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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, 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 (I.R.S. Employer
jurisdiction of incorporation) 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 October 31, 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 September 30, 1997........................................3
o Consolidated Statements of Operations
Quarters ended September 30, 1996 and 1997 and
Nine-month periods ended September 30, 1996 and
1997............................................................................4
o Consolidated Statements of Cash Flows
Nine-month periods ended September 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 6. Exhibits and Reports on Form 8-K..........................................................13
SIGNATURES.........................................................................................13
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
United Dental Care, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------- --------
ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents .................................................... $ 50,035 $ 15,206
Premiums receivable, net ..................................................... 11,016 9,717
Accrued interest and other current assets .................................... 832 1,808
Deferred taxes, current ...................................................... 957 2,704
-------- --------
Total current assets ....................................................... 62,840 29,435
Regulatory deposits .......................................................... 3,433 3,954
Furniture and equipment, net ................................................. 7,056 11,778
Intangible assets, net ....................................................... 91,066 100,039
Pre-operational costs, net ................................................... 127 287
Other assets, net ............................................................ 856 9
Deferred taxes, noncurrent ................................................... 294 1,031
-------- --------
TOTAL ASSETS ................................................................... $165,672 $146,533
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses ........................................ $ 5,805 $ 8,002
Current portion of debt ...................................................... 26,191 7,612
Claims reserve ............................................................... 2,172 5,098
Unearned premiums ............................................................ 3,177 2,226
Other current liabilities .................................................... 75 --
-------- --------
Total current liabilities ................................................. 37,420 22,938
Long-term debt, net of current portion ....................................... 2,757 1,971
-------- --------
Total liabilities .......................................................... 40,177 24,909
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value .............................................. -- --
Common stock, $.10 par value ................................................. 891 894
Additional paid-in-capital ................................................... 108,223 108,642
Retained earnings ............................................................ 16,381 12,088
-------- --------
Total stockholders' equity ................................................. 125,495 121,624
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................... $165,672 $146,533
======== ========
</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 Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1996 1997 1996 1997
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Dental services revenue ....... $ 26,560 $ 41,339 $ 77,288 $ 130,214
Interest income ............... 153 154 550 505
---------- ----------- ---------- -----------
Total revenues ............ 26,713 41,493 77,838 130,719
---------- ----------- ---------- -----------
COSTS AND EXPENSES:
Dental services expense ....... 15,976 29,660 46,650 95,741
Sales and marketing ........... 3,195 4,635 8,921 13,839
General and administrative .... 3,926 7,437 12,611 22,381
Depreciation and amortization . 562 1,346 1,565 3,775
Interest expense .............. 87 103 296 316
---------- ----------- ---------- -----------
Total costs and expenses... 23,746 43,181 70,043 136,052
---------- ----------- ---------- -----------
INCOME (LOSS) BEFORE FEDERAL INCOME 2,967 (1,688) 7,795 (5,333)
INCOME TAX EXPENSE (BENEFIT) ...... 1,091 (376) 2,863 (1,040)
---------- ----------- ---------- -----------
NET INCOME (LOSS) ................. $ 1,876 $ (1,312) $ 4,932 $ (4,293)
========== =========== ========== ===========
NET INCOME (LOSS) PER COMMON SHARE $ 0.26 $ (0.15) $ 0.68 $ (0.48)
WEIGHTED AVERAGE SHARES OUTSTANDING 7,169,204 8,942,616 7,204,403 8,932,009
</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 Nine Months Ended
September 30,
-----------------------
1996 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ......................................................... $ 4,932 $ (4,293)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ......................................... 1,565 3,775
Changes in operating assets and liabilities:
Decrease (increase) in premiums receivable ....................... (3,108) 1,626
Increase in accrued interest and other current assets ............ (478) (766)
Increase (decrease) in accounts payable, accrued expenses
and claims reserve .......................................... (1,084) 2,394
Increase in deferred income taxes ................................ (190) (2,036)
Decrease (increase) in other assets .............................. (736) 360
Decrease in unearned premiums .................................... (2,128) (1,236)
-------- --------
Net cash used by operating activities ....................... (1,227) (176)
INVESTING ACTIVITIES:
Purchases of furniture and equipment ...................................... (3,186) (6,227)
Increase in regulatory deposits ........................................... (13) (171)
Investment in new markets ................................................. (164) (160)
Purchase of acquisitions (net of cash acquired) ........................... (14,775) (8,917)
-------- --------
Net cash used in investing activities ....................... (18,138) (15,475)
FINANCING ACTIVITIES:
Increase in short-term debt ............................................... -- 6,630
Repayment of indebtedness ................................................. (12,254) (25,995)
Stock options exercised ................................................... 140 187
-------- --------
Net cash used in financing activities ....................... (12,114) (19,178)
NET DECREASE IN CASH AND CASH EQUIVALENTS ................................... (31,479) (34,829)
CASH AND CASH EQUIVALENTS:
Beginning of period ...................................................... 46,940 50,035
-------- --------
End of period ............................................................ $ 15,461 $ 15,206
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .............................................................. $ 379 $ 277
======== ========
Income taxes .......................................................... $ 2,272 $ 1,749
======== ========
</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 1996 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. In the third quarter of 1997, the Company paid $0.9
million to certain of the former shareholders of KCDC in partial settlement
of the contingent earn-out provisions of the KCDC acquisition agreement.
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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 ($0.30 per share after tax) 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. One
contract terminated effective October 1, 1997, and the option to terminate
the second contract at the end of 1997 has been exercised.
5. Reserve for Premiums Receivable
In the third quarter of 1997, the Company recorded an increase of $4.5
million ($0.33 per share after tax) in the reserve for estimated
uncollectible premiums receivable due to the availability of additional
information regarding the collectibility of certain receivables. This cost
has been reported as a reduction in the dental services revenue for the
third quarter and as a reduction of net premiums receivable as of September
30, 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
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correct. Important factors that could cause actual results to differ materially
from the Company's expectations are disclosed throughout the Company's 1996 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.
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
------------------ ------------------
1996 1997 1996 1997
------ ------ ----- ------
<S> <C> <C> <C> <C>
Revenues:
Managed Benefits .................. 84.9% 77.1% 84.8% 79.1%
Indemnity ......................... 14.2 11.8 14.4 10.3
Point of service .................. 0.3 7.9 0.1 7.5
Dental Centers .................... -- 5.4 -- 5.2
Less: Intercompany ............ -- (2.6) -- (2.5)
Interest income ................... 0.6 0.4 0.7 0.4
------ ------ ----- ------
Total revenues .............. 100.0 100.0 100.0 100.0
------ ------ ----- ------
Expenses:
Dental services:
Managed benefits ............... 50.5 53.8 49.6 55.2
Less: Intercompany ......... -- (2.6) -- (2.5)
Indemnity ...................... 9.0 9.8 10.2 10.1
Point of service ............... 0.3 5.9 0.1 6.2
Dental centers ................. -- 4.6 -- 4.2
------ ------ ----- ------
Subtotal .................... 59.8 71.5 59.9 73.2
------ ------ ----- ------
Sales and marketing expenses ...... 12.0 11.2 11.5 10.6
General and administrative expenses 14.7 17.9 16.2 17.1
Depreciation and amortization ..... 2.1 3.2 2.0 2.9
Interest expense .................. 0.3 0.3 0.4 0.3
------ ------ ----- ------
Total expenses .............. 88.9 104.1 90.0 104.1
------ ------ ----- ------
Net income (loss) before income taxes ... 11.1 (4.1) 10.0 (4.1)
Income tax expense (benefit) ............ 4.1 (0.9) 3.7 (0.8)
------ ------ ----- ------
Net income (loss) ....................... 7.0% (3.2)% 6.3% (3.3)%
====== ====== ===== ======
</TABLE>
Comparison of Third Quarter of 1997 to Third Quarter of 1996
Revenues. Total revenues for the quarter ended September 30, 1997 increased by
$14.8 million, or 55.4%, to $41.5 million from $26.7 million in the comparable
quarter of 1996. Managed benefits revenues increased $9.3 million to $32.0
million. Excluding the impact of the $4.5 million increase in the receivables
reserve, managed benefits revenues would have increased by $13.8 million. Of
this increase, $10.7 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.
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<PAGE> 9
During the three months ended September 30, 1997, membership decreased from
2,076,000 at June 30, 1997 to 2,040,000. Membership for the comparable period in
1996 increased from 1,175,000 to 1,179,000. 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 $3.8 million in 1996 to $4.9 million in 1997. Point of service
revenues were $3.3 million, representing about 7.9% of total revenues, up from
$0.1 million in the prior year's comparable period. Approximately 2.8% 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 $13.7 million, or
85.6%, to $29.7 million in 1997 from $16.0 million in 1996. Dental services
expense as a percentage of total revenues increased to 71.5% in 1997 from 59.8%
in 1996, primarily due to higher dental services expense on the Company's
fee-for-service products, consisting of indemnity and point of service, and the
$4.5 million receivables reserve increase that reduced revenues in the third
quarter. Dental services expense for the Company's managed benefits plans, which
consist primarily of capitation payments to general dentists, increased to 69.7%
of managed benefits revenues in 1997, from 59.5% in 1996, largely due to (i) the
dental services cost of 100% on Arizona Medicaid revenues as a result of
applying losses above that level to the second quarter's loss accrual and (ii)
the $4.5 million receivables reserve increase that reduced revenues in the third
quarter. 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. The dental services expense ratio for the Company's
fee-for-service products (indemnity and point-of-service) was 79.7% for the
third quarter of 1997, as compared to 64.0% in the comparable period in 1996,
due to a higher level of claims payments. The dental centers' dental services
expense, 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 $1.4
million, or 43.8%, to $4.6 million in 1997 from $3.2 million in 1996. Sales and
marketing expenses as a percentage of revenue decreased to 11.2% in 1997 from
12.0% 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 $3.5 million, or 89.7%, to $7.4 million in 1997 from $3.9 million in
1996. The increase in general and administrative expenses as a percentage of
revenues from 14.7 % in 1996 to 17.9% in 1997 was primarily attributable to an
increase in salaries and benefits of administrative personnel. The Company
substantially increased such staffing and related expenses through the
acquisitions completed within the last year. Until the acquisitions' systems are
fully integrated, the Company will not be able to achieve significant
administrative cost reductions. In addition, costs associated with the payment
of fee-for-service claims are greater in 1997 due to the larger volume of claims
paid relative to revenues during the period as well as an increase in the
percentage fee paid to the third-party administrator.
Depreciation and Amortization. Depreciation and amortization expenses increased
$0.7 million, or 116.7%, to $1.3 million in 1997 from $0.6 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 system.
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
third quarter of 1997 was 7.6%. This weighted average interest rate includes the
fees for letters of credit related to the agreements. In the third quarter, the
Company borrowed $6.6 million under its credit facility. The weighted average
interest cost for borrowings under the credit facility during the period was
7.0%. In addition, the Company amortized the original cost of obtaining its
credit facility (approximately 0.13%). The Company pays a fee equal to about
0.15% per
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annum on the amount remaining available to be drawn under the credit facility
for a total interest cost for the undrawn portion of the credit facility of
0.28% per annum.
Taxes. For the three months ended September 30, 1997, the tax benefit
represented 22.3% of the loss before taxes. The effective tax rate in the third
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 Nine Months of 1997 to First Nine Months of 1996
Revenues. Total revenues for the nine months ended September 30, 1997 increased
by $52.9 million, or 68.0%, to $130.7 million from $77.8 million in the
comparable period in 1996. Managed benefits revenues increased by $37.4 million,
or 56.7%, to $103.4 million in 1997 from $66.0 million in 1996. Of this
increase, $30.9 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 nine months ended September 30, 1997, membership increased from
1,729,000 at December 31, 1996 to 2,040,000. Membership for the comparable
period in 1996 increased from 937,000 to 1,179,000. 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 $11.2 million to $13.5 million. Point of service
revenues were $9.8 million, representing 7.5% of total revenues, up from $0.1
million 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 $49.0 million, or
104.9%, to $95.7 million in 1997 from $46.7 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 58.4% in 1996 largely due to (i) the $4.2 Arizona Medicaid loss accrual
that increased the dental services cost in the second quarter and (ii) the $4.5
million receivables reserve increase that reduced revenues in the third quarter.
The dental services expense ratio for the Company's fee-for-service products
(indemnity and point-of-service) was 91.7% for the first nine months of 1997, as
compared to 70.9% in the comparable period in 1996, due to greater-than-expected
claims payments in 1997. The dental centers' dental services expense, 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 Expenses. Sales and marketing expenses increased $4.9
million, or 55.1%, to $13.8 million in 1997 from $8.9 million in 1996. Sales and
marketing expenses as a percentage of revenue decreased to 10.6% in 1997 from
11.5% 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 $9.8 million, or 77.8%, to $22.4 million in 1997 from $12.6 million in
1996. The increase in general and administrative expenses as a percentage of
revenues to 17.1% in 1997 from 16.2% in 1996 was primarily attributable to an
increase in salaries and benefits of administrative personnel. The Company has
substantially increased such staffing in connection with the acquisitions
completed within the last year. In addition, costs associated with the payment
of fee-for-service claims are greater in 1997 due to the larger volume of claims
paid relative to revenues during the period as well as an increase in the
percentage fee paid to the third-party administrator. The general and
administrative expenses for the period ended September 30, 1997 included
non-recurring expenses of $1.4 million recorded in the second quarter for the
administrative cost of reviewing the accounting and operational issues that
arose in that quarter and the cost of a re-engineering project related to the
Company's system improvements.
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<PAGE> 11
Depreciation and Amortization. Depreciation and amortization expenses increased
$2.2 million, or 137.5%, to $3.8 million in 1997 from $1.6 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 $0.3
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 nine months of 1997 was 7.6%.
This weighted average interest rate also includes the fees for letters of credit
related to the agreements. In the third quarter, the Company borrowed $6.6
million under its credit facility. The weighted average interest cost for
borrowings under the credit facility during the period was 7.0%. In addition,
the Company amortized the original cost of obtaining its credit facility
(approximately 0.13%). The Company pays 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 undrawn portion of the credit facility of 0.28% per annum.
Taxes. For the nine months ended September 30, 1997, the tax benefit represented
19.5% of the pre-tax loss. The effective tax rate for the first three 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
$0.2 million for the nine months ended September 30, 1997. An increase in
accounts payable, accrued expenses and claims reserves provided net cash of $2.4
million largely as a result of an increase of $2.9 million in claims reserve.
The Company's primary cash need after operations (other than capital
expenditures) is for debt service on consulting and non-competition agreements
entered into in connection with previous acquisitions and on the outstanding
balance in the Company's credit facility (see below). The principal amount of
such indebtedness of the Company at September 30, 1997 was $9.6 million. The
various consulting and non-competition 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 $8.5 million and to be completed in 1998. Capital
expenditures were $6.2 million during the nine months ended September 30, 1997.
Such expenditures, other than the cost of the new information system, included
approximately (a) $1.1 million for leasehold improvements, furniture and office
equipment purchased in connection with the relocation of the Company's
headquarters to new office space at the end of March, (b) $0.8 million for
personal computers and systems hardware and (c) $0.7 million
11 of 13
<PAGE> 12
for telephone systems and network upgrades. Capital expenditures for the
remainder of the 1997 fiscal year, excluding the costs associated with the new
information system, are expected to be approximately $0.2 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 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 the redemption of the Company's
outstanding common stock in an amount up to $10.0 million out of the total
amount available under the credit facility; and (iv) a working capital line of
credit in an amount up to $5.0 million out of the total amount available under
the credit facility. The credit facility has a remaining term of three years,
expiring November 30, 2000. Outstanding indebtedness under the 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 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 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 credit facility.
In September 1997, the Company borrowed $6.6 million on the credit facility,
including $5.0 million under the working capital portion of the credit facility.
Approximately $5.0 million of the proceeds were used to enhance the invested
assets of the Company's regulated insurance subsidiary, United Dental Care
Insurance Company ("UDCIC"). UDCIC's net invested assets were adversely affected
by the losses incurred and accrued on the Arizona Medicaid contracts and the
greater-than-expected claims on fee-for-service products. The Company used $0.9
million for a portion of the contingent earn-out on the acquisition of KCDC and
$0.8 million for the payments on consulting and non-competition agreements due
in September.
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 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.
12 of 13
<PAGE> 13
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 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).
10.01** First Amendment to Credit Agreement. The Credit Agreement was
filed as Exhibit 10.26 to the Company's Form 10-K for the year
ended December 31, 1996.
11.0** 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 September 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: November 11, 1997 /s/ MARK E. PAPE
-------------------------------------
Mark E. Pape, Senior Vice President
Chief Financial Officer
13 of 13
<PAGE> 14
UNITED DENTAL CARE, INC.
INDEX OF EXHIBITS
Exhibit No.
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).
10.01** First Amendment to Credit Agreement. The Credit Agreement was
filed as Exhibit 10.26 to the Company's Form 10-K for the year
ended December 31, 1996.
11.0** Statement regarding computation of per share earnings.
27.1** Financial Data Schedule
- -------------------------------
* Previously filed.
** Filed herewith.
<PAGE> 1
EXHIBIT 10.01
FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT
THIS FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT (this "AMENDMENT") is
entered into as of June 29, 1997 between UNITED DENTAL CARE, INC., a Delaware
corporation ("BORROWER"), each lender which is a signatory to this Amendment
(collectively, the "LENDERS"), and NATIONSBANK OF TEXAS, N.A., a national
banking association, as agent for Lenders ("AGENT").
Borrower, Agent, and Lenders are parties to the Revolving Credit Agreement
(as modified, amended, renewed, and extended from time-to-time, the "CREDIT
AGREEMENT") dated as of November 14, 1996, providing for a $35,000,000.00
revolving credit facility (a) to support Borrower's and its Subsidiaries'
capital expenditures and working capital needs (not to exceed $5,000,000.00 in
the aggregate at any one time outstanding), (b) to finance Permitted
Acquisitions, and (c) for the issuance of letters of credit. Borrower and
Lenders have agreed, upon the following terms and conditions, to amend the
Credit Agreement to, among other things, modify Borrower's minimum Liquidity
Coverage Ratio and allow Borrower to repurchase outstanding shares of its
capital stock. Accordingly, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Borrower and Lenders agree as
follows:
1. TERMS AND REFERENCES. Unless otherwise stated in this Amendment (a)
terms defined in the Credit Agreement have the same meanings when used in this
Amendment, and (b) references to "Sections" are to the Credit Agreement's
sections.
2. OPINION OF COUNSEL. Notwithstanding anything contained in the Credit
Agreement, Borrower shall provide Agent, on or before September 15, 1997, with
an opinion of counsel, reasonably satisfactory to Agent, setting forth an
analysis of the Acquisition by Peter Barnett of OraCare Dental Associates, P.A.,
and stating that such Acquisition complies in all respects with applicable
Governmental Requirements, including N.J. REV. STAT. SECTION 45:6-12 (1996).
Failure by Borrower to deliver such opinion of counsel to Agent shall constitute
an Event of Default.
3. AMENDMENTS TO THE CREDIT AGREEMENT.
(a) The first recital is hereby deleted in its entirety and replaced with
the following:
1. Borrower has requested that Lenders provide to Borrower a revolving
credit facility of up to $35,000,000.00 (a) to support Borrower's and its
Subsidiaries's capital expenditures and working capital needs (but not to
exceed $5,000,000.00 in the aggregate at any one time outstanding), (b) to
finance Permitted Acquisitions (defined below), (c) for the issuance of
letters of credit required in connection with such working capital needs
(subject to the limitations described in (a) above), the OraCare
Acquisition (defined below), or Permitted Acquisitions, and (d) to allow
Borrower to redeem shares of its issued and outstanding stock (provided
that Advances for such purposes may not exceed $10,000,000.00 in the
aggregate).
- 1 -
<PAGE> 2
EXHIBIT 10.01
(b) SECTION 7.4 is hereby amended to delete the first sentence therein and
replace such sentence with the following:
Borrower shall not directly or indirectly declare or make, or incur any
liability to make, any Distribution, except for redemptions of Borrower's
common stock, so long as the aggregate amount of any such redemptions does
not exceed $10,000,000.00.
(c) Lenders hereby waive Borrower's non-compliance with SECTION 7.18 as of
June 30, 1997. SECTION 7.18 is hereby deleted in its entirety and replaced with
the following:
7.18 LIQUIDITY COVERAGE RATIO. Borrower shall not permit the ratio of
(a) Liquid Assets to (b) the sum of (i) accounts payable, (ii) accrued
expenses, and (iii) Reserves to be (x) as of any date between July 1, 1997
and December 30, 1997, less than 1.25 to 1.00, and (y) as of any date after
December 30, 1997, less than 1.50 to 1.00.
(d) SECTION 7.19 is hereby deleted in its entirety and replaced with the
following:
7.19 CAPITAL EXPENDITURES. Borrower shall not permit the aggregate
amount of all Capital Expenditures made by the Companies to exceed (a) from
January 1, 1997 through December 31, 1997, $8,000,000, and (b) during any
calendar year ending after December 31, 1997, $5,000,000.
4. RATIFICATIONS. Borrower (a) ratifies and confirms all provisions of the
Loan Documents as amended by this Amendment, (b) ratifies and confirms that all
guaranties, assurances, and Liens granted, conveyed, or assigned to Agent and
Lenders under the Loan Documents are not released, reduced, or otherwise
adversely affected by this Amendment and continue to guarantee, assure, and
secure full payment and performance of the present and future Obligation, and
(c) agrees to perform such acts and duly authorize, execute, acknowledge,
deliver, file, and record such additional documents, and certificates as Agent
may request in order to create, perfect, preserve, and protect those guaranties,
assurances, and Liens.
5. REPRESENTATIONS. Borrower represents and warrants to Agent and Lenders
that as of the date of this Amendment: (a) this Amendment and the other Loan
Documents to be delivered under this Amendment have been duly authorized,
executed, and delivered by Borrower; (b) no action of, or filing with, any
Governmental Authority is required to authorize, or is otherwise required in
connection with, the execution, delivery, and performance by Borrower of this
Amendment; (c) the Loan Documents, as amended by this Amendment, are valid and
binding upon Borrower and are enforceable against Borrower in accordance with
their respective terms, except as limited by Debtor Laws; (d) the execution,
delivery, and performance by Borrower of this Amendment do not require the
consent of any other Person and do not and will not constitute a violation of
any laws, agreements, or understandings to which Borrower is a party or by which
Borrower is bound; (e) all representations and warranties in the Loan Documents
are true and correct in all material respects except to the extent that (i) any
of them speak to a different specific date or (ii) the facts on which any of
them were based have been changed by transactions contemplated or
- 2 -
<PAGE> 3
EXHIBIT 10.01
permitted by the Credit Agreement; and (f) after giving effect to this
Amendment, no Event of Default or Potential Default exists.
6. CONDITIONS PRECEDENT. This Amendment shall not be effective unless and
until: (a) Agent receives counterparts of this Amendment executed by each party
listed below; (b) the representations and warranties in the Credit Agreement, as
amended by this Amendment, and each other Loan Document are true and correct in
all material respects on and as of the date of this Amendment as though made as
of the date of this Amendment; and (c) Agent receives an officer's certificate
executed by an authorized officer of Borrower, certifying to (i) the resolutions
adopted by its board of directors authorizing the transactions contemplated by
this Amendment, (ii) incumbency of officers of Borrower, and (iii) changes in
its articles of incorporation and bylaws, if any, since November 14, 1996.
7. CONTINUED EFFECT. Except to the extent amended hereby, all terms,
provisions, and conditions of the Credit Agreement and the other Loan Documents,
and all documents executed in connection therewith, shall continue in full force
and effect and shall remain enforceable and binding in accordance with their
respective terms.
8. MISCELLANEOUS. Unless stated otherwise (a) the singular number includes
the plural and vice versa and words of any gender include each other gender, in
each case, as appropriate, (b) headings and captions may not be construed in
interpreting provisions, (c) this Amendment must be construed -- and its
performance enforced -- under Texas law, (d) if any part of this Amendment is
for any reason found to be unenforceable, all other portions of it nevertheless
remain enforceable, and (e) this Amendment may be executed in any number of
counterparts with the same effect as if all signatories had signed the same
document, and all of those counterparts must be construed together to constitute
the same document.
9. ENTIRETIES. THE CREDIT AGREEMENT AS AMENDED BY THIS AMENDMENT REPRESENTS
THE FINAL AGREEMENT BETWEEN THE PARTIES ABOUT THE SUBJECT MATTER OF THE CREDIT
AGREEMENT AS AMENDED BY THIS AMENDMENT AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
10. PARTIES. This Amendment binds and inures to Borrower, Agent, Lenders,
and their respective successors and permitted assigns.
REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURE PAGE TO FOLLOW.
- 3 -
<PAGE> 4
EXHIBIT 10.01
EXECUTED as of the date first stated above.
BORROWER:
UNITED DENTAL CARE, INC.,
a Delaware corporation
By: /s/ Mark Pape
-------------------------------
Mark Pape
Senior Vice President
AGENT:
NATIONSBANK OF TEXAS, N.A.,
a national banking association
By: /s/ Sueanna Miranda
-------------------------------
Sueanna Miranda
Vice President
LENDERS:
NATIONSBANK OF TEXAS, N.A.,
a national banking association
By: /s/ Sueanna Miranda
-------------------------------
Sueanna Miranda
Vice President
- 4 -
<PAGE> 1
EXHIBIT 11.0
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,
---------------------- ----------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
I. Reported net earnings
Net income (loss) ............................................. $1,876 $(1,312) $4,932 $(4,293)
====== ======= ====== =======
II. Primary earnings per share
A. Shares outstanding
Weighted average number of shares outstanding during
period ............................................. 6,908 8,943 6,906 8,932
Shares potentially issuable upon the assumed exercise of
stock options, net of assumed repurchase using the
Treasury Stock Method .............................. 261 N/A 298 N/A
------ ------- ------ -------
Total common shares and common equivalent shares ........ 7,169 8,943 7,204 8,932
====== ======= ====== =======
B. Computation of net earnings (loss) per share
Net income (loss) .............................. $ 0.26 $ (0.15) $ 0.68 $ (0.48)
====== ======= ====== =======
III. Fully diluted earnings per share (see NOTE below)
A. Shares outstanding
Weighted average number of shares outstanding during
period ............................................. 6,908 8,943 6,906 8,932
Shares potentially issuable upon the assumed exercise of
stock options, net of assumed repurchase using the
Treasury Stock Method .............................. 276 N/A 302 N/A
------ ------- ------ -------
Total common shares and common equivalent shares ....... 7,184 8,943 7,208 8,932
====== ======= ====== =======
B. Computation of net earnings (loss) per share
Net income (loss) .............................. $ 0.26 $ (0.15) $ 0.68 $ (0.48)
====== ======= ====== =======
</TABLE>
NOTES:
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.
Shares potentially issuable upon assumed exercise of stock options are not
applicable for any period in which their inclusion would have the effect of
decreasing the loss per share amount for such period.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 15,206
<SECURITIES> 0
<RECEIVABLES> 9,717
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,435
<PP&E> 11,778
<DEPRECIATION> 0
<TOTAL-ASSETS> 146,533
<CURRENT-LIABILITIES> 22,938
<BONDS> 0
0
0
<COMMON> 894
<OTHER-SE> 120,730
<TOTAL-LIABILITY-AND-EQUITY> 146,533
<SALES> 0
<TOTAL-REVENUES> 130,719
<CGS> 0
<TOTAL-COSTS> 136,052
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 316
<INCOME-PRETAX> (5,333)
<INCOME-TAX> (1,040)
<INCOME-CONTINUING> (4,293)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,293)
<EPS-PRIMARY> (.48)
<EPS-DILUTED> (.48)
</TABLE>
