Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 (the "1995 Act") provides a "safe harbor" for forward-looking statements, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. The Company desires to take advantage of these safe harbor provisions. The statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations concerning growth and strategies, future operating results and financial position, as well as economic and market events and trends, any future premium pricing levels, future dental health care expense levels, the Company's ability to control health care, selling, general and administrative expenses, items discussed under heading "Year 2000" and all other statements that are not historical facts, are forward looking statements. Words such as expects, projects, anticipates, intends, plans, believes, seeks or estimates, or variations of such words and similar expressions are also intended to identify forward-looking statements. These forward-looking statements are subject to significant uncertainties and contingencies, many of which are beyond the control of the Company. 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, changes in dental health care regulations, 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 ability to obtain waivers and/or extensions from its lenders, whether or not the Company enters into any extraordinary transaction, changes in the Company's operating or expansion strategy, or failure to consummate proposed resale of dental offices and/or promissory notes. 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. Any critical unresolved Year 2000 issues at the Company or its vendors could have a material adverse effect on the Company's results of operations, liquidity or financial condition. In addition, the Company's expectations about the future costs and timely and successful completion of its Year 2000 Program are subject to uncertainties that could cause actual results to differ materially from what has been discussed under the heading "Year 2000". Factors that could influence the amount of future costs and the completion dates and effectiveness of remediation testing and certification and contingency planning efforts include the Company's success in identifying IT systems and embedded systems that contain two-digit year codes, the nature and amount of required reprogramming, testing and certification, the rate and magnitude of related labor and consulting costs, the availability of qualified personnel and the success of the Company's external relationships in addressing their own Year 2000 issues. 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, benefits 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.
The following should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto.
Health care expenses increased 0.5% or $318 for the twelve months ended December 31, 1998. As a percent of revenues, health care expenses improved 1.2% from 68.9% of revenues for the twelve months ended December 31, 1997 to 67.7% for the same period in 1998. Including the Advantage acquisition for twelve months of 1997, health care expenses for the period would have been $66,452 or 68.2% of revenues. The comparison to 1998 then shows a decrease of $432 in health care expenses and a decrease of 0.6% of revenues. The Company continues to improve the health care cost ratios in its existing business, including the business provided by its recent acquisitions, as well as improvements to cost control measures.
Selling, general and administrative expenses increased $12,389 or 49.4%. Including the Advantage acquisition for all of 1997, such increase is $11,819 on an increase of 11.6% of revenues. The increase experienced in 1998 is attributable to certain transitional costs the Company experienced during the year, including a charge for uncollectible accounts receivable, the Company's relocation of its corporate headquarters from Anaheim, CA to Aliso Viejo, CA, and the associated operating leases, the costs associated with the elimination of various job functions at year-end, and the continuing increases in costs associated with telecommunications and computer networks.
Loss on impairment of assets in the amount of $11,165 for the twelve months ended December 31, 1998 primarily represents a pre-tax charge against under-performing notes.
Net loss of $11,094 for the twelve months ended December 31, 1998 was an increase of $8,745 over the loss of $2,349 reported for the same period a year ago. This was primarily due to the year-end discontinued and transitional charges discussed above.
The operating results, net of taxes, of the discontinued orthodontic and general dental practices for the twelve months ended December 31, 1997, reflect a net loss of $4,160 for the twelve months ending December 31, 1997, an increase in losses of $5,810 over the same period in 1996. This includes a pre-tax charge of $8,550 for under-performing notes and receivables ($5,600), litigation costs ($750), and other transition costs ($2,200).
Net loss of $2,349 for the twelve months ended December 31, 1997, was a decrease of $5,401 in net income over the same period in the prior year. This was primarily due to the impact of the discontinued charge discussed above, as well as the other above factors.
Proforma operating results, net of taxes, of the discontinued general dental and orthodontic practices for the twelve months ended December 31, 1996, reflect a net income of $1,650 net of an after tax deferred loss of $621. This compares to a net after tax income of $353 for the same period in 1995. The income amount for 1996 included an after tax gain of $1,678 on the sale of four general dental practices during 1996 as well as the cumulative effect, after taxes, of the change in accounting principle which increased income by $824 and was adopted as of January 1, 1996. Net income increased due to the above factors.
At December 31, 1998 and December 31, 1997, the current ratio was 1.3 to 1.0 and 1.3 to 1.0, respectively. The Company's net worth was $21.8 million at December 31, 1998, compared to $32.8 million the previous year. The Company had $6.2 million and $12.9 million of cash and short-term investments as of December 31, 1998 and December 31, 1997, respectively. As a result of its regulated nature, the Company is required to maintain various regulatory bank accounts in an aggregate amount of approximately $9.0 million to satisfy depository requirements imposed by state regulatory agencies. The Company believes that cash flow from continuing operations, together with the existing cash and short-term investments on hand and other available sources of financing, should be adequate to meet operating capital and regulatory needs for the foreseeable future. See discussion of credit facilities below.
On September 30, 1997, the Company completed a private placement of $32.5 million in long-term debt consisting of eight-year notes through John Hancock Mutual Life Insurance Company ("Hancock"). The Company used the proceeds to repay all of its long-term indebtedness and for general corporate purposes. The senior notes have a principal payment of $6.5 million due on September 30, of each year starting in 2001. The interest rate for the loan is fixed at 7.91 percent. The notes are unsecured senior notes. In connection with the senior notes, the Company is subject to certain financial and operational debt covenants. As of December 31, 1998, the Company was in compliance, or has obtained a waiver, with respect to these covenants.
On May 9, 1997, the Company completed the acquisition of Advantage Dental HealthPlans, Inc. The Company financed part of the acquisition through an unsecured $8.5 million promissory note with the seller, with an interest rate which averaged 8.5 percent during 1998. The promissory note was paid in full in April 1998.
The Company relies heavily upon information technology ("IT") systems and other systems and facilities such as telephones, building access control systems and heating and ventilation equipment ("embedded systems") to conduct its business. The Company also has business relationships with dental health care providers, financial institutions and other third parties ("Vendors") as well as regulators and customers who are themselves reliant upon IT and embedded systems to conduct their business.
(2) Phase 2: Assessment - identify IT and other systems and facilities that utilize date functions and assessing them for Year 2000 functionality;
As part of the Company's Year 2000 Compliance Program Planning/Awareness and Assessment phases, the Company documented the state and condition of existing systems and processes and conducted a thorough analysis of inventory and vendor supplied systems and subsystems. The Company included information technology systems and non-information technology systems.
The Company also faces the risk that one or more of its Vendors will not be able to interact with the Company due to the Vendor's inability to resolve its own Year 2000 issues, including those associated with its own external relationships. The Company has completed its inventory of Vendors and risk rated each external relationship based upon the potential business impact, available alternatives and cost of substitution. Although the Company is diligently working with its vendors regarding Year 2000 compliance, there can be no guarantee that all of the Company's vendors will be Year 2000 compliant.
As a result of the anticipated execution of the Renovation, Validation and Implementation phases of the Company's Year 2000 Compliance Program, the Company believes the Year 2000 issue will not have a material impact on the Company's results or operations.
is critical to the Company. Therefore, the Company has redeployed some resources from non-critical system enhancements to address Year 2000 issues. Due to the importance of IT systems to the Company's business, management has not deferred the decision to make non-critical systems enhancements Year 2000 ready. The Company does not expect these redeployments to have a material impact on the Company's financial condition or result of operations.
The Company reasonably believes that its Year 2000 Compliance Program, which involves the phases of planning and awareness, assessment, renovation, validation and implementation should prevent the Year 2000 from having a material effect on the Company's business or financial condition. However, if the Company's Year 2000 issues were unresolved, potential consequences would include, among other possibilities, the inability to accurately and timely process benefits claims, update client groups' accounts, process financial transactions, bill client groups, report accurate data to management, shareholders, customers, regulators and others as well as business interruptions or shutdowns, financial losses, reputational harm, increased scrutiny by regulators and litigation related to Year 2000 issues. The Company is attempting to limit the potential impact of the Year 2000 by monitoring the progress of its own Year 2000 project and those of its critical Vendors by developing contingency/recovery plans.
The Consolidated Financial Statements and the related Notes and Schedules thereto filed as part of this 1998 Annual Report on Form 10-K are listed on the accompanying Index to Financial Statements on page.