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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 June 30, 1998
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)
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DELAWARE 75-2309712
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
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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 13, 1998 was 8,982,616.
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UNITED DENTAL CARE, INC.
INDEX
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Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
o Consolidated Balance Sheets
December 31, 1997 and June 30, 1998.............................................3
o Consolidated Statements of Operations
Three months ended June 30, 1997 and 1998 and
Six months ended June 30, 1997 and 1998.........................................4
o Consolidated Statements of Cash Flows
Six months ended June 30, 1997 and 1998.........................................5
Notes to Consolidated Financial Statements.................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................................9
PART II. OTHER INFORMATION
Item 5. Pending Merger with Protective Life Corporation...........................................14
Item 6. Exhibits and Reports on Form 8-K..........................................................14
SIGNATURES..................................................................................................15
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
United Dental Care, Inc.
Consolidated Balance Sheets
(In thousands)
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December 31, June 30,
1997 1998
------------ --------
(Unaudited)
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ASSETS
Current Assets:
Cash and cash equivalents ................................................................... $ 12,427 $ 22,771
Premiums receivable, net .................................................................... 10,606 9,066
Accrued interest and other current assets ................................................... 4,416 4,327
Deferred taxes, current ..................................................................... 1,592 1,688
-------- --------
Total current assets ................................................................... 29,041 37,852
Regulatory deposits ............................................................................ 4,005 4,046
Furniture and equipment, net ................................................................... 12,612 13,169
Intangible assets, net ......................................................................... 105,479 104,085
Other assets, net .............................................................................. 303 206
-------- --------
TOTAL ASSETS ................................................................................... $151,440 $159,358
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses ....................................................... $ 9,771 $ 8,887
Current portion of debt and revolving credit facility ....................................... 7,981 14,609
Claims reserve .............................................................................. 5,936 4,915
Unearned premiums ........................................................................... 2,065 1,696
-------- --------
Total current liabilities .............................................................. 25,753 30,107
Deferred taxes, noncurrent ..................................................................... 1,236 1,236
Long-term debt, net of current portion ......................................................... 1,403 1,403
-------- --------
Total liabilities ...................................................................... 28,392 32,746
-------- --------
Stockholders' Equity:
Common stock, $.10 par value ................................................................ 894 898
Additional paid-in-capital .................................................................. 108,620 108,995
Retained earnings ........................................................................... 13,534 16,719
-------- --------
Total stockholders' equity ............................................................. 123,048 126,612
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................................... $151,440 $159,358
======== ========
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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)
(Unaudited)
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Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1997 1998 1997 1998
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REVENUES:
Premium revenue................... $ 44,027 $ 43,092 $ 88,875 $ 86,371
Interest income .................. 176 232 351 376
-------- -------- -------- --------
Total revenues ............ 44,203 43,324 89,226 86,747
-------- -------- -------- --------
COSTS AND EXPENSES:
Dental services expense........... 35,881 27,189 66,081 54,442
Sales and marketing .............. 4,498 4,608 9,204 9,243
General and administrative ....... 8,618 6,758 14,944 13,907
Depreciation and amortization .... 1,293 1,405 2,429 2,768
Interest expense ................. 66 342 213 600
-------- -------- -------- --------
Total costs and expenses... 50,356 40,302 92,871 80,960
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES .... (6,153) 3,022 (3,645) 5,787
INCOME TAX EXPENSE (BENEFIT) ......... (1,720) 1,353 (664) 2,601
-------- -------- -------- --------
NET INCOME (LOSS) .................... $ (4,433) $ 1,669 $ (2,981) $ 3,186
======== ======== ======== ========
SHARES OUTSTANDING (IN THOUSANDS):
Basic ............................ 8,935 8,982 8,927 8,968
Diluted .......................... 8,935 9,197 8,927 9,148
NET INCOME (LOSS) PER COMMON SHARE:
Basic ............................ $ (0.50) $ 0.19 $ (0.33) $ 0.36
Diluted .......................... $ (0.50) $ 0.18 $ (0.33) $ 0.35
</TABLE>
The accompanying notes are an integral part of these financial statements.
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United Dental Care, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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For Six Months Ended
June 30,
----------------------
1997 1998
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Operating activities:
Net income (loss) ............................................................ $ (2,981) $ 3,186
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization .............................................. 2,429 2,768
Changes in operating assets and liabilities:
Decrease (increase) in premiums receivable ............................... (1,228) 1,540
Decrease (increase) in accrued interest and other current assets ......... (378) 89
Increase in deferred income taxes ........................................ (461) (96)
Decrease (increase) in other assets ...................................... 360 (213)
Increase (decrease) in accounts payable, accrued expenses
and claims reserve ..................................................... 2,709 (1,905)
Decrease in unearned premiums ............................................ (588) (369)
-------- --------
Net cash provided by (used in) operating activities .................... (138) 5,000
Investing activities:
Purchases of furniture and equipment ......................................... (4,572) (1,622)
Increase in regulatory deposits .............................................. (119) (41)
Investment in new markets .................................................... (136) --
Purchase of acquisitions (net of cash acquired) .............................. (8,042) --
-------- --------
Net cash used in investing activities .................................. (12,869) (1,663)
Financing activities:
Increase in short-term debt .................................................. -- 7,000
Repayment of indebtedness .................................................... (25,382) (372)
Stock options exercised ...................................................... 187 379
-------- --------
Net cash provided by (used in) financing activities .................... (25,195) 7,007
-------- --------
Net increase (decrease) in cash and cash equivalents ........................... (38,202) 10,344
Cash and cash equivalents:
Beginning of period .......................................................... 50,035 12,427
-------- --------
End of period ................................................................ $ 11,833 $ 22,771
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................................................. $ 198 $ 623
======== ========
Income taxes ............................................................. $ 1,579 $ 476
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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United Dental Care, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. The Company
United Dental Care, Inc. (the "Company"), a Delaware corporation incorporated in
1989, is a managed dental benefits company that is licensed to operate prepaid
dental plans in 29 states and, as of June 30, 1998, provided dental coverage to
approximately 1.8 million members. The Company offers a comprehensive range of
dental plans capable of meeting the needs of employer groups of all sizes as
well as individuals. The Company's prepaid dentist networks, as of June 30,
1998, consisted of approximately 7,100 general dentists and specialty dentists
providing a broad range of dental services. The Company sells its services
through multiple distribution channels, including independent brokers,
third-party arrangements including health maintenance organizations, and direct
sales.
2. Basis of Presentation
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the "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 1997
Annual Report on Form 10-K, as amended on Form 10-K/A filed with the Commission
on August 4, 1998. 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.
3. Acquisitions
Effective February 1, 1996, the Company completed the acquisition of all of the
outstanding common stock of both Associated Health Plans, Inc. ("AHP") and
Associated Companies, Inc. for $18.5 million composed of $14.4 million in cash
at closing, financed through internal funds, and additional payments to be made
for up to four years commencing with February 1996.
The acquisition has been accounted for as a purchase and the net assets and
results of operations of both have been included in the Company's consolidated
financial statements beginning February 1, 1996. The purchase price has been
allocated to assets and liabilities based on their estimated respective fair
values. The purchase price exceeded the fair value of net assets by $18.2
million, of which $17.6 million is recorded as goodwill and $0.6 million is
recorded as the value of non-competition and consulting agreements. As of the
purchase date, liabilities assumed included an estimated amount accrued of
$555,000 for the termination or relocation of employees and other exit costs of
the acquired company.
Effective October 1, 1996, the Company completed the acquisition of all of the
outstanding common stock of Independent Dental Plans, Inc. ("Independent") for
$1.3 million in cash at closing, financed through internal funds.
The acquisition has been accounted for as a purchase and the net assets and
results of operations of Independent have been included in the Company's
consolidated financial statements beginning October 1, 1996. The purchase price
has been allocated to assets and liabilities of Independent based on their
estimated respective fair values. The
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purchase price exceeded the fair value of Independent's net assets by $1.5
million, all of which was recorded as goodwill. The Company has not allocated
any portion of the purchase price to any other intangible assets considered to
have nominal value such as the dentist networks and subscriber contracts. Assets
acquired and liabilities assumed totaled $0.5 million and $0.7 million,
respectively.
Effective October 1, 1996, the Company completed the acquisition of all of the
outstanding common stock of Association Dental Plan, Inc. ("Association") for
$3.2 million in cash at closing, financed through internal funds.
The acquisition has been accounted for as a purchase and net assets and results
of operations of Association have been included in the Company's consolidated
financial statements beginning October 1, 1996. The purchase price has been
allocated to assets and liabilities of Association based on their estimated
respective fair values. The purchase price exceeded the fair value of
Association's net assets by $3.5 million, all of which was recorded as goodwill.
The Company has not allocated any portion of the purchase price to any other
intangible assets considered to have nominal value such as the subscriber
contracts. Assets acquired and liabilities assumed totaled $0.2 million and $0.5
million, respectively. As of the purchase date, liabilities assumed included an
estimated amount accrued of $400,000 for the termination or relocation of
employees and other exit costs of the acquired company.
Effective November 1, 1996, the Company completed the acquisition of all of the
outstanding common stock of OraCare DPO, Inc. and a dental management company
affiliated with OraCare (collectively, "OraCare"). In addition, as a part of the
acquisition, the Company agreed to cause an affiliate to acquire a dental
professional association owned by the majority stockholder of OraCare DPO, Inc.
These entities were acquired for $30.5 million, composed of $5.6 million in cash
at closing, financed through internal funds, and an additional payment of $24.9
million in January 1997 from an amount held in escrow, plus certain contingent
payments up to a maximum aggregate amount of $6.0 million based on the financial
performance of the Company in the states of New Jersey and Pennsylvania in 1997
and 1998.
The acquisition has been accounted for as a purchase and the net assets and
results of operations of OraCare and its subsidiaries have been included in the
Company's consolidated financial statements beginning November 1, 1996. The
purchase price has been allocated to assets and liabilities of OraCare based on
their estimated respective fair values. The purchase price exceeded the fair
value of OraCare's net assets by $31.7 million of which $31.5 million is
recorded as goodwill and $0.2 million is recorded as the value of
non-competition and consulting agreements. The Company has not allocated any
portion of the purchase price to any other intangible assets considered to have
nominal value such as the dentist networks and subscriber contracts. Assets
acquired and liabilities assumed totaled $2.4 million and $3.3 million,
respectively. As of the purchase date, liabilities assumed included an estimated
amount accrued of $825,000 for the termination or relocation of employees and
other exit costs of the acquired company.
In response to certain regulations in New Jersey, the capital stock of the
OraCare dental professional association (the "OraCare PA"), was acquired by a
company officer who is a licensed New Jersey dentist. Additionally, the dentist
has provided the Company, for nominal consideration, with an option to transfer,
at the Company's discretion, the ownership of the dental professional
association to another licensed dentist of the Company's choosing. Successor
dentists will be required to provide a comparable option to the Company as a
condition of the transfer of the ownership of the dental professional
association to each successor dentist.
Because of corporate practice of medicine laws in the state of New Jersey, where
OraCare operates, the Company does not own the OraCare PA, but, instead, has the
contractual right to designate, in its sole discretion and at any time, the
licensed dentist who is the owner of the OraCare PA's capital stock at a nominal
cost ("Nominee Arrangement"). In addition, the Company has entered into an
exclusive long-term management service agreement with the OraCare PA. Through
this agreement, the Company has exclusive authority over decision making
relating to all major ongoing operations of the OraCare PA with the exception of
the professional aspects of the practice of
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dentistry as required by New Jersey state law. Under the management service
agreement, the Company establishes annual operating and capital budgets for the
OraCare PA and compensation guidelines for the licensed dental professionals.
The management service agreement has an initial term of ten years with options
for additional ten-year terms thereafter. Management fees are based upon
billings of the affiliated practice less the amounts necessary to pay
professional compensation and other professional expenses, and these fees are
meant to compensate the Company for expenses incurred in providing covered
services plus all profits and losses. The Company's financial interest in the
OraCare PA is unilaterally saleable and transferable by the Company and
fluctuates based upon the actual performance of the operations of the OraCare
PA.
Through the Nominee Arrangement, the Company has a significant long-term
financial interest in the OraCare PA and, therefore, according to Emerging
Issues Task Force Issue No. 97-2, "Application of FASB Statement No. 94,
Consolidation of All Majority-Owned Subsidiaries, and APB Opinion No. 16,
Business Combinations, to Physician Practice Management Entities and Certain
Other Entities with Contractual Management Arrangements," must consolidate the
results of the OraCare PA with those of the Company. Because the Company must
present consolidated financial statements, net patient service revenues are
presented in the accompanying statements of operations.
Effective November 1, 1996, the Company completed the acquisition of all of the
outstanding common stock of Kansas City Dental Care, Inc. ("KCDC") for $12.5
million, composed entirely of cash at closing, financed through internal funds,
plus a contingent payment up to a maximum of $2.0 million based on the financial
performance of the Company in the states of Missouri and Kansas in the second
year after completion of the acquisition. In 1997, the Company paid $625,000 of
contingent payments in connection with the acquisition agreement.
The acquisition has been accounted for as a purchase and the net assets and
results of operations of KCDC have been included in the Company's consolidated
financial statements beginning November 1, 1996. The purchase price has been
allocated to assets and liabilities of KCDC based on their estimated respective
fair values. The purchase price exceeded the fair value of KCDC's net assets by
$13.3 million, all of which was recorded as goodwill. The Company has not
allocated any portion of the purchase price to any other intangible assets
considered to have nominal value such as the dentist networks and subscriber
contracts. Assets acquired and liabilities assumed totaled $0.8 million and $1.0
million, respectively. As of the purchase date, liabilities assumed included an
estimated amount accrued of $575,000 for the termination or relocation of
employees and other exit costs of the acquired company.
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 closing, financed through internal funds.
The acquisition has been accounted for as a purchase and the net assets and
results of operations of United have been included in the Company's consolidated
financial statements beginning January 1, 1997. The purchase price has been
allocated to assets and liabilities of United based on their estimated
respective fair values. The purchase price exceeded the fair value of United's
assets by $5.6 million, all of which was recorded as goodwill. The Company has
not allocated any portion of the purchase price to any other intangible assets
considered to have nominal value such as the dentist networks and subscriber
contracts. Assets acquired and liabilities assumed totaled $3.6 million and $1.1
million, respectively. As of the purchase date, an additional liability was
accrued in the amount of $525,000 for the termination or relocation of employees
and other exit costs of the acquired company.
Effective June 1, 1997, the Company completed the acquisition of all of the
outstanding common stock of International Dental Plans, Inc. ("IDP") for $5.0
million in cash at closing, financed through internal funds.
The acquisition has been accounted for as a purchase and the net assets and
results of operations of IDP have been
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included in the Company's consolidated financial statements beginning June 1,
1997. The purchase price has been allocated to assets and liabilities of IDP
based on their estimated respective fair values. The purchase price exceeded the
fair value of IDP's assets by $4.7 million, all of which was recorded as
goodwill. The Company has not allocated any portion of the purchase price to any
other intangible assets considered to have nominal value such as the dentist
networks and subscriber contracts. Assets acquired and liabilities assumed
totaled $1.8 million and $1.0 million, respectively. As of the purchase date, an
additional liability was accrued in the amount of $525,000 for the termination
or relocation of employees and other exit costs of the acquired company.
4. 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 the
fourth quarter of 1996 and of United and IDP in 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
Certain written and oral statements made or incorporated by reference from time
to time by the Company or its representatives in this report, other reports,
filings with the Commission, press releases, conferences, or otherwise, are
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements include, without limitation any
statement that may predict, forecast, indicate, or imply future results,
performance, or achievements, and may contain the words "believe," "anticipate,"
"expect," "estimate,""project," "will be," "will continue," "will likely
result," or words or phrases of similar meaning. Such statements involve risks,
uncertainties and other factors which may cause actual results to differ
materially from the future results, performance or achievements expressed or
implied by such forward looking statements. Certain risks, uncertainties and
other factors are detailed in this report and will be detailed from time to time
in reports filed by the Company with the Commission, including forms 8-K, 10-Q
and 10-K, and include, among others, the following: heightened competition,
including specifically the intensification of price competition; adverse state
and federal legislation and regulation; loss of key executives; the ability to
attract and retain qualified dentists for the Company's networks; general
economic and business conditions which are less favorable than expected;
unanticipated changes in industry trends; demographic changes; customer service,
adverse publicity, fluctuations and difficulty in forecasting operating results;
the ability of the Company to sustain, manage or forecast its growth; the entry
of new competitors and the development of new products or services by new and
existing competitors; failure to obtain new customers or failure to retain
existing customers; inability to carry out marketing and sales plans; the loss
of significant suppliers, business disruptions; changes in business strategy or
development plans; liability and other claims asserted against the Company; the
ability to attract and retain qualified personnel; and other factors referenced
or incorporated by reference in this report may include additional factors which
could adversely impact the Company's business and financial performance.
Moreover, the Company operates in a very competitive and rapidly changing
environment. New risk factors emerge from time to time and it is not possible
for management to predict all such risk factors, nor can it assess the impact of
all such risk factors on the Company's business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward looking statements. These forward looking
statements represent the estimates and assumptions of management only as of the
date of this report. The Company expressly disclaims any obligation or
undertaking to disseminate any updates or revisions to any forward looking
statement contained herein to reflect any change in its expectations with regard
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thereto or any change in events, conditions or circumstances on which any
statement is based. Given these risks and uncertainties, investors should not
place undue reliance on forward looking statements as a prediction of actual
results. 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:
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For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- ------------------------
1997 1998 1997 1998
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Revenues:
Managed benefits .................... 80.7% 80.7% 82.5% 80.7%
Indemnity ........................... 16.2 15.6 14.4 15.6
Dental centers ...................... 5.1 5.9 5.2 6.0
Less: Intercompany ............ (2.4) (2.7) (2.5) (2.7)
Interest income...................... 0.4 0.5 0.4 0.4
------ ------ ------ ------
100.0 100.0 100.0 100.0
Expenses:
Dental expense
Managed benefits .................. 58.4 46.9 57.1 46.5
Indemnity ......................... 21.1 13.6 15.4 14.0
Dental centers .................... 4.1 5.0 4.1 5.0
Less: Intercompany ............ (2.4) (2.7) (2.5) (2.7)
------ ------ ------ ------
81.2 62.8 74.1 62.8
Sales and marketing ................. 10.2 10.6 10.3 10.7
General and administrative .......... 19.5 15.6 16.8 16.0
Depreciation and amortization ....... 2.9 3.2 2.7 3.2
Interest expense .................... 0.1 0.8 0.2 0.7
------ ------ ------ ------
Total expenses ................. 113.9 93.0 104.1 93.4
Net income (loss) before income taxes ... (13.9) 7.0 (4.1) 6.6
Provision (benefit) for income taxes .... (3.9) 3.1 (0.8) 3.0
------ ------ ------ ------
Net income (loss) ....................... (10.0)% 3.9% (3.3)% 3.6%
</TABLE>
Comparison of Second Quarter of 1998 to Second Quarter of 1997
Revenues. Total revenues for the quarter ended June 30,1998, decreased by $0.9
million or 2.0% to $43.3 million. During the three months ended June 30, 1998,
membership remained steady at approximately 1.8 million, which represents a
decrease of approximately 254,000 members compared to membership at June 30,
1997, principally attributable to the termination of 120,000 Arizona Medicaid
members effective January 1, 1998. Indemnity revenues were $6.8 million
representing a 5.9% decrease compared to 1997 while indemnity membership
declined 8.5% from June 30, 1997 to June 30, 1998. This trend reflects an
improvement in the determination of renewal premium rates commensurate with past
claims experience.
Dental Services Expense. Dental services expense decreased by approximately $8.7
million or 24.2%, to $27.2 million in 1998 compared to 1997. Dental services
expense as a percentage of total revenues decreased to 62.8% in 1998 from 81.2%
in 1997. Compared to 1997, managed benefit expenses decreased by $0.7 million or
2.0%. As
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a percentage of managed benefit revenues, managed benefit expenses decreased to
46.9% from 58.4%, principally as a result of the termination of the Arizona
Medicaid membership on which the Company accrued a $4.2 million loss during the
second quarter of 1997. Dental services expense for the Company's indemnity
products decreased by 36.8% to $5.8 million compared to the same period in 1997,
also attributable to the termination of the Arizona Medicaid membership.
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 to maintain the Company's competitive
position and to improve the economics for managed care general dentists.
Sales and Marketing Expenses. Sales and marketing expenses increased 2.4% to
$4.6 million in 1998 from $4.5 million in 1997. 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
decreased 21.6% to $6.8 million in 1998 from $8.6 million in 1997, 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 of 1997 and the cost of a re-engineering project related to the
Company's system improvements.
Depreciation and Amortization. Depreciation and amortization expenses increased
8.7% to $1.4 million in 1998 from $1.3 million in 1997. This increase was the
result of amortization of the goodwill and the consulting and non-competition
agreements attributable to the acquisition of IDP and depreciation related to
the Company's new computer system.
Interest Expense. Interest expense consists primarily of: (i) interest expense
for borrowings under or commitment fees associated with the Company's credit
facility; (ii) imputed interest related to acquisition related non-competition
and contingent payment agreements; and (iii) capitalized leases. Interest
expense increased approximately $276,000 in 1998 compared to 1997, principally
related to borrowings under the Company's credit facility.
Taxes. For the three months ended June 30, 1998, the effective tax rate was
44.8%. For the three months ended June 30, 1997, the tax benefit represented
28.0% of the pretax loss. The effective tax rate varied from the statutory tax
rate of 34.5% 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 1998 to First Six Months of 1997
Revenues. Total revenues for the six months ended June 30, 1998 decreased by
$2.5 million, or 2.8% to $86.7 million from $89.2 million in the comparable
period in 1997. Managed benefits revenues decreased $3.6 million to $70.0
million. The decrease in managed benefits premium revenues was primarily a
result of a decrease in the number of members rather than price decreases.
During the six months ended June 30, 1998, membership decreased from 1,965,000
at December 31, 1997 to 1,822,000 at June 30, 1998. Membership for the
comparable period in 1997 increased from 1,729,000 to 2,076,000. Indemnity
revenues increased from $12.8 million to $13.5 million.
Dental Services Expense. Dental services expense decreased by $11.6 million, or
17.6% to $54.4 million in 1998 from $66.0 million in 1997. Dental services
expense as a percentage of total revenues decreased to 62.8% in 1998 from 74.1%
in 1997, primarily due to the higher dental services expense ratio in the
Arizona Medicaid managed dental benefits business added during the fourth
quarter of 1996 which terminated January 1, 1998. Dental services expense for
the Company's managed benefits plans, which consist primarily of capitation
payments to general dentists, decreased to 57.6% of managed benefits revenues in
1998, from 69.1% in 1997. The Arizona Medicaid managed benefits plans, which
terminated January 1, 1998, paid general dentists a significantly higher
percentage of premiums than the average of the Company's other managed benefits
plans. Claims expense for the indemnity business in the first six months of 1998
was 90.1% of indemnity revenues, down from 107.0% in the comparable period of
1997, again attributable to the Arizona Medicaid membership, on which the
Company experienced higher
11 of 15
<PAGE> 12
than anticipated utilization of fee-for-service business rather than capitated
service. 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 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 were $9.2 million
during the first six months of 1997. This amount was virtually unchanged during
the first six months of 1998. Sales and marketing expenses as a percentage of
revenue increased to 10.7% in 1998 from 10.3% in 1997. 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 increase as
revenues decrease.
General and Administrative Expenses. General and administrative expenses
decreased $1.0 million, or 6.9%, to $13.9 million in 1998 from $14.9 million in
1997. The decrease in general and administrative expenses as a percentage of
revenues from 16.8% in 1997 to 16.0% in 1998 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 of 1997
and the cost of a re-engineering project related to the Company's system
improvements.
Depreciation and Amortization. Depreciation and amortization expenses increased
$0.3 million, or 14.0%, to $2.7 million in 1998 from $2.4 million in 1997. This
increase was the result of amortization of the goodwill and the consulting and
non-competition agreements attributable to the acquisition of IDP and
depreciation related to the Company's new computer system.
Interest Expense. Interest expense increased $0.4 million to $0.6 million in
1998 from $0.2 million in 1997 and was composed primarily of interest on
borrowings under the Company's credit facility and also the imputed interest on
the consulting and non-competition agreements incurred to finance the Company's
acquisitions. The increase is principally related to borrowings under the
Company's credit facility.
Taxes. For the six months ended June 30, 1998, the average tax rate was 44.9%.
For the six months ended June 30, 1997, the tax benefit represented 18.2% of the
pretax loss. The average tax rate differs from the statutory federal tax rate of
34%, primarily as the result of the non-deductibility of the amortization of
goodwill incurred in the Company's acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company's historical operating cash requirements have been met
through cash provided by operations. Net cash provided by operating activities
was $5.0 million for the six months ended June 30, 1998. A decrease in accounts
payable, accrued expenses and claims reserves represented a use of cash of $1.9
million largely as a result of a decrease of $1.0 million in required claims
reserves, principally for indemnity, specialty referrals and Arizona Medicaid.
In addition, a decrease in premiums receivable represented a source of cash of
$1.5 million.
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 June 30, 1998 was $16.0 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 $5.0 million for the acquisition of IDP (see Note 3
above).
12 of 15
<PAGE> 13
Capital Expenditures. The Company is capitalizing certain costs associated with
implementing a new system for tracking and administering customer data to
replace the variety of systems in use by the Company's subsidiaries. The core
system was functional by late 1996. Costs associated with the software
development and the conversion of systems for the Company's subsidiaries during
the six months ended June 30, 1998 were approximately $1.2 million or 73% of
total capital expenditures. The conversion of all the Company's subsidiaries is
expected to be substantially completed by the end of 1998.
Credit Facility. On November 14, 1996, the Company signed a revolving credit
agreement, as amended, 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 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 and
capital expenditure line of credit in an amount up to $15.0 million out of the
total amount available under the credit facility. The credit facility expires
November 30, 2000. Outstanding indebtedness under the credit facility 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 revolving 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 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 earnout on the acquisition of KCDC and
$0.8 million for the payments on consulting and non-competition agreements due
in September 1997.
In March 1998, the Company borrowed $7.0 million on the credit facility.
Approximately $6.0 million of the proceeds were to enhance the invested assets
of UDCIC, and the remaining $1.0 million was used to enhance working capital.
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
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
13 of 15
<PAGE> 14
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 a portion 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 5. PENDING MERGER WITH PROTECTIVE LIFE CORPORATION
On March 10, 1998, the Company entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Protective Life Corporation ("Protective"), a Delaware
corporation, and PLC Merger Subsidiary Corporation ("MergerSub"), a Delaware
corporation and wholly-owned subsidiary of Protective, pursuant to which the
Company would be merged with and into MergerSub (the "Merger") and MergerSub
would be the surviving corporation.
In the Merger, the stockholders of the Company would receive for each share of
outstanding common stock of the Company a combination of $9.31 in cash and
0.2893 shares of common stock, $0.50 par value per share, of Protective
("Protective Common Stock") (after giving effect to the two-for-one stock split
announced by Protective on March 2, 1998 and paid on April 1, 1998 to the
holders of Protective Common Stock). The Merger Agreement provides that either
the Company (subject to Protective's right to increase the merger consideration)
or Protective may terminate the Merger Agreement if the price of Protective
Common Stock is below $27.50 per share and Protective may terminate the Merger
Agreement if the price of Protective Common Stock is above $39.50 per share
(after adjustment for Protective's stock split).
The Merger is subject to approval by the stockholders of the Company, regulatory
approvals and other customary closing conditions. Therefore, there can be no
assurance as to whether or when the Merger will be completed. A meeting of the
stockholders of the Company is scheduled for September 11, 1998 for the purpose
of obtaining stockholders' approval of the Merger.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
2.1* Agreement and Plan of Merger dated as of March 10, 1998 and amended
as of March 17, 1998, as of July 8, 1998 and as of August 6, 1998 by
and among Protective Life Corporation, PLC Merger Subsidiary
Corporation and the Company (filed as Annex 1 to the Company's Proxy
Statement included as part of Amendment No. 1 to Protective Life
Corporation's Registration Statement on Form S-4, No. 333-60535,
filed with the Commission on August 6, 1998 and incorporated herein
by reference).
3.1* 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).
3.2* Amended and Restated Bylaws of the Company (filed as Exhibit 3.02 to
the 1995 Registration Statement and incorporated herein by
reference).
4.1* Specimen Common Stock Certificate (filed as Exhibit 4.01 to the 1995
Registration Statement and incorporated herein by reference).
11.0** Statement regarding computation of per share earnings.
27.1** Financial Data Schedule
14 of 15
<PAGE> 15
- -------------------------------
* Previously filed.
** Filed herewith.
(b) The Company did not file any reports on Form 8-K during the quarter covered
by this report.
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.
Date: August 14, 1998 By: /s/ JOHN W. McCARTY
----------------------------------------
John W. McCarty, Senior Vice President
Chief Financial Officer
15 of 15
<PAGE> 16
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Description
- --------- ------------------
<S> <C>
11.0 Statement regarding computation of per share earnings.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
UNITED DENTAL CARE, INC.
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,
---------------------- --------------------
1997 1998 1997 1998
---------- -------- --------- ---------
<S> <C> <C> <C> <C>
I. Reported net earnings
Net income (loss).............................................. $ (4,433) $ 1,669 $ (2,981) $ 3,186
========= ======== ========= ========
II. Basic earnings per share
A. Shares outstanding
Weighted average number of shares outstanding during
period.............................................. 8,935 8,982 8,927 8,968
========= ======== ========= ========
B. Net income (loss) per share................................ $ (0.50) $ 0.19 $ (0.33) $ 0.36
========= ======== ========= ========
III. Diluted earnings per share (see NOTE below)
A. Shares outstanding
Weighted average number of shares outstanding during
period.............................................. 8,935 8,982 8,927 8,968
Shares potentially issuable upon the assumed exercise of
stock options, net of assumed repurchase using the
Treasury Stock Method............................... N/A 215 N/A 180
--------- -------- --------- --------
Total common shares and common equivalent shares......... 8,935 9,197 8,927 9,148
========= ======== ========= ========
B. Net income (loss) per share................................ $ (0.50) $ 0.18 $ (0.33) $ 0.35
========= ======== ========= ========
</TABLE>
NOTE: 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 22,771
<SECURITIES> 0
<RECEIVABLES> 9,066
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 37,852
<PP&E> 13,169
<DEPRECIATION> 0
<TOTAL-ASSETS> 159,358
<CURRENT-LIABILITIES> 30,107
<BONDS> 0
0
0
<COMMON> 898
<OTHER-SE> 125,714
<TOTAL-LIABILITY-AND-EQUITY> 159,358
<SALES> 0
<TOTAL-REVENUES> 86,747
<CGS> 0
<TOTAL-COSTS> 80,960
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 600
<INCOME-PRETAX> 5,787
<INCOME-TAX> (2,601)
<INCOME-CONTINUING> 3,186
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,186
<EPS-PRIMARY> .36
<EPS-DILUTED> .35
</TABLE>
