The Company's selected financial data presented below for the years ended December 31, 1994, 1995 and 1996 and at December 31, 1995 and 1996, are derived from the audited consolidated financial statements of the Company. The selected financial data presented below for the Company for each of the years ended December 31, 1992 and 1993 and at December 31, 1992, 1993 and 1994 are derived from the audited consolidated financial statements of the Company not included herein. This data is not necessarily indicative of the Company's future performance. The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and the related Notes thereto included herein:
Effective September 1, 1994, the Company completed the acquisition of all of the outstanding common stock of IDH for $14.3 million in cash and additional payments of $5.4 million (consulting and non-competition agreements) over the six year period beginning September 16, 1994. The cash portion of the purchase price was financed through bank borrowings of $11.0 million and $3.3 million of working capital. As a result of the IDH acquisition, the Company incurred interest expense and the Company's amortization expense significantly increased beginning in the third quarter of 1994. The Company repaid the entire outstanding balance of the bank borrowings with the proceeds of the September 21, 1995 initial public offering.
The Company's revenues consist primarily of managed benefits premiums for the prepaid dental plans offered by the Company, such premiums representing 85.2% and 78.2% of total revenues for the years ended December 31, 1996 and 1995, respectively. A secondary source of revenue (representing 13.3% and 21.0% of total revenues for the years ended December 31, 1996 and 1995, respectively) is the indemnity premiums received
The Company estimates that premium rate increases have generally averaged less than 3.5% per year during the five-year period ended December 31, 1996.
The following table sets forth, for the periods indicated, the percentages of revenues represented by certain items reflected in the Company's consolidated statements of operations.
Sales and Marketing. Sales and marketing expenses increased $3.0 million, or 31.3%, to $12.6 million in 1996 from $9.6 million in 1995. Sales and marketing expenses as a percentage of revenues declined to 11.1% in 1996 from 12.2% in 1995. This decrease was largely attributable to the change in product mix with a higher percentage of revenues generated by managed benefits products. Since the indemnity business generates a higher per-member-per-month revenue than generated by the managed benefits plans, and a portion of the sales and marketing costs, such as base salaries and printing costs, are fixed, the expenses as a percentage of revenues decline. In addition, the commissions paid on the indemnity business are lower as a percentage of revenues than those paid on the managed benefits plans.
Depreciation and Amortization. Depreciation and amortization expenses increased $0.7 million, or 120.0%, to $1.2 million in 1995 from $0.5 million in 1994. Most of this increase was the result of amortization of goodwill and consulting and non-competition agreements (the "Agreements") attributable to the acquisitions of IDH and US Dental and the depreciation of the assets acquired.
Interest. Interest expense increased to $1.0 million in 1995 from $0.4 in 1994. The $1.0 million was composed of the interest on the Bank Loan, the Promissory Note and the imputed interest on the consulting and non-competition agreements incurred to finance the IDH and US Dental acquisitions (the "Agreements"). The weighted average interest rates on the Bank Loan, the Promissory Note and the Agreements during 1995 were 9.5%, 4.4% and 8.6%, respectively. These weighted average interest rates include the effects of amortization of debt issuance costs and the fees for letters of credit related to the Agreements.
Taxes. The average tax rate was 36.4% and 37.4% in 1995 and 1994, respectively. In 1995 and 1994, the average tax rate was higher than the statutory Federal tax rate of 34.0%, primarily as the result of the nondeductibility of the amortization of goodwill. The average rate decrease from 1994 to 1995 was primarily due to tax exempt interest income in 1995.
Extraordinary Charge. Upon completion of the Company's initial public offering in September 1995, the Company used a portion of the offering's proceeds to repay its bank debt. This required the write off of the unamortized debt-financing expenses capitalized in connection with the bank financing incurred to finance the IDH acquisition and the financing obtained (but not used) for the US Dental acquisition.
The revolving 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 revolving 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.
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. 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 may require that the Company increase its investment in UDCIC. However, the Company does not believe that compliance with such regulations will adversely affect the Company's ability to meet its operating cash requirements. The Company believes that UDCIC will be able to satisfy such regulations without the need for significant capital contributions by the Company. Applicable laws generally limit the ability of the Company's subsidiaries to pay dividends to the extent that required regulatory capital would be impaired.
The consolidated financial statements and supplementary data are set forth herein commencing on page of this Form 10-K. See Item 14 for the list of documents filed as a part of this report.