-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AiFSEYukiY+NSW8Zor0ruX2PoDAxyYB/JoNGc73HEP1VwyJUwwtFhXlneydpAYmp VfDFavRtz6vTx6wOEbgJBg== 0001017062-96-000592.txt : 19961121 0001017062-96-000592.hdr.sgml : 19961121 ACCESSION NUMBER: 0001017062-96-000592 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961120 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAFEGUARD HEALTH ENTERPRISES INC CENTRAL INDEX KEY: 0000727303 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 521528581 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12050 FILM NUMBER: 96669418 BUSINESS ADDRESS: STREET 1: 505 N EUCLID ST STREET 2: PO BOX 3210 CITY: ANAHEIM STATE: CA ZIP: 92803-3210 BUSINESS PHONE: 7147781005 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 0-12050 SAFEGUARD HEALTH ENTERPRISES, INC. (Exact name of registrant as specified in its charter) DELAWARE 52-1528581 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 505 NORTH EUCLID STREET ANAHEIM, CALIFORNIA 92801 (Address of principal executive offices) (Zip Code) (714) 778-1005 (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 registrant's common stock, par value $.01 per share, at September 30, 1996, was 4,714,999 shares (not including 3,274,788 shares of common stock held in treasury). Page 1 of 11 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996 INFORMATION INCLUDED IN REPORT
Page ---- Part I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements 3 Consolidated Statements of Financial Position 3 Consolidated Statements of Income 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II. OTHER INFORMATION Item 1. Legal Proceedings 10 Item 6. Exhibits and Reports on Form 8-K 10 SIGNATURES 11
Page 2 of 11 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (000'S OMITTED, EXCEPT SHARE DATA)
September 30, December 31, 1996 1995 -------------- ------------- (Unaudited) ASSETS Current assets: Cash $ 239 $ 506 Investment securities available for sale, at estimated fair value 8,989 14,038 Investment securities held to maturity, at cost 207 202 Accounts and notes receivable, net of allowances of $394 in 1996 and $260 in 1995 4,119 3,258 Income taxes receivable - 45 Prepaid expenses and other 515 519 Deferred income taxes 262 262 Net assets of discontinued operations 2,901 1,748 -------------- ------------- Total current assets 17,232 20,578 -------------- ------------- Property and equipment, net 14,918 13,055 Investment securities held to maturity, at cost 5,410 4,073 Notes receivable - long-term 2,000 - Other assets 229 226 Intangibles, net of accumulated amortization of $1,471 in 1996 and $1,384 in 1995 474 411 Goodwill 21,494 - Covenant not to compete 3,576 - -------------- ------------- Total assets $ 65,333 $ 38,343 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 2,442 $ - Accounts payable and accrued expenses 4,215 3,683 Reserves for incurred but not reported claims 1,742 2,063 Income taxes payable 404 - Deferred revenue 127 195 -------------- ------------- Total current liabilities 8,930 5,941 -------------- ------------- Long-term debt 20,134 - Deferred income taxes 1,264 473 Stockholders' equity Common stock $.01 par value; 30,000,000 shares authorized; 4,715,000 and 4,695,000 shares outstanding, stated at 21,303 21,092 Preferred stock - $.01 par value; 1,000,000 shares authorized; 0 shares outstanding - - Retained earnings 31,916 29,113 Net unrealized loss on investment securities available for sale (91) (153) Treasury stock, at cost (18,123) (18,123) -------------- ------------- Total stockholders' 35,005 31,929 equity -------------- ------------- Total liabilities and $ 65,333 $ 38,343 stockholders' equity ============== =============
See accompanying Notes to Consolidated Financial Statements. Page 3 of 11 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (000's omitted, except per share data)
Three months ended Nine months ended September 30 September 30 -------------------- ------------------- 1996 1995 1996 1995 --------- -------- -------- -------- Health care revenues $19,543 $17,383 $57,122 $49,359 ------- ------- ------- ------- Expenses: Health care services 14,176 12,752 42,474 36,145 Selling, general and administrative 3,869 3,476 10,924 10,072 ------- ------- ------- ------- Total expenses 18,045 16,228 53,398 46,217 ------- ------- ------- ------- Operating income 1,498 1,155 3,724 3,142 Other income, net 170 403 708 846 ------- ------- ------- ------- Income before income taxes 1,668 1,558 4,432 3,988 Provision for income taxes 651 561 1,718 1,510 ------- ------- ------- ------- Income from continuing operations 1,017 997 2,714 2,478 ------- ------- ------- ------- Discontinued operations, net of tax: Income (loss) from dental operations to be disposed of (net of income tax benefits of $643 and $649 in 1996 and $222 and $507 in 1995) (1,030) (348) (1,040) (794) Gain on disposal of dental practices (net of income taxes of $721) 1,129 - 1,129 - ------- ------- ------- ------- Income (loss) from discontinued operations 99 (348) 89 (794) ------- ------- ------- ------- Net income $ 1,116 $ 649 $ 2,803 $ 1,684 ======= ======= ======= ======= Earnings per share: Primary and fully diluted Income from continuing operations $ 0.21 $ 0.21 $ 0.55 $ 0.52 Income (loss) from discontinued operations 0.02 (0.07) 0.02 (0.17) ------- ------- ------- ------- Net income $ 0.23 $ 0.14 $ 0.57 $ 0.35 ======= ======= ======= =======
See accompanying Notes to Consolidated Financial Statements. Page 4 of 11 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (000's omitted)
Nine months ended September 30, ------------------- 1996 1995 -------- ------- Cash flows from operating activities: Net income $ 2,803 $ 1,684 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,458 1,194 Deferred income taxes 791 123 Gain on sale of dental offices (1,850) - Changes in assets and liabilities: Accounts receivable, net (2,014) (1,318) Income taxes receivable 45 255 Prepaid expenses and other 4 199 Current portion of long-term debt 2,442 - Accounts payable and accrued expenses 532 217 Reserves for incurred but not reported claims (321) 224 Income taxes payable 404 170 Deferred revenue (68) (150) -------- ------- Net cash provided by operating activities 4,226 2,598 -------- ------- Cash flows from investing activities: Purchase of investments available for sale (9,160) (3,508) Proceeds from sales/maturity of investments available for sale 12,488 2,652 Purchase of investments held to maturity (7,771) (1,458) Proceeds from maturity of investments held to maturity 8,211 874 Additions to property and equipment (3,394) (2,431) Purchase of goodwill (21,494) - Purchase of covenant not to compete (3,576) - Other activity, net (142) (43) -------- ------- Net cash provided by (used in) investing activities (24,838) (3,914) -------- Cash flows from financing activities: Proceeds from exercise of stock 211 819 options Proceeds from long-term debt 20,134 - -------- ------- Net cash provided by financing activities 20,345 819 -------- ------- Net decrease in cash (267) (497) Cash at beginning of period 506 503 -------- ------- Cash at end of period $ 239 $ 6 ======== =======
See accompanying Notes to Consolidated Financial Statements. Page 5 of 11 SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF REPORTING - --------------------------- The accompanying unaudited Consolidated Financial Statements of Safeguard Health Enterprises, Inc. and subsidiaries (the "Company") for the quarter ended September 30, 1996, have been prepared in accordance with generally accepted accounting principles applicable to interim periods, and reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of results for the interim periods. The statements have been prepared in accordance with the regulations of the Securities and Exchange Commission, but omit certain information and footnote disclosures necessary to present the statements in accordance with generally accepted accounting principles. This information should be read in conjunction with the Consolidated Financial Statements and Notes including Significant Accounting Policies, contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. Management believes that the disclosures herein are adequate to make the information presented not misleading. As described in Note 4 herein, the Operating Results for the Quarter ended September 30, 1996 and the year ended December 31, 1995, have been restated to reflect the effect of the discontinued operation of the General Practices. Effective September 27, 1996, the Company completed the acquisition of all of the outstanding shares of First American Dental Benefits, Inc., dba American Dental Corporation ("First American"), a privately held managed dental care company based in Dallas, Texas, and a related marketing entity for total consideration of approximately $23.5 million, consisting of cash and bank debt. First American provides managed dental care services to approximately 175,000 members in the State of Texas, through a network of approximately 490 dental care providers. The acquisition was accounted for using the purchase method of accounting with the results of operations of the businesses acquired included from the effective date of the acquisition. The acquisition resulted in excess cost over fair market value of net assets acquired of $21.5 million which is being amortized over 40 years. There is no impact on the results of operations during the nine months ended September 30, 1996, however the acquisition was included as part of the Company's consolidated financial statements, as applicable. Unaudited pro forma results of operations of the Company for the nine months ended September 30, 1996, and the year ended December 31, 1995, are included below. Such pro forma presentation, in millions, has been prepared assuming that the acquisitions had occurred as of January 1, of each period.
Nine Months Ended Year Ended September 30, 1996 December 31, 1995 ------------------ ----------------- Revenues $65,037 $79,826 Net income from continuing operations 2,035 3,066 Net income from continuing operations per common share .41 .65 Net income per common share .43 .48
The pro forma results include the historical accounts of the Company, and historical accounts of the acquired businesses and pro forma adjustments, as may be required, including the amortization of the excess purchase price over the fair value of the net assets acquired, the amortization for the noncompete agreements entered into by the former owners of First American, and the applicable income tax effects of these adjustments. The 1996 pro forma results include the effect of audit adjustments recorded subsequent to the purchase of First American by the Company. Substantially all of the adjustments are one- time in nature and Management anticipates that the acquisition will be accretive to net income for 1997. Such audit adjustments will be applied to the applicable holdback funds maintained by the Company in connection with its acquisition. The pro forma results of operations are not necessarily indicative of actual results which may have occurred had the operations of the acquired companies been combined in prior periods. Page 6 of 11 Note 2: Stockholders' Equity and Earnings Per Share - ---------------------------------------------------- Since October 1986, the Company's Board of Directors has, at various times, authorized the repurchase of up to 4,510,888 shares of its common stock through open market or private transactions. As of September 30, 1996, a total of 3,819,088 shares had been acquired at an average cost of $5.54 per share. All shares acquired prior to August 24, 1987, have been retired as required by California law. All shares acquired after the August 24, 1987 reincorporation in Delaware are being held as treasury stock. Earnings per share for the periods ended September 30, 1996 and 1995 were computed by dividing net income by 4,958,456 and 4,777,262 shares, respectively, which was the weighted average number of outstanding common shares and common share equivalents (stock options) during the respective periods. Note 3: Recent Accounting Pronouncements - ----------------------------------------- In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," which will be effective for the Company beginning January 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply APB Opinion No. 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB Opinion No. 25 to its stock-based compensation awards to employees and will disclose the required pro forma effect on net income and earnings per share. Note 4. Operating Results For the Quarter Ended December 30, 1996 and the year - ------------------------------------------------------------------------------- ended December 31, 1995 - ----------------------- On October 21, 1996, the Company implemented a strategic plan to sell all of the general dental practice owned by the Company ("General Practices"). Two of the General Practices were sold during the third quarter. The Company anticipates that the remaining General Practices should be sold by September 30, 1997. One of the General Practices that was sold during the third quarter, was sold to Boyd Professional Dental Corporation, a California corporation ("Boyd Corporation"). Steven J. Baileys, D.D.S., an Officer and Director of the Company and Bradford M. Boyd, D.D.S., a Director of the Company are the owners of Boyd Corporation. The sale of such General Practice to Boyd Corporation was unanimously approved by the Disinterested and Independent Members of the Board of Directors of the Company, after a review by such Disinterested and Independent Directors found the transaction to be fair to all parties involved. The assets of the General Practices to be sold, pursuant to the Company's plan, consist primarily of accounts receivable and supply inventories. Each General Practice sold will also enter into a long-term contract with the Company's newly formed practice management subsidiary, whereby the Company will provide ongoing services to support the dentists in the operation of their practices, including marketing and administrative support. The Company will retain the orthodontic practice in each of the General Practices, and intends to operate the orthodontic practice in the other dental offices as they are sold. The Company projects a substantial gain on the disposal of the discontinued operations, more than offsetting the net assets to be disposed of, as well as any expected operating losses of the General Practices during the phase-out period from October 1, 1996 through September 30, 1997. Due to the estimated gain on the sale of these offices, actual gains will be recorded at the time of such sales. Operating results of the General Practices for the nine months ended September 30, 1996, are shown separately in the accompanying income statement, under the term "Discontinued Operations". The income statement for 1995 has been restated and operating results of the General Practices are also shown separately. Net sales of the General Practices for the nine months ended September 30, 1995 and 1996, were $10,094 and $8,703, respectively. These amounts are not included in the net sales in the accompanying income statements. Page 7 of 11 Assets and liabilities of the General Practices, shown at their book values, to be disposed of consisted of the following:
September 30, 1996 December 31, 1995 ------------------ ----------------- Accounts Receivable $2,239 $1,086 Supplies Inventories 662 662 ------ ------ Total Assets $2,901 $1,748
Net assets to be disposed of, at their book values, have been separately classified in the accompanying balance sheet at September 30, 1996. The December 31, 1995 balance sheet has been restated to conform with the current year's presentation. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the attached consolidated financial statements and notes thereto.
1996 versus 1995 Nine months ended September 30, ------------------------------------- Increase/ Percent Results of operations (000's omitted) (Decrease) Change - -------------------------------------------------------------------------------- Health Care Revenues Managed care revenues $6,740 15.3 Indemnity revenues 404 88.2 Orthodontic revenues 619 12.8 ------ ----- Total Health Care Revenues $7,763 15.7 - -------------------------------------------------------------------------------- Health Care Expenses Managed care expenses $5,443 16.8 Indemnity expenses 405 113.4 Orthodontic expenses 481 14.5 ------ ----- Total Health Care Expenses $6,329 17.5 - -------------------------------------------------------------------------------- Total Selling, General and $ 852 8.5 Administrative Expenses - -------------------------------------------------------------------------------- Other Income, Net $ (138) (16.3) - -------------------------------------------------------------------------------- Net Income $1,119 66.4 - --------------------------------------------------------------------------------
1996 Versus 1995 - ---------------- After restating the Company's financial statements to reflect the discontinuation of the Company's dental practices (see Note 4 of the Consolidated Financial Statements), the Company's revenues for the nine months ended September 30, 1996, were $57,122, or a 15.7% increase on a 7.6% membership increase over the corresponding period a year ago. This increase excluded the membership increase due to the acquisition of First American completed on September 27, 1996. These increases were a result from sales to new small and mid-size clients and moderate price increases to renewing clients. The increases in revenue also resulted from the growth in the Company's indemnity revenues of 88.2% over the comparable period a year ago. Page 8 of 11 Health care expenses for the nine months increased 17.5% primarily due to the increased indemnity and preferred provider organization benefits paid and incurred. These costs are directly related to increased premium revenue. Management continued the selected purging of less profitable clients based on actuarial reviews of plan designs and utilization. Overall selling, general and administrative cots grew at 8.5% for the nine months, approximately half the rate of revenue increases, bringing these costs to 19.1% of health care revenue compared to 20.4% for the same period in 1995. Other income decreased due to lower balances in investment securities as a result of the purchase of the outstanding stock of First American, and other capital expenditures. Net income increased due to the above factors. Business Segment Information - ---------------------------- The Company is engaged primarily in three distinct businesses; the operation of managed care dental programs, the operation of dental indemnity insurance programs, and the operation of orthodontic practices.
1996 versus 1995 Nine months ended September 30 ---------------------------------------------------- 1996 Percent of 1995 Percent of Results of operations (000's omitted) Amount Revenue Amount Revenue - ---------------------------------------------------------------------------------------------- Health Care Revenues - ---------------------------------------------------------------------------------------------- Managed care revenues $50,813 89.0 $44,073 89.3 Indemnity revenues 862 1.5 458 0.9 Orthodontic revenues 5,447 9.5 4,828 9.8 ------- ------- ------- ------- Total Health Care Revenues $57,122 100.0 $49,359 100.0 - ---------------------------------------------------------------------------------------------- Health Care Expenses Managed care expenses $37,917 74.6 $32,474 73.7 Indemnity expenses 762 88.4 357 77.9 Orthodontic revenues 3,795 69.7 3,314 68.6 ------- ------- ------- ------- Total Health Care Expenses $42,474 74.4 $36,145 73.2 - ---------------------------------------------------------------------------------------------- Total Selling, General and Administrative Expenses $10,924 19.1 $10,072 20.4 - ----------------------------------------------------------------------------------------------
Liquidity and Capital Resources - ------------------------------- The Company's business has not been capital intensive. The Company's operational cash requirements have been met principally from operating cash flow and this is expected to continue. At September 30, 1996, the current ratio was 1.93 to 1.00. The Company's net worth was $35.0 million compared to $31.9 million a year earlier. The Company had $14.8 million of cash and investments as of September 30, 1996 compared to $16.3 million a year earlier. The Company also established a $30 million bank loan during the period ended September 30, 1996, of which $19 million was used to fund the acquisition of First American. The Company believes that income from operations, together with the existing cash and investments on hand, its bank loan, and other available sources of financing, should be adequate to meet operating capital needs for the foreseeable future. Impact of Inflation - ------------------- Management believes that the Company's operations are not materially affected by inflation. The Company believes that a majority of its costs are capitated or fixed in nature and are directly related to membership levels, and therefore related to premium levels. Page 9 of 11 Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 - -------------------------------------------------------------------------------- The statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations concerning any future premium pricing levels, future dental health care expense levels, the Company's ability to control health care, selling, general and administrative expenses, and all other statements that are not historical facts, are forward looking statements. Actual results may differ materially from those projected in the forward looking statements, if any, which statements involve risks and uncertainties. The Company's ability to expand is affected by competition not only in benefit program choices, but also the number of dental plan competitors in the markets in which the Company operates. Certain large employer groups and other purchasers of commercial dental health care services, continue to demand minimal premium rate increases, while limiting the number of choices offered to employees. In addition, securing cost effective contracts with dentists may become more difficult in part due to the increased competition among dental plans for dentist contracts. The Company's profitability depends, in part, on its ability to maintain effective control over health care costs, while providing members with quality dental care. Factors such as levels of utilization of dental health care services, new technologies, specialists costs, and numerous other external influences may effect the Company's operating results. The Company's expectations for the future are based on current information and evaluation of external influences. Changes in any one factor could materially impact the Company's expectations relating to premium rates, benefit plans offered, membership growth, the percentage of health care expenses, and as a result, profitability and therefore, effect the forward looking statements which may be included in these reports. In addition, past financial performance is not necessarily a reliable indicator of future performance. An investor should not use historical performance alone to anticipate future results or future period trends. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a defendant in litigation arising in the normal course of business. In the opinion of management, the defense costs and/or ultimate outcome of such litigation is covered by insurance or will not have material effect on the Company's financial position or results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (b) Reports on Form 8-K Reports on Form 8-K were filed with the Securities and Exchange Commission on August 26, 1996 and October 9, 1996, respectively. The Reports on Form 8-K mentioned in this Item 6, are hereby incorporated herein to this Quarterly Report on Form 10Q for the period ended September 30, 1996, as if set forth in full herein. Page 10 of 11 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) or 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, in the City of Anaheim, State of California, on the 19th of November, 1996. SAFEGUARD HEALTH ENTERPRISES, INC. By: /s/ STEVEN J. BAILEYS, D.D.S. ------------------------------------------ STEVEN J. BAILEYS, D.D.S., Chairman, President and Chief Executive Officer By: /s/ THOMAS C. TEKULVE ------------------------------------------ THOMAS C. TEKULVE, Vice President and Chief Financial Officer Page 11 of 11 -----END PRIVACY-ENHANCED MESSAGE-----