<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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)
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 May 12, 1998 was 8,982,616.
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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, 1997 and March 31, 1998............................................3
o Consolidated Statements of Income
for the three months ended March 31, 1997 and 1998..............................4
o Consolidated Statements of Cash Flows
for the three months ended March 31, 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 4. Submission of Matters to a Vote of Security-Holders.......................................13
Item 5. Merger with Protective Life Corporation...................................................13
Item 6. Exhibits and Reports on Form 8-K..........................................................13
SIGNATURES..................................................................................................14
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
United Dental Care, Inc.
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .................................... $ 12,427 $ 21,249
Premiums receivable, net ..................................... 10,606 9,780
Accrued interest and other current assets .................... 4,416 3,800
Deferred taxes, current ...................................... 1,592 1,592
------------ ------------
Total current assets .................................... 29,041 36,421
Regulatory deposits ............................................. 4,005 4,011
Furniture and equipment, net .................................... 12,612 13,026
Intangible assets, net .......................................... 105,479 104,696
Pre-operational costs, net ...................................... 295 250
Other assets, net ............................................... 8 --
------------ ------------
TOTAL ASSETS .................................................... $ 151,440 $ 158,404
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses ........................ $ 9,771 $ 9,092
Current portion of debt and revolving credit facility ........ 7,981 14,724
Claims reserve ............................................... 5,936 4,762
Unearned premiums ............................................ 2,065 2,243
------------ ------------
Total current liabilities ............................... 25,753 30,821
Deferred taxes, noncurrent ...................................... 1,236 1,236
Long-term debt, net of current portion .......................... 1,403 1,403
------------ ------------
Total liabilities ....................................... 28,392 33,460
------------ ------------
Stockholders' Equity:
Preferred stock, $.10 par value .............................. -- --
Common stock, $.10 par value ................................. 894 898
Additional paid-in-capital ................................... 108,620 108,995
Retained earnings ............................................ 13,534 15,051
------------ ------------
Total stockholders' equity .............................. 123,048 124,944
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................... $ 151,440 $ 158,404
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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United Dental Care, Inc.
Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1997 1998
---------- ----------
<S> <C> <C>
Revenues:
Dental services revenues ..................... $ 44,848 $ 43,279
Interest income .............................. 175 144
---------- ----------
Total revenues ........................ 45,023 43,423
---------- ----------
Costs and expenses:
Dental services expense ...................... 30,200 27,253
Sales and marketing .......................... 4,706 4,635
General and administrative ................... 6,326 7,149
Depreciation and amortization ................ 1,136 1,363
Interest expense ............................. 147 258
---------- ----------
Total costs and expenses .............. 42,515 40,658
---------- ----------
Income before income taxes ....................... 2,508 2,765
Provision for income taxes ....................... 1,056 1,248
---------- ----------
Net income ....................................... $ 1,452 $ 1,517
========== ==========
Shares outstanding (in thousands):
Basic .......................................... 8,918 8,952
Diluted ........................................ 9,159 9,106
Net income per common share:
Basic ........................................ $ 0.16 $ 0.17
Diluted ...................................... $ 0.16 $ 0.17
</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)
<TABLE>
<CAPTION>
For Three Months Ended
March 31,
------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Operating activities:
Net income ................................................................... $ 1,452 $ 1,517
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .............................................. 1,136 1,363
Changes in operating assets and liabilities:
Decrease (increase) in premiums receivable ............................... (2,607) 826
Decrease (increase) in accrued interest and other current assets ......... (590) 616
Increase (decrease) in accounts payable, accrued expenses
and claims reserve ..................................................... 4,729 (1,853)
Decrease (increase) in other assets and intangibles ...................... 597 (2)
Increase (decrease) in unearned premiums ................................. (295) 178
------------ ------------
Net cash provided by operating activities .............................. 4,422 2,645
Investing activities:
Purchases of furniture and equipment ......................................... (2,466) (939)
Decrease (increase) in regulatory deposits ................................... 28 (6)
Investment in new markets .................................................... (111) --
Purchase of acquisitions (net of cash acquired) .............................. (7,589) --
------------ ------------
Net cash used in investing activities .................................. (10,138) (945)
Financing activities:
Increase in short-term debt .................................................. -- 7,000
Repayment of indebtedness .................................................... (25,080) (257)
Stock options exercised ...................................................... 103 379
------------ ------------
Net cash provided by (used in) financing activities .................... (24,977) 7,122
------------ ------------
Net increase (decrease) in cash and cash equivalents ........................... (30,693) 8,822
Cash and cash equivalents:
Beginning of period .......................................................... 50,035 12,427
------------ ------------
End of period ................................................................ $ 19,342 $ 21,249
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................................................. $ 228 $ 199
============ ============
Income taxes ............................................................. $ 16 $ 48
============ ============
</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. 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. 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.
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 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 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
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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 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,
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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 income.
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 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.
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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 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 Securities and Exchange Commission (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 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.
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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 income:
<TABLE>
<CAPTION>
For three Months Ended
March 31,
---------------------
1997 1998
-------- --------
<S> <C> <C>
Revenues:
Managed benefits ....................... 84.3% 80.8%
Indemnity .............................. 12.5 15.6
Dental centers ......................... 5.3 6.1
Less: Intercompany ................ (2.5) (2.8)
Interest ............................... 0.4 0.3
-------- --------
Total revenues ................... 100.0 100.0
-------- --------
Expenses:
Dental services:
Managed benefits .................... 51.3 46.1
Indemnity ........................... 14.1 14.5
Dental centers ...................... 4.2 5.0
Less: Intercompany .............. (2.5) (2.8)
-------- --------
Subtotal ......................... 67.1 62.8
Sales and marketing expenses ........... 10.5 10.7
General and administrative expenses .... 14.0 16.4
Depreciation and amortization .......... 2.5 3.1
Interest expense ....................... 0.3 0.6
-------- --------
Total expenses ................... 94.4 93.6
-------- --------
Net income before income taxes ............... 5.6 6.4
Income tax expense ........................... 2.3 2.9
-------- --------
Net income ................................... 3.3% 3.5%
======== ========
</TABLE>
Comparison of First Quarter of 1998 to First Quarter of 1997
Revenues. Total revenues for the quarter ended March 31, 1998, decreased by $1.6
million or 3.6% to $43.4 million. During the three months ended March 31, 1998,
membership declined from approximately 1.9 million at December 31, 1997 to
approximately 1.8 million, principally attributable to the termination of
120,000 Arizona Medicaid members effective January 1, 1998. Membership at March
31, 1998 decreased by approximately 126,000 members compared to the same period
in 1997, again principally attributable to the termination of Arizona Medicaid
membership. Indemnity revenues were $6.8 million representing a 20.6% increase
compared to 1997 while indemnity membership declined 6.8% during the same
period. This trend reflects an improvement in the determination of renewal
premium rates commensurate with past claims experience. Point of service
revenues, including both managed benefits and indemnity, were $3.1 million
representing a 4.1% increase compared to 1997 although membership for both
periods remained comparable.
Dental Services Expense. Dental services expense decreased by approximately $2.9
million or 9.8%, to $27.3 million in 1998 compared to 1997. Dental services
expense as a percentage of total revenues decreased to 62.8% in 1998 from 67.1%
in 1997. Compared to 1997, managed benefit expenses decreased by $3.1 million or
13.8%. As a percentage of managed benefit revenues, managed benefit expenses
decreased to 56.7% from 60.8%, principally as a result of the termination of the
Arizona Medicaid membership. Dental services expense for the Company's
fee-for-service products, consisting of indemnity and point of service,
decreased by 1.0% to $6.3 million compared to the
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first three months in 1997. 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 decreased 1.5% to
$4.6 million in 1998 from $4.7 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
increased 13% to $7.1 million in 1998 from $6.3 million in 1997. A significant
portion of this increase is attributable to increased staffing in the Company's
customer service, group service and information systems operations. 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 1998 due to
the larger volume of claims paid by the third party administrator which
experienced a backlog during the same period in 1997.
Depreciation and Amortization. Depreciation and amortization expenses increased
20% to $1.4 million in 1998 from $1.1 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 $111,000 in 1998 compared to 1997, principally
related to borrowings under the Company's credit facility.
Taxes. For the three months ended March 31, 1998, the effective tax rate was
45.1%. 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.
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 $2.6 million for the three months ended March 31, 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 $1.1 million in required
claims reserves, principally for indemnity, specialty referrals and Arizona
Medicaid.
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 March 31, 1998 was $16.1 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 2
above).
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
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systems for the Company's subsidiaries during the three months ended March 31,
1998 were approximately $770,000 or 82% 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 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 14
<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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to the security-holders for a vote during the first
quarter of 1998.
ITEM 5. 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.
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 by and among Protective Life Corporation, PLC
Merger Subsidiary Corporation and the Company (filed as Exhibit 2.1
to the Company's Current Report on Form 8-K filed on March 17, 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
- ----------
* Previously filed.
** Filed herewith.
13 of 14
<PAGE> 14
(b) One report on Form 8-K was filed during the quarter ended March 31, 1998.
Such Current Report on Form 8-K, dated March 10, 1998, reported the Company
entering into the Merger Agreement and did not include any financial statements.
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: May 13, 1998 By: /s/ JOHN W. MCCARTY
--------------------------------------
John W. McCarty, Senior Vice President
Chief Financial Officer
14 of 14
<PAGE> 15
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1* Agreement and Plan of Merger dated as of March 10, 1998 and amended
as of March 17, 1998 by and among Protective Life Corporation, PLC
Merger Subsidiary Corporation and the Company (filed as Exhibit 2.1
to the Company's Current Report on Form 8-K filed on March 17, 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
- ----------
* Previously filed.
** Filed herewith.
<PAGE> 1
EXHIBIT 11
UNITED DENTAL CARE, INC.
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
I. Reported net earnings
Net income........................................................ $ 1,452 $ 1,517
=========== ===========
II. Basic earnings per share
A. Shares outstanding
Weighted average number of shares outstanding during
the period.............................................. 8,918 8,952
=========== ===========
B. Net income per share......................................... $ 0.16 $ 0.17
=========== ===========
III. Diluted earnings per share
A. Shares outstanding
Weighted average number of shares outstanding during
the period............................................. 8,918 8,952
Shares potentially issuable upon the assumed exercise
of stock options and conversion of warrants, net of
assumed repurchase using the Treasury Stock method..... 241 154
----------- -----------
Total common shares and common equivalent shares....... 9,159 9,106
=========== ===========
B. Net income per share......................................... $ 0.16 $ 0.17
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 21,249
<SECURITIES> 0
<RECEIVABLES> 9,780
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 36,421
<PP&E> 13,026
<DEPRECIATION> 0
<TOTAL-ASSETS> 158,404
<CURRENT-LIABILITIES> 30,821
<BONDS> 0
0
0
<COMMON> 898
<OTHER-SE> 124,046
<TOTAL-LIABILITY-AND-EQUITY> 158,404
<SALES> 0
<TOTAL-REVENUES> 43,423
<CGS> 0
<TOTAL-COSTS> 40,658
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 258
<INCOME-PRETAX> (2,765)
<INCOME-TAX> (1,248)
<INCOME-CONTINUING> (1,517)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,517)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
