<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, 1997
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 incorporation) (I.R.S. Employer
Identification No.)
13601 PRESTON ROAD, SUITE 500 EAST
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 [X] No [ ]
The number of shares outstanding of the issuer's only class of $.10 par value
common stock as of August 1, 1997 was 8,942,616.
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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, 1996 and June 30, 1997 . . . . . . . 3
o Consolidated Statements of Operations
Quarters ended June 30, 1996 and 1997 and
Six-month periods ended June 30, 1996 and
1997 . . . . . . . . . . . . . . . . . . . . . . 4
o Consolidated Statements of Cash Flows
Six-month periods ended June 30, 1996 and
1997 . . . . . . . . . . . . . . . . . . . . . . 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 4. Submission of Matters to a Vote of Security-Holders . . 12
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</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
(In thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
-------- --------
ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents .................... $ 50,035 $ 11,833
Premiums receivable, net ..................... 11,016 12,570
Accrued interest and other current assets .... 832 1,420
Deferred taxes, current ...................... 957 1,286
-------- --------
Total current assets ....................... 62,840 27,109
Regulatory deposits .......................... 3,433 3,902
Furniture and equipment, net ................. 7,056 10,695
Intangible assets, net ....................... 91,066 99,939
Pre-operational costs, net ................... 127 263
Other assets, net ............................ 856 9
Deferred taxes, noncurrent ................... 294 874
-------- --------
TOTAL ASSETS ................................... $165,672 $142,791
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses ........ $ 5,805 $ 7,792
Current portion of debt ...................... 26,191 1,198
Claims reserve ............................... 2,172 5,404
Unearned premiums ............................ 3,177 2,874
Other current liabilities .................... 75 --
-------- --------
Total current liabilities ................. 37,420 17,268
Long-term debt, net of current portion ....... 2,757 2,583
-------- --------
Total liabilities .......................... 40,177 19,851
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value .............. -- --
Common stock, $.10 par value ................. 891 894
Additional paid-in-capital ................... 108,223 108,645
Retained earnings ............................ 16,381 13,401
-------- --------
Total stockholders' equity ................. 125,495 122,940
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $165,672 $142,791
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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United Dental Care, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts and share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Dental services revenue ............. $ 26,146 $ 44,027 $ 50,728 $ 88,875
Interest income ..................... 185 176 397 351
----------- ----------- ----------- -----------
Total revenues ............... 26,331 44,203 51,125 89,226
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Dental services expense ............. 15,743 35,881 30,674 66,081
Sales and marketing ................. 2,928 4,498 5,726 9,204
General and administrative .......... 4,403 8,618 8,685 14,944
Depreciation and amortization ....... 538 1,293 1,003 2,429
Interest expense .................... 115 66 209 213
----------- ----------- ----------- -----------
Total costs and expenses ..... 23,727 50,356 46,297 92,871
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ....... 2,604 (6,153) 4,828 (3,645)
INCOME TAX EXPENSE (BENEFIT) ............ 959 (1,720) 1,772 (664)
----------- ----------- ----------- -----------
NET INCOME (LOSS) ....................... $ 1,645 $ (4,433) $ 3,056 $ (2,981)
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE ...... $ 0.23 $ (0.49) $ 0.42 $ (0.33)
WEIGHTED AVERAGE SHARES OUTSTANDING ..... 7,193,857 9,134,492 7,222,149 9,126,911
</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
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For Six Months Ended
June 30,
----------------------
1996 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ................................................ $ 3,056 $ (2,981)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................ 1,003 2,429
Changes in operating assets and liabilities:
Decrease (increase) in premiums receivable .............. 822 (1,228)
Increase in accrued interest and other current assets ... (339) (378)
Increase (decrease) in accounts payable, accrued expenses
and claims reserve ................................. (1,958) 2,709
Increase in deferred income taxes ....................... (190) (461)
Decrease in other assets ................................ 325 360
Increase (decrease) in unearned premiums ................ (2,152) (588)
--------- ---------
Net cash provided (used) by operating activities ... 567 (138)
INVESTING ACTIVITIES:
Purchases of furniture and equipment ............................. (2,001) (4,572)
Increase in regulatory deposits .................................. (82) (119)
Investment in new markets ........................................ (148) (136)
Purchase of acquisitions (net of cash acquired) .................. (13,575) (8,042)
--------- ---------
Net cash used in investing activities .............. (15,806) (12,869)
FINANCING ACTIVITIES:
Repayment of indebtedness ........................................ (11,371) (25,382)
Stock options exercised .......................................... 15 187
--------- ---------
Net cash used in financing activities .............. (11,356) (25,195)
NET (DECREASE) IN CASH AND CASH EQUIVALENTS ........................ (26,595) (38,202)
CASH AND CASH EQUIVALENTS:
Beginning of period ............................................. 46,940 50,035
--------- ---------
End of period ................................................... $ 20,345 $ 11,833
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ..................................................... $ 175 $ 198
========= =========
Income taxes ................................................. $ 1,972 $ 1,579
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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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 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 common stock of U.S. Dental Management, Inc. ("US
Dental") for $1.3 million in cash, deferred payments of $1.0 million
(consulting and non-competition agreements) and a promissory note,
maturing January 18, 1996, in the amount of $10.3 million (the "US
Dental Promissory Note"). US Dental was a managed dental benefits
company that operated managed dental plans in Arizona, Colorado,
Nebraska and New Mexico, providing dental benefits to approximately
163,000 members.
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, composed of $14.1 million in cash at closing, financed through
internal funds, $0.3 million in cash from escrow deposits and additional
monthly payments totaling $0.6 million for the three-year period
beginning February 1996. Associated was a managed dental benefits
company that operated managed dental plans in Arizona, providing dental
benefits to over 220,000 members.
Effective October 1, 1996, the Company completed the acquisitions of all
of the outstanding common stock of Independent Dental Plan, Inc.
("Independent") for $1.3 million in cash and of Association Dental Plan,
Inc. ("Association") for $3.2 million in cash. Independent operated a
prepaid dental plan in Michigan having approximately 10,000 members.
Association operated a multi-state dental referral plan having
approximately 60,000 members.
Effective November 1, 1996, the Company completed the acquisitions of
all of the outstanding common stock of Kansas City Dental Care, Inc.
("KCDC") for $12.5 million in cash and of OraCare DPO, Inc. ("OraCare")
for $5.6 million in cash and a promissory note, maturing January 2,
1997, in the amount of $24.9 million (the "OraCare Promissory Note").
The OraCare Promissory Note was paid in full at maturity on January 2,
1997. KCDC operated prepaid dental plans in Missouri and Kansas having
approximately 90,000 members in the aggregate. OraCare was a New Jersey
prepaid dental plan having approximately 150,000 members and an
affiliated dental management company.
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Effective January 1, 1997, the Company completed the acquisition of all
of the outstanding common stock of United Dental Care, Inc., an Oklahoma
corporation ("United") for $7.6 million in cash. At the date of
acquisition, United had cash and regulatory deposits of $3.2 million.
United, through an indemnity insurance company subsidiary, operated a
prepaid plan in Oklahoma having approximately 90,000 members.
Effective June 1, 1997, the Company completed the acquisition of all of
the outstanding common stock of International Dental Plan, Inc., a
Florida corporation ("International"), for $5.0 million in cash.
International was a managed dental benefits company that operated
managed dental plans in Florida, providing dental benefits to over
130,000 members.
3. Stockholders' Equity
In October 1996, the Company completed a public offering of 2,000,000
shares of its common stock for $30.00 per share (the "Offering"),
resulting in net proceeds of $56.2 million. The Company used a portion
of the proceeds to complete the acquisitions of Independent,
Association, OraCare and KCDC in 1996 and of United and International in
1997.
4. Provision for Future Losses
In the second quarter of 1997, the Company recorded a charge to dental
services expense of $4.2 million or $0.30 per share, to provide for the
future estimated losses expected to be incurred over the remaining term
of the two contracts related to its Arizona Medicaid membership. These
contracts cover approximately 7.5% of the Company's total enrollment.
The estimate of future losses included the assumption that the Company
exercised its options to terminate such contracts at the end of 1997.
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.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This document includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this document, including, without
limitation, statements under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" regarding the Company's financial
position, business strategy and plans and objectives of management of the
Company for future operations are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results
to differ materially from the Company's expectations are disclosed throughout
the Company's 1997 Form 10-K, including, without limitation, in conjunction
with the forward-looking statements included therein. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are hereby expressly qualified in their entirety.
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<PAGE> 8
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
-------------------- --------------------
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Managed Benefits .................... 85.4% 80.1% 84.7% 80.0%
Indemnity ........................... 13.9 9.1 14.5 9.7
Point of service .................... -- 7.7 -- 7.2
Dental Centers ...................... -- 5.1 -- 5.2
Less: Intercompany .............. -- (2.4) -- (2.5)
Interest income ..................... 0.7 0.4 0.8 0.4
-------- -------- -------- --------
Total revenues ................ 100.0 100.0 100.0 100.0
-------- -------- -------- --------
Expenses:
Dental services:
Managed benefits ................. 49.5 61.3 49.1 55.8
Less: Intercompany ........... -- (2.4) -- (2.5)
Indemnity ........................ 10.3 11.6 10.9 10.2
Point of service ................. -- 6.6 -- 6.4
Dental centers ................... -- 4.1 -- 4.2
-------- -------- -------- --------
Subtotal ...................... 59.8 81.2 60.0 74.1
-------- -------- -------- --------
Sales and marketing expenses ........ 11.1 10.2 11.2 10.3
General and administrative expenses . 16.7 19.5 17.0 16.8
Depreciation and amortization ....... 2.0 2.9 2.0 2.7
Interest expense .................... 0.5 0.1 0.4 0.2
-------- -------- -------- --------
Total expenses ................ 90.1 113.9 90.6 104.1
-------- -------- -------- --------
Net income (loss) before income taxes ..... 9.9 (13.9) 9.4 (4.1)
Provision for income taxes ................ 3.7 (3.9) 3.4 (0.8)
-------- -------- -------- --------
Net income (loss) ......................... 6.2% (10.0)% 6.0% (3.3)%
======== ======== ======== ========
</TABLE>
Comparison of Second Quarter of 1997 to Second Quarter of 1996
Revenues. Total revenues for the quarter ended June 30, 1997 increased by
$17.9 million, or 67.9%, to $44.2 million from $26.3 million in the comparable
quarter of 1996. Managed benefits revenues increased $12.9 million to $35.4
million. Of this increase, $9.9 million was attributable to the members added
through the acquisitions of Independent and Association (effective October 1,
1996), KCDC and OraCare (effective November 1, 1996), United (effective January
1, 1997) and International (effective June 1, 1997). The increase in revenues
was primarily a result of an increase in the number of members rather than
price increases. During the three months ended June 30, 1997, membership
increased from 1,935,000 at March 31, 1997 to 2,076,000. Membership for the
comparable period in 1996 decreased from 1,178,000 to 1,175,000. 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 increased from $3.7 million to $4.0 million. Point of
service revenues were about $3.4 million, representing about 7.7% of total
revenues, up from an immaterial level in the prior year's comparable period.
Approximately 2.7% of total revenues (after the elimination of intercompany
revenues in consolidation) were generated by the dental centers acquired as
part of the OraCare acquisition in November 1996.
Dental Services Expense. Dental services expense increased by $20.2 million,
or 127.9%, to $35.9 million in 1997 from $15.7 million in 1996. Dental
services expense as a percentage of total revenues increased to 81.2% in 1997
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<PAGE> 9
from 59.8% in 1996, primarily due to higher dental services expenses on the
Company's fee-for-service products, consisting of indemnity and point of
service, and the accrual of $4.2 million for estimated losses on two Arizona
Medicaid contracts added during the fourth quarter of 1996. Dental services
expense for the Company's managed benefits plans, which consist primarily of
capitation payments to general dentists, increased to 76.6% of managed benefits
revenues in 1997, from 58.0% in 1996, largely due to the Arizona Medicaid loss
accrual. Generally, it is management's intention to continue to increase
premiums in all markets over the next several years, as market conditions
permit, thereby increasing revenues. In most markets, amounts paid to general
dentists through capitation payments will also be increased somewhat to
maintain the Company's competitive position and to improve the economics for
managed care general dentists. Management expects these actions to result in
the dental services expense for the managed dental benefits plans as a
percentage of managed benefits revenues to be in a range of 60-65%. The dental
centers' dental services expenses, as a percentage of total revenues, exceeded
the dental centers' contribution to revenues as a result of the elimination in
consolidation of intercompany revenues.
Sales and Marketing Expenses. Sales and marketing expenses increased $1.6
million, or 53.6%, to $4.5 million in 1997 from $2.9 million in 1996. Sales
and marketing expenses as a percentage of revenue decreased to 10.2% in 1997
from 11.1% in 1996. A portion of the sales and marketing costs, such as base
salaries of field sales personnel and office rents, are fixed so that the
expenses as a percentage of revenues decline as revenues increase.
General and Administrative Expenses. General and administrative expenses
increased $4.2 million, or 95.7%, to $8.6 million in 1997 from $4.4 million in
1996. The increase in general and administrative expenses as a percentage of
revenues from 16.7 % in 1996 to 19.5% in 1997 was primarily attributable to
non-recurring expenses of $1.4 million for the administrative cost of reviewing
the accounting and operational issues that arose in the second quarter and the
cost of a re-engineering project related to the Company's system improvements.
Excluding such non-recurring expenses, general and administrative expenses were
16.3% of revenues.
Depreciation and Amortization. Depreciation and amortization expenses
increased $0.8 million, or 140.0%, to $1.3 million in 1997 from $0.5 million in
1996. This increase was the result of amortization of the goodwill and the
consulting and non-competition agreements attributable to the acquisitions of
Associated, Independent, Association, KCDC, OraCare, United and International
and depreciation related to the Company's new computer systems.
Interest Expense. Interest expense remained essentially unchanged at about
$0.1 million. The $0.1 million was composed primarily of the imputed interest
on the consulting and non-competition agreements incurred to finance the
Company's acquisitions. The weighted average interest rates on the agreements
during the second quarter of 1997 was 7.9%. This weighted average interest
rate includes the fees for letters of credit related to the agreements. In
addition, the Company amortized the cost of its revolving credit agreement and
paid a fee equal to about 0.15% per annum on the amount remaining available to
be drawn under the credit facility for a total interest cost for the credit
facility of 0.26% per annum.
Taxes. For the three months ended June 30, 1997, the tax benefit represented
28.0% of the loss before taxes. The effective tax rate in the second quarter
of 1996 was 36.8%. The effective tax rate varied from the statutory Federal
tax rate of 34% primarily as the result of the non-deductibility of the
amortization of the goodwill incurred in the Company's acquisitions.
Comparison of First Six Months of 1997 to First Six Months of 1996
Revenues. Total revenues for the six months ended June 30, 1997 increased by
$38.1 million, or 74.5%, to $89.2 million from $51.1 million in the comparable
period in 1996. Managed benefits revenues increased by $28.1 million, or
64.9%, to $71.4 million in 1997 from $43.3 million in 1996. Of this increase,
$20.2 million was attributable to the members added through the acquisitions of
Independent and Association (effective October 1, 1996), KCDC and OraCare
(effective November 1, 1996), United (effective January 1, 1997) and
International (effective June 1, 1997). The increase in revenues was primarily
a result of an increase in the number of members rather than price increases.
During the six months ended June 30, 1997, membership increased from 1,729,000
at
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December 31, 1996 to 2,076,000. Membership for the comparable period in 1996
increased from 937,000 to 1,175,000. 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
increased from $7.4 million to $8.6 million. Point of service revenues were
about $6.5 million, representing about 7.2% of total revenues, up from an
immaterial level in the prior year's comparable period. Approximately 2.7% of
total revenues (after the elimination of intercompany revenues in
consolidation) were generated by the dental centers acquired as part of the
OraCare acquisition in November 1996.
Dental Services. Dental services expenses increased $35.4 million, or 115.4%,
to $66.1 million in 1997 from $30.7 million in 1996, primarily due to the
increase in membership discussed above. Dental services expense for the
Company's managed benefits plans, which consist primarily of capitation
payments to general dentists, increased to 69.8% of managed benefits revenues
in 1997, from 58.0% in 1996. The Arizona Medicaid managed benefits plans pay
general dentists a significantly higher percentage of premiums than the average
of the Company's other managed benefits plans. The dental centers' dental
services expenses, as a percentage of total revenues, exceeded the dental
centers' contribution to revenues as a result of the elimination in
consolidation of intercompany revenues. See above discussion for additional
information concerning trends in dental expenses.
Sales and Marketing. Sales and marketing expenses increased $3.5 million, or
60.7% to $9.2 million in 1997 from $5.7 million in 1996. Sales and marketing
expenses as a percentage of revenue declined to 10.3% in 1997 from 11.2% in
1996. A portion of the sales and marketing costs, such as base salaries of
field sales personnel and office rents are fixed so that the expenses as a
percentage of revenues decline as revenues increase.
General and Administrative. General and administrative expenses increased $6.2
million, or 72.1%, to $14.9 million in 1997 from $8.7 million in 1996. The
decline in general and administrative expenses as a percentage of revenues to
16.8% in 1997 from 17.0% in 1996 was primarily attributable to the fixed nature
of such costs, which generally do not vary in the short term relative to
changes in revenue. In addition, the general and administrative expenses for
the period ended June 30, 1997 included non-recurring expenses of $1.4 million
for the administrative cost of reviewing the accounting and operational issues
that arose in the second quarter and the cost of a re-engineering project
related to the Company's system improvements. Excluding such non-recurring
expenses, general and administrative expenses were 15.2 % of revenues.
Depreciation and Amortization. Depreciation and amortization expenses
increased $1.4 million, or 142.2%, to $2.4 million in 1997 from $1.0 million in
1996. This increase was the result of amortization of the goodwill and the
consulting and non-competition agreements attributable to the acquisitions of
Associated, Independent, Association, KCDC, OraCare, United and International
and depreciation related to the Company's new computer systems.
Interest. Interest expense remained essentially unchanged at about $0.2
million. The 1997 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 1997
was 7.9%. This weighted average interest rate also includes the fees for
letters of credit related to the agreements.
Taxes. For the six months ended June 30, 1997, the tax benefit represented
18.2% of the pre-tax loss. The effective tax rate for the first two quarters
of 1996 was 36.7%. The effective tax rate varies from the statutory Federal
tax rate of 34%, primarily as the result of the non-deductibility of the
amortization of the goodwill incurred in the Company's acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company's historical operating cash requirements have been met
through cash provided by operations. Net cash used by operating activities was
$0.1 million for the six months ended June 30, 1997. An increase in accounts
payable, accrued expenses and claims reserves provided net cash of $2.7 million
largely as a result of an increase of $3.2 million in claims reserve.
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<PAGE> 11
The Company's primary cash need after operations is for debt service on
consulting and non-competition agreements entered into in connection with
previous acquisitions. The principal amount of such indebtedness of the
Company at June 30, 1997 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 each year.
In January 1997, the Company paid off the OraCare Promissory Note for $24.9
million as required by the OraCare acquisition agreement. The Company
completed the acquisition of United in January 1997. The United acquisition
agreement required the Company to pay $7.6 million at the closing. In the
second quarter of 1997, the Company funded the acquisition of International
($5.0 million). (See Note 2 above)
The Company completed the acquisition of Associated effective February 1, 1996.
The Associated acquisition agreement required the Company to pay $14.1 million
at the closing and to release $0.3 million from escrow deposits. In January
1996, the Company paid off the US Dental Promissory Note for $10.3 million as
required by the US Dental acquisition agreement (see Note 2 above).
Capital Expenditures. In June 1995, the Company entered into a contract to
acquire a new information system to replace its existing system. Management
has reviewed the status of the project and revised the projected capital cost
of the system and the related database conversion, including conversion of the
databases of the Company's recent acquisitions. The project is currently
expected to cost approximately $7.1 million and to be completed in 1998.
Capital expenditures were $4.6 million during the six months ended June 30,
1997. Such expenditures, other than the cost of the new information system,
included approximately (a) $1.1 million for personal computers and systems
hardware and (b) $0.6 million for telephone systems and network upgrades. The
remaining capital expenditures primarily consisted of leasehold improvements
and equipment purchased in connection with the relocation of the Company's
headquarters to new office space at the end of March. Capital expenditures for
the remainder of the 1997 fiscal year, excluding the costs associated with the
new information system, are expected to be approximately $1.3 million.
Credit Facility. On November 14, 1996, the Company signed a revolving credit
agreement providing a $35.0 million revolving credit facility with an
unaffiliated bank. The purpose of the revolving credit facility is to provide
(i) for funding future acquisition of managed dental benefits companies; (ii)
for the issuance of letters of credit; (iii) for capital expenditures; and (iv)
at the election of the Company, a working capital line of credit in an amount
up to $5.0 million out of the total amount available under the revolving credit
facility. The revolving credit facility has a term of four years, expiring
November 30, 2000. Outstanding indebtedness under the revolving line of credit
will bear interest payable quarterly, at the Company's option, at: (i) up to
0.25% over the base rate of the lender or (ii) up to 1.85% over LIBOR, with the
margin over the respective rates decreasing as the ratio of total funded debt
to earnings before interest, taxes, depreciation and amortization ("EBITDA")
decreases. The Company pays an annual fee of up to 0.25% of the amount
remaining available to be drawn under the credit facility and up to 0.85% of
the amount available to be drawn under letters of credit issued under the
credit facility.
The revolving credit facility is secured by the pledge of all the outstanding
capital stock of the direct and indirect subsidiaries of the Company and a
negative pledge on all other assets. The revolving credit facility contains
numerous covenants including, among other things, that the Company cannot,
except in certain permitted instances, (i) incur any additional indebtedness;
(ii) grant liens on any of the assets of the Company or its subsidiaries; (iii)
declare or pay any dividends; or (iv) merge or consolidate with any other
entity. In addition, the Company is required to satisfy on an ongoing basis
certain financial covenants. The Company's breach of any covenant would result
in an event of default under the revolving credit facility.
In 1994, the Company arranged for the issuance of two letters of credit in the
aggregate amount of $4.8 million. The letters of credit secure the obligations
of the Company under certain agreements executed in connection with an
acquisition. The letters of credit decline in amount annually and expire in
September 1998. The Company pays an annual fee of up to 0.85% of the amount
remaining to be drawn under the letters of credit.
Regulation. Under applicable insurance laws of most states in which the
Company conducts business, the
11 of 13
<PAGE> 12
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 insurance companies, such as United Dental
Care Insurance Company ("UDCIC") and UDC Life & Health Insurance Co. ("UDCLH"),
the Company's indemnity dental insurance subsidiaries. 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 and UDCLH may
require that the Company increase its investment in such subsidiaries.
However, the Company does not believe that compliance with such regulations
will adversely affect the Company's ability to meet its operating cash
requirements. Applicable laws generally limit the ability of the Company's
subsidiaries to pay dividends to the extent that required regulatory capital
would be impaired.
Inflation. Management believes that the Company's operations are not
materially affected by inflation. The Company's principal costs, such as
dental services expense and part of sales and marketing expenses, are largely
related to membership levels and therefore generally vary with 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.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The only matter submitted to a vote of the stockholders of the Company during
the current fiscal year was the uncontested election of directors voted upon at
the Company's annual meeting of stockholders held on April 18, 1997. A total
of 7,425,725 shares were represented at the annual meeting in person or by
proxy, including 202 shares that abstained from voting for any director
nominee. The 1,499,691 (16.8% of the outstanding shares) non-votes (nominees
or beneficial holders that did not respond to the proxy solicitation) were not
considered as "represented" at the meeting and were not counted in tabulating
the results of the election. The following is a tabulation of the votes:
<TABLE>
<CAPTION>
VOTES REPRESENTED
AFFIRMATIVE VOTES PERCENTAGE OF VOTES AT MEETING BUT
RECEIVED FOR REPRESENTED AT WITHHELD OR
NAME OF NOMINEE NOMINEE MEETING ABSTAINED
---------------------------------------- ------------------ -------------------- ------------------
<S> <C> <C> <C>
Jack R. Anderson . . . . . . . . . . . . 7,425,523 99.997% 202
George E. Bello . . . . . . . . . . . . . 7,425,523 99.997% 202
James E. Buncher . . . . . . . . . . . . 7,425,483 99.997% 242
William H. Longfield . . . . . . . . . . 7,425,523 99.997% 202
Robert J. Nettinga . . . . . . . . . . . 7,423,783 99.974% 1,942
James Ken Newman . . . . . . . . . . . . 7,425,523 99.997% 202
Donald K. Steen . . . . . . . . . . . . . 7,425,458 99.996% 267
William H. Wilcox . . . . . . . . . . . . 7,425,083 99.991% 642
</TABLE>
12 of 13
<PAGE> 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
3.01* Restated Certificate of Incorporation of the Company (filed as
Exhibit 3.01 to the Company's Registration Statement on Form S-1,
Registration Number 33-94356 (the "1995 Registration Statement")
and incorporated herein by reference).
3.02* Amended and Restated Bylaws of the Company (filed as Exhibit 3.02
to the 1995 Registration Statement and incorporated herein by
reference).
4.01* Specimen Common Stock Certificate (filed as Exhibit 4.01 to the
1995 Registration Statement and incorporated herein by
reference).
11.** Statement regarding computation of per share earnings.
27.1** Financial Data Schedule
- --------------------
* Previously filed.
** Filed herewith.
(b) No reports on Form 8-K were filed during the quarter ended June 30, 1997.
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: August 6, 1997 /s/ MARK E. PAPE
---------------------------------------------
Mark E. Pape, Senior Vice President
Chief Financial Officer
13 of 13
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<S> <C>
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 Six Months Ended
June 30, June 30
------------------------- -------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
I. Reported net earnings
Net income (loss) ................................................... $ 1,645 $ (4,433) $ 3,056 $ (2,981)
=========== =========== =========== ===========
II. Primary earnings per share
A. Shares outstanding
Weighted average number of shares outstanding during
period ............................................... 6,908,416 8,935,275 6,905,120 8,926,617
Shares potentially issuable upon the assumed exercise of
stock options, net of assumed repurchase using the
Treasury Stock Method ................................ 285,441 199,215 317,029 200,293
----------- ----------- ----------- -----------
Total common shares and common equivalent shares .......... 7,193,857 9,134,490 7,222,149 9,126,910
=========== =========== =========== ===========
B. Computation of net earnings (loss) per share
Net income (loss) ................................ $ 0.23 $ (0.49) $ 0.42 $ (0.33)
=========== =========== =========== ===========
III. Fully diluted earnings per share (see NOTE below)
A. Shares outstanding
Weighted average number of shares outstanding during
period................................................ 6,908,416 8,935,275 6,905,120 8,926,617
Shares potentially issuable upon the assumed exercise
of stock options, net of assumed repurchase using the
Treasury Stock Method ................................ 291,201 199,215 324,225 200,293
----------- ----------- ----------- -----------
Total common shares and common equivalent shares ......... 7,199,617 9,134,490 7,229,345 9,126,910
=========== =========== =========== ===========
B. Computation of net earnings (loss) per share
Net income (loss) ................................ $ 0.23 $ (0.49) $ 0.42 $ (0.33)
=========== =========== =========== ===========
</TABLE>
NOTE: The amounts of per share earnings (loss) 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 11,833
<SECURITIES> 0
<RECEIVABLES> 12,570
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,109
<PP&E> 10,695
<DEPRECIATION> 0
<TOTAL-ASSETS> 142,791
<CURRENT-LIABILITIES> 17,268
<BONDS> 0
0
0
<COMMON> 894
<OTHER-SE> 122,046
<TOTAL-LIABILITY-AND-EQUITY> 142,791
<SALES> 0
<TOTAL-REVENUES> 89,226
<CGS> 0
<TOTAL-COSTS> 92,871
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 213
<INCOME-PRETAX> (3,645)
<INCOME-TAX> (664)
<INCOME-CONTINUING> (2,981)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,981)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.33)
</TABLE>
