During 1997, the Company entered into a lease agreement to lease office space consisting of approximately 68,000 square feet in Aliso Viejo, California. The Company intends on moving its corporate headquarters and executive offices from its current location at Anaheim, California to Aliso Viejo, California during the third quarter of 1998. The Company is in the process of selling its current corporate headquarters and executive offices in Anaheim, California and intends on completing that transaction during 1998, although no assurances can be given that the office building currently owned by the Company will be sold during 1998 or that a suitable buyer willing to purchase the building under terms and conditions which are satisfactory to the Company will be found during 1998.
The financial data included in the table as of December 31, 1996 and 1997 and for the three years ended December 31, 1997, have been derived from financial statements audited by the Company's independent accountants, Deloitte & Touche, LLP. This data was reclassified in prior years to reflect the discontinuation of the Company's general dental and orthodontic practices (see Note 2 of the Consolidated Financial Statements). This data should be read in conjunction with such financial statements and notes thereto, and
Health care expenses increased 20.5 percent, or $11,168 for the twelve months ended December 31, 1997. As a percentage of revenues, health care expenses improved by 6.1 percent, from 75.0 percent of revenues for the twelve months ended December 31, 1996, to 68.9 percent for the same period in 1997. This was primarily due to the acquisitions of both First American and Advantage, which have a lower health care cost as a percent of revenues. The Company also realized improvements in health care cost ratios for its existing business, excluding the two acquisitions, from 76.2 percent for the twelve months ended December 31, 1996, to 74.5 percent for the same period in 1997, an improvement of 1.7 percentage points. This improvement is due to improved pricing as well as continued improvement in control of costs.
Selling, general and administrative expenses increased $8,811, or 54.1 percent, for the twelve months ended December 31, 1997. This was primarily due to the acquisitions of First American and Advantage with the related selling, general and administrative costs of those businesses. Goodwill and intangible amortization expense related to the acquisitions was $1,525 for the twelve months ending December 31, 1997 compared to $312 for same period in 1996. Excluding the effect of the two acquisitions, the ratio of selling, general and administrative expenses to revenues increased to 23.0 percent from 21.3 percent for the twelve months ending December 31, 1997, compared to the same period of 1996. This was as a result of increases in telecommunications and computer network systems costs, as well as increases in management staffing levels.
Other income increased by $648 for the twelve months ending December 31, 1997, from $984 in 1996, to $1,632, an increase of 65.9 percent. This was due to an increase in interest bearing notes receivable resulting from the sale of the discontinued general dental practices. Interest expense of $2,871 for the twelve months ending December 31, 1997, is primarily a result of the borrowings obtained for the acquisition of both First American and Advantage. This represents an increase of $2,386 from $485 in 1996.
The Company's capital and operational cash requirements have been met principally from operating cash flows, and corporate borrowings, and this is expected to continue.
At December 31, 1997 and December 31, 1996, the current ratio was 1.3 to 1.0 and 2.4 to 1.0, respectively. The Company's net worth was $32.8 million, compared to $35.2 million the previous year. The Company had $12.9 million and $9.8 million of cash and short-term investments as of December 31, 1997 and December 31, 1996, 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. Due to the significant cash and short-term investments maintained by the Company, these requirements do not pose a significant liquidity burden on the Company. 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.
On September 30, 1997, the Company completed a private placement of $32.5 million in long-term debt consisting of eight-year notes. 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, with the remaining principal of $6.5 million due on September 30, 2005. 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, 1997, the Company was in compliance, or has obtained a waiver, with respect to these covenants.
On May 13, 1997, the Company announced that it had 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. The promissory note, as amended, calls for a maturity date not later than April 2, 1998. The interest rate for the note is the Prime Rate, which has averaged 8.5 percent during 1997.
On January 29, 1998, the Company entered into a $8,000,000 revolving working capital credit facility with Silicon Valley Bank, all of which is currently available. The loan has a maturity date of January 28, 1999. The interest rate for the facility, as amended, was established at the bank's Prime rate, plus .25 percent or at the Company's option, LIBOR plus 2.25 percent. The loan is secured by a first priority security interest in all the personal property of the Company, including accounts receivable, fixed assets and intangibles and a negative pledge on the stock of the Company's subsidiaries and on the real property owned by the Company. In connection with the bank loan, the Company will be subject to certain financial and operational debt covenants.
The Consolidated Financial Statements and the related Notes and Schedules thereto filed as part of this 1997 Annual Report on Form 10-K are listed on the accompanying Index to Financial Statements on page.