding computation of per share earnings.
27. Financial Data Schedule.
</TABLE>
<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 Nine Months Ended
September 30, September 30,
-------------------- -------------------
1995 1996 1995 1996
------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
I. Reported net earnings
---------------------
Income before extraordinary charge . . . . . . . . . . . . . . $ 960 $1,876 $2,211 $4,932
Extraordinary charge, net of tax . . . . . . . . . . . . . . . (142) ---- (142) ----
------- ------ ------- ------
Net income . . . . . . . . . . . . . . . . . . . $ 818 1,876 2,069 4,932
======= ====== ======= ======
II. Primary earnings per share
--------------------------
A. Shares outstanding
Weighted average number of shares outstanding during
period . . . . . . . . . . . . . . . . . . . . . 4,756 6,908 4,428 6,906
Shares potentially issuable upon the assumed exercise of
stock options, net of assumed repurchase using the
Treasury Stock Method . . . . . . . . . . . . . . . 300 261 418 298
------- ------ ------- ------
Total common shares and common equivalent shares . . . . . 5,056 7,169 4,846 7,204
======= ====== ======= ======
B. Computation of net earnings per share. . . . . . . . . . .
Income before extraordinary charge . . . . . . . . . . . . $ 0.19 $ 0.26 $ 0.45 $ 0.68
Extraordinary charge, net of tax. . . . . . . . . . . . . (0.03) ---- (0.03) ----
------- ------ ------- ------
Net income . . . . . . . . . . . . . . . . . . . $ 0.16 $ 0.26 $ 0.42 $ 0.68
======= ====== ======= ======
III. Fully diluted earnings per share (see NOTE below)
-------------------------------------------------
A. Shares outstanding
Weighted average number of shares outstanding during
period . . . . . . . . . . . . . . . . . . . . . . . 4,756 6,908 4,428 6,906
Shares potentially issuable upon the assumed exercise of
stock options, net of assumed repurchase using the
Treasury Stock Method . . . . . . . . . . . . . . . 355 276 513 302
------- ------ ------- ------
Total common shares and common equivalent shares . . . . . 5,056 7,184 4,941 7,208
======= ====== ======= ======
B. Computation of net earnings per share
Income before extraordinary charge . . . . . . . . . . . $ 0.19 $ 0.26 $ 0.45 $ 0.68
Extraordinary charge, net of tax . . . . . . . . . . . . (0.03) ---- (0.03) ----
------- ------ ------- ------
Net income . . . . . . . . . . . . . . . . . . . $ 0.16 $ 0.26 $ 0.42 $ 0.68
======= ====== ======= ======
</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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 15,461
<SECURITIES> 0
<RECEIVABLES> 8,317
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 25,507
<PP&E> 5,466
<DEPRECIATION> 0
<TOTAL-ASSETS> 78,158
<CURRENT-LIABILITIES> 8,713
<BONDS> 0
0
0
<COMMON> 691
<OTHER-SE> 65,981
<TOTAL-LIABILITY-AND-EQUITY> 78,158
<SALES> 0
<TOTAL-REVENUES> 77,838
<CGS> 0
<TOTAL-COSTS> 70,043
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 296
<INCOME-PRETAX> 7,795
<INCOME-TAX> 2,863
<INCOME-CONTINUING> 4,932
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,932
<EPS-PRIMARY> .68
<EPS-DILUTED> .68
</TABLE>
