-----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, SfvpiT2RoRwuKMov1DYlLSXjbLDNY2KHehvYpYTvqOSAO+pMVYJxiY6hcNn4Z305 eoT6Hql4Ndhp+k+1qdp2yw== 0000950134-98-006295.txt : 19980805 0000950134-98-006295.hdr.sgml : 19980805 ACCESSION NUMBER: 0000950134-98-006295 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980804 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED DENTAL CARE INC /DE/ CENTRAL INDEX KEY: 0000948556 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 752309712 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-26688 FILM NUMBER: 98676662 BUSINESS ADDRESS: STREET 1: 13601 PRESTON ROAD SUITE 500 EAST STREET 2: STE 300 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 2144587474 MAIL ADDRESS: STREET 1: 13601 PRESTON ROAD SUITE 500 EAST STREET 2: STE 300 CITY: DALLAS STATE: TX ZIP: 75240 10-K/A 1 AMENDMENT NO. 1 TO FORM 10-K FOR YEAR END 12/31/97 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended December 31, 1997 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 of incorporation) (I.R.S. Employer Identification No.) 13601 Preston Road, Suite 500 East Dallas, Texas 75240 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 458-7474 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of class: COMMON STOCK, $.10 PAR VALUE 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 XX No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the shares of Common Stock held by non-affiliates of the registrant, based on the closing price of the Common Stock on The Nasdaq Stock Market on July 31, 1998, was approximately $171.8 million. (For the purposes of this computation, all directors, officers and 10% beneficial stockholders of the registrant are deemed to be affiliates.) As of July 31, 1998, 8,982,616 shares of Common Stock were outstanding. 2
TABLE OF CONTENTS ITEM PAGE - ---- ---- PART I ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
3 ITEM 1. BUSINESS GENERAL United Dental Care, Inc. ("UDC" or "the Company") is a managed dental benefits company that is licensed to operate prepaid dental plans in 29 states and, as of December 31, 1997, provided dental coverage to approximately 1,900,000 members. The Company offers a comprehensive range of dental plans capable of meeting the needs of employer groups of all sizes as well as individuals. UDC's prepaid dentist networks, as of December 31, 1997, consisted of approximately 6,700 general dentists as well as specialty dentists providing a broad range of dental services. The Company sells its services through multiple distribution channels, including independent brokers, third-party arrangements with HMOs and direct sales. In 1996, the Company entered into agreements to acquire five managed dental benefits companies and one dental referral plan company, all six companies having approximately 500,000 members in the aggregate. All the acquisitions were completed as of mid-1997. Managed dental benefits plans are usually offered as an alternative to traditional dental indemnity insurance, although the Company has the capability of offering dual choice plans that provide both prepaid and indemnity plans. Industry sources report that prepaid dental plans are typically priced 20% or more below comparable indemnity plans. Prepaid dental plans are offered by employers to employees, frequently on a voluntary participation basis with all or part of the premium being paid by the employee. At the time of enrollment, participating employees and dependents become members of the prepaid dental plan and, under most of the Company's plans, each member is entitled to select his or her own dentist from the dentist network. The Company pays the network dentist a fixed monthly amount, or capitation payment, for each member who selected that dentist, regardless of the services rendered in any particular month. In addition, the dentist is paid a separate fee, or copayment, by the member at the time of service for many of the dental services covered under the plan. Under the prepaid dental plans of the Company, the vast majority of all covered dental services are provided through these capitation arrangements, in which the Company bears little financial risk for either utilization levels or cost of services. Many of the Company's prepaid plans have a specialty care benefit which pays the dentist on a fee-for-service basis and is controlled by a specialty referral process. THE MANAGED DENTAL BENEFITS INDUSTRY Background According to the U.S. Office of National Health Statistics, total expenditures for dental care in the United States grew from approximately $14.4 billion in 1980 to approximately $47.6 billion in 1996. According to the American Dental Association, there were approximately 138,000 active licensed dentists engaged in private practice in the United States in 1991. The American Dental Association estimated that in 1993 approximately 68% of the nation's private dentists were in solo practice and approximately 20% were in two-person practices. Historically, payment for dental services has been on a fee-for-service basis. Under this system, the individual, or a dental indemnity insurance company, pays fees established by the dentist for the dental services provided by the dentist and the dentist has little incentive to control costs or minimize expenses. The charges for services generally vary widely among dentists. Since the individual pays all or a portion of the established fees, the individual may be reluctant to incur the costs of preventive dental care. In addition, the individual has limited access to information regarding cost and quality for use as a basis for selecting a dentist. Dental Indemnity Insurance The number of individuals in the United States with dental benefits was estimated by the National Association of Dental Plans to be approximately 117 million in 1995, representing approximately 47% of the total United States population. Historically, dental coverage was not an employee benefit customarily provided by employers. The Company believes that dental benefits are a frequently requested employee benefit. In response to employee demand, employers have increasingly offered dental coverage to employees usually in the form of indemnity insurance. According to a 1993 survey performed by Foster Higgins, an employee benefits consulting firm, approximately 87% of employers with more than 200 employees, approximately 63% of employers with 50-199 employees and approximately 39% of employers with 10-49 employees offer dental coverage as an available employee benefit. 3 4 Dental coverage is typically offered as a separate benefit from medical coverage with the employer frequently paying none, or only a portion, of the premium for the dental coverage. Dental indemnity insurance is similar to medical indemnity insurance in that the individual or the employer pays a premium for the dental insurance coverage and the insurance company pays or reimburses the dentist in whole or in part for the charges for dental services. While dental indemnity insurance companies have utilized mechanisms to control costs such as limiting charges to reasonable and customary charges for the community in which the services are rendered and utilizing preferred providers with whom discounted fee schedules are negotiated, such mechanisms do not transfer significant risk to the dentist or provide significant incentives to the dentist to control costs or reduce fees or to the individual to utilize preventive dental services. Managed Dental Benefits Increasing concern with the costs of health care, including dental care, has resulted in a greater willingness by employers and consumers to consider managed health care delivery systems. The Company believes that these alternate benefit plans are able to provide services, or benefits, at a lower cost, or premium, than fee-for-service alternatives. Companies having the management expertise and industry knowledge required to establish and maintain a network of specialized providers such as dentists have developed specialized managed delivery systems to provide such health care services. HMOs, PPOs and other forms of managed health care plans for general medical services have not customarily devoted the resources to develop specialty managed delivery systems and frequently subcontract with companies providing single specialty managed delivery systems such as the Company's prepaid dental plans. According to the National Association of Dental Plans, prepaid dental plans have grown from approximately 10.4 million covered members in 1991 to 20.7 million in 1995, an annual compounded growth rate of approximately 18.8%. The Company believes the relatively high growth rate for prepaid dental plans is attributable to: (i) the greater acceptance and utilization of managed care alternatives by employers and employees to reduce costs; (ii) the significant price advantage relative to indemnity plans; (iii) the cost effectiveness to employers of prepaid plans as an employee benefit; (iv) the growing acceptance of capitated dental plans by dentists, resulting in improved accessibility and convenience for members; and (v) the use of these plans by several state Medicaid programs. The number of people with dental benefits was estimated by the National Association of Dental Plans to be approximately 117 million in 1995, of which approximately 18% were covered under prepaid dental plans representing approximately 8% of the total United States population. The Company believes there is significant growth opportunity for the managed dental benefits industry. A prepaid dental plan pays a fixed monthly capitation payment to the network dentist who provides dental services as needed at either no cost to the member or at reduced fees (copayments) paid by the member. Consequently, the risk of high utilization is shifted to the dentist, although, generally, the dentist receives copayments for many covered services that are often greater than the direct costs of the dentist, reducing financial risk. The capitation method rewards efficient providers who stress routine, preventive care and control their fixed expenses. In comparison, under the traditional fee-for-service payment system, the risk of utilization is borne by the insurer or the consumer, with little incentive to the dentist to be an efficient provider. The Company believes that the ability of a managed dental benefits plan to volume purchase, shift risk to providers and manage both the costs and utilization of dental care typically results in premiums 40% or more below premiums for a traditional indemnity plan. In addition, some prepaid dental plans provide for specialty care at fixed copayments by the member. Unlike medical care, the majority of dental care is provided by general dentists with some specialty care provided by endodontists (specialists in root canal therapy), orthodontists (specialists in tooth movement), oral surgeons (specialists in extractions), pedodontists (specialists in dentistry for children) and periodontists (specialists in gum-related treatment). Companies such as UDC that arrange for specialty care at fixed copayments are further able to manage the costs and utilization of dental services through specialty referral authorization programs and discounted fee arrangements with specialty dentists. Medium to large employers increasingly expect comprehensive dental care, including specialty care, from prepaid dental plans, at stipulated copayments comparable to the type of coverage provided by a general medical plan. 4 5 According to the National Association of Dental Plans, the number of dentists affiliated with prepaid dental plans was approximately 28,000 in 1995, or approximately 19% of all active dentists. The Company believes that significant growth of prepaid dental plans will continue as a result of: (i) growing acceptance and participation in such plans by dentists; (ii) greater acceptance of such plans by consumers who are becoming increasingly aware of the price advantages, improved service and convenience offered by such plans; and (iii) recognition by employers that such plans can be used to provide important employee benefits at little or no cost to the employer. Consequently, the Company believes prepaid dental plans will be increasingly used to replace more expensive forms of dental coverage and provide dental coverage to greater portions of the population that presently have no dental coverage. The Company believes that the managed dental benefits industry has the potential for significant growth and is highly fragmented. The National Association of Dental Plans estimated that, during 1995, approximately 45% of its members operating prepaid dental plans were single-state companies. The Company believes that large, independent, managed dental benefits companies will have a greater opportunity to grow and expand because of growing interest in multi-state coverage by medium and large employers and increased use by medical HMOs that contract with large dental plans to provide dental coverage to the medical HMO members. The Company believes that large dental plans have the resources and systems required to satisfy the expectations of employers and the requirements of dentists and regulatory authorities while achieving financial economies of scale. The Company believes that the factors supporting the growth of large dental plans will give rise to consolidation opportunities. BUSINESS STRATEGY The Company's goal is to be the leading dental benefits company in the United States with the ability to offer prepaid dental plans to employers of all sizes. The Company intends to maintain and develop a leadership position within each of its existing key markets and to strategically enter new markets that afford significant growth opportunities. At present, the Company is licensed to operate prepaid dental plans in 29 states. The Company believes that, as a large, multi-state managed dental benefits company with significant management depth and financial resources, it will have a competitive advantage over smaller and single-market companies in gaining market share and participating in the consolidation of the managed dental benefits industry. In order to implement its strategy, the Company will: Offer a Full Range of Comprehensive Dental Benefits Plans. One of the keys to the Company's success has been its ability to offer a broad range of prepaid and dual-choice dental plans providing different levels of dental coverage, including specialty care. The variety of its dental plans has enabled the Company to attract both small, single-market employers and large, multi-state employers as well as individuals. In addition, the Company has developed prepaid and dual-choice dental plans that may be offered in substantially all states where it is licensed so that large, multi-state employers can provide the same dental coverage to all of their employees. Ensure Quality Dental Care Through Accessible Dentist Networks. The Company's strategy is to have one of the three largest dentist networks in its key markets, providing a full spectrum of dental care, including specialty care. The Company believes that having provider relations representatives located in each of its key markets enhances the quality of its dentist networks. The local knowledge and expertise provided through these local representatives enables the Company to develop highly accessible dentist networks convenient for members, which is an important factor to employers in selecting a prepaid dental plan. All local efforts are supported by the Company's corporate and regional dental directors. Utilize Multiple Distribution Channel Sales Efforts. The Company sells its dental plans to employers primarily through agents, brokers and benefit consultants. The Company employs a sales force of approximately 90 persons, 50 of whom focus on new group sales and 40 of whom are responsible for renewal sales. In addition, the Company sells to third- party medical HMOs that offer its prepaid dental plans as an additional benefit to members of the medical HMOs. The Company believes that its multiple distribution channel approach is a competitive advantage that provides the flexibility to meet the needs of the full spectrum of customers. Emphasize an Integrated Approach to Customer Service. The Company utilizes an integrated service approach involving local and regional specialized service representatives to optimize its operations and product strategy for each target market. Local offices are maintained in each of the Company's key markets with specialized sales and service representatives for employer groups and insurance brokers and with the local provider relations representatives for dentists. Customer service is performed by member service centers, accessed via an 800-telephone number, with the objective of providing consistent, responsive and efficient member service. 5 6 Acquire Other Managed Dental Benefits Companies. The Company intends to continue acquisition efforts to enter target markets and to expand its market penetration in current markets. The acquisition of U.S. Dental Management, Inc. ("US Dental") in November 1995 resulted in approximately 165,000 additional members, and the acquisition of Associated Health Plans, Inc. ("AHP") in January 1996 resulted in approximately 220,000 additional members. In 1996, the Company entered into agreements to acquire five managed dental benefits companies and one dental referral plan having approximately 500,000 members in the aggregate. These acquisitions are as follows:
EFFECTIVE APPROXIMATE STATES OF DATE OF ACQUIRED COMPANY MEMBERSHIP PREPAID OPERATION OWNERSHIP ---------------- ---------- ------------------ --------- Independent Dental Plans, Inc ("Independent") 10,000 (managed) Michigan 10/01/96 Association Dental Plan, Inc. ("Association") 60,000 (referral) Not applicable 10/01/96 OraCare DPO, Inc. ("OraCare") . . . . . . . . 150,000(managed) New Jersey, Pennsylvania 11/01/96 Kansas City Dental Care, Inc. ("KCDC") . . . 90,000 (managed) Kansas, Missouri 11/01/96 United Dental Care, Inc. ("United") . . . . . 90,000 (managed) Oklahoma 01/01/97 International Dental Plans, Inc. ("IDP") . . 100,000(managed) Florida 06/01/97
The Company currently has no agreement or understanding relating to any acquisition of other companies. (See Subsequent Event, No. 12 in the Notes to Consolidated Financial Statements.) BENEFITS PLANS Managed Dental Plans The Company offers a full spectrum of managed dental plans ("Plans") through numerous state-level subsidiaries. The Plans range from lower coverage, higher co-payment plans with low premiums to higher coverage, low co-payment plans with higher premiums. Under each of the Company's Plans, a premium is paid to the Company for the type of coverage selected, making the employee and each participating dependent a member of the Plan. Premium payments are made by the employer or by the employee (usually by payroll deduction) with respect to employer offered Plans or by the member directly. A significant portion of the Company's revenues are derived from Plans in which the member pays the entire premium. The remainder of the Plans are paid either entirely by the employer or partially by the employer with the member contributing the balance of the premium. Typically, the premiums charged are fixed for a 12-month contract, except for certain multiple year contracts that are subject to limitations on premium increases. Recently, the increase in the dental component of the Consumer Price Index has averaged approximately 6% per year. The Company estimates that its increases in premiums have averaged less than 3.5% per year and that the prepaid premiums charged by the Company are typically 40% or more below premiums for comparable indemnity dental plans. Consequently, the Company believes that it is able to offer Plans that are not only less expensive than the indemnity competition, but also have had lower increases than most dental costs and indemnity premiums. Many of the Company's Plans permit each member to select his or her own individual general dentist from the Company's dentist network at the time of enrollment. The Company intends to incorporate this flexibility into all its Plans. Each month, the Company pays a fixed payment, or capitation, to the member's general dentist regardless of which services are rendered in the month. In return for the capitation payment and the specified copayments, the general dentist agrees to provide all covered services for the member. The effect of this capitation structure is that the Company maintains a degree of risk relating to family size since premiums are structured on a tiered basis, generally not differentiating based on family size. Although the Plans vary, typically routine preventive and diagnostic care (exams, x-rays, sealants, teeth cleanings) is provided at no charge or at a small co-payment, while basic care (including fillings and extractions) and specialty care (root canal therapy and gum disease, or periodontal services) is provided at stipulated copayments. More 6 7 involved major care (such as crowns and bridges) is also provided at copayments that are frequently lower than the member's cost of coinsurance under a comparable indemnity insurance plan. Under many of the prepaid dental plans offered by the Company, specialty dental care by specialty dentists is made available to members. Specialty dentists are generally reimbursed by the Company on a discounted, fee-for-service basis and are not reimbursed on a capitated basis. Accordingly, the Company retains the risk for the payment of specialty care benefits in such situations. In the event that the utilization of specialty care benefits increases under the outstanding plans of the Company, it could substantially adversely affect the profitability of the Company. The Company believes that a specialty care referral program with specialty dentists providing services at fixed copayments is necessary for the cost management of dental care services. Orthodontic care is also available under many of the Company's Plans. Dual Choice Plans The Company is able to offer employers Plans providing both managed dental benefits and traditional indemnity insurance coverage, commonly referred to as dual choice plans. Such Plans allow an employee to select the most suitable type of coverage at the beginning of the contract year by offering each employee the choice of a prepaid plan utilizing the Company's dentist network or traditional indemnity insurance coverage utilizing any dentist, but usually at higher premiums and with lower coverage than the prepaid plan alternative. A dual choice plan is particularly useful when some employees reside in areas where the Company's dentist network is less developed or in states where the Company is not yet licensed to offer managed dental benefits. The indemnity portion of the dual choice plans is made available either through United Dental Care Insurance Company ("UDCIC"), the Company's subsidiary that is licensed to offer dental indemnity insurance in all states where the Company operates a prepaid dental plan, or through contractual arrangements with third party insurers. An employee who selects the indemnity insurance option pays a portion of the charges for covered services (or coinsurance) after satisfying any deductible. Although coinsurance payments are typically higher than the copayments charged for the same services under the other Company Plans, the employee may select any dentist for dental services. In certain states, the Company has contracted with PPOs for discounted fees for services covered under the Company's indemnity insurance. Currently, the Company intends to offer its dual choice plans and its point of service plan as an enhancement to the marketing of its core business of prepaid dental benefits. As of December 31, 1997, the Company had approximately 90,000 indemnity members through its dual-choice plans. Third Party Plans The Company offers customized plans and services through contractual arrangements with medical HMOs, including contracts under which the Company acts as a dental benefits subcontractor to HMOs that have contracted with state agencies to provide Medicaid benefits or that provide Medicare benefits. Under these arrangements, the Company often provides only preventive and diagnostic dental benefits but may also provide more comprehensive coverages, in each case either on a "private-label" basis or directly through the Company's Plans. As of December 31, 1997, the Company had 31 such arrangements, which accounted for approximately 26% of its membership and approximately 12% of its 1997 revenues. The Company believes its size and geographic scope give it a competitive advantage in developing additional third party HMO relationships. Point of Service Plan The Company has developed a point of service plan ("POS") that provides members of the Company's prepaid dental plans the option of receiving dental services from dentists outside the Company's dentist network on an indemnity basis. The POS Plan allows the member to select the dentist of the member's choice each time services are obtained. Although the Company charges higher premiums under the POS Plan, the Company has somewhat greater risk exposure than under its managed dental benefit plans. As of December 31, 1997, the Company had approximately 81,000 POS members. 7 8 Dental Referral Plan Through its acquisition of Association Dental Plan, Inc., the Company offers a referral plan. This plan is currently delivered through a network of approximately 10,500 providers in 36 states. The referral plan contracts with the dentists to provide dental services to referral plan members at certain scheduled fee-for-service rates. No capitation payments are made to dentists. Members of the referral plan pay a fixed fee per month for the member's ability to access the Company's referral plan network. There are no claim forms or deductibles and no pre-authorization is required. The Company bears no financial risk or responsibility for dental services provided to members in conjunction with its referral product. DENTIST NETWORKS The Company designs its Plans and capitation programs to create dentist networks of general and specialty dentists that the Company believes provide the quality of care and convenience needed to attract and retain members. The Company's strategy is to have one of the three largest dentist networks in each of its key markets. As of December 31, 1997, the Company had provider contracts with approximately 6,700 dentists. Included in this number are specialty dentists representing the specialties of endodontics, oral surgery, orthodontics, periodontics and pedodontics. Since specialty care is covered under many of the Company's Plans, the Company has a specialty care referral review program in order to manage the specialty care provided. The Company employs about 50 provider relations representatives, located in local offices situated in its key markets, who recruit general and specialty dentists, determine their qualifications for participation in the Company's network, provide administrative training to the dentist's office staff and assist the dentists with respect to participation in the Company's network. The Company also employs or contracts with regional dental directors. Collectively, the provider relations representatives and the dental directors are responsible for establishing and monitoring the Company's quality review efforts, including credentialing and re-credentialing for network participation, review of specialty referrals and utilization review. Typically, the Company seeks established, private-practice dentists who have capacity in their practice to see at least 200 of the Company's members as new patients. Most general dentists and specialty dentists with whom the Company contracts have small dental offices similar to those familiar to most consumers. Both the dentist and the facility are reviewed in the Company's credentialing process, which incudes verification of licensure and malpractice coverage, as well as review of any actions that may have been taken by state regulatory authorities. In addition to professional practice capabilities, the Company also reviews the service amenities of the office, including available parking, days and hours of operation, a patient recall system for routine, preventive check-ups and radiographic and sterilization equipment and procedures. Upon determining that a dentist meets the Company's requirements for participation in the Company's dental network, the Company offers the dentist a provider contract setting forth the capitation payments, copayments, limitations and exclusions and other terms and conditions applicable to the specific Plans in which such dentist will participate. Provider contracts are typically non-exclusive and permit the Company or the dentist to terminate the contract with 90 days prior written notice. The Company periodically reviews its general and specialty dentists for continued compliance with Company requirements for participation in the Company's dentist network. The Company believes that the advantages to a dentist who participates in a managed dental benefits plan include: (i) increasing the size of the dentist's practice as a result of selection of the dentist by plan members and referrals from plan members; (ii) increasing practice profitability through utilization of excess capacity to accept additional patients; (iii) generation of predictable incremental cash flow from regular capitation payments; (iv) retention of patients seeking managed dental plan participation; and (v) reduction of paper work and collection risks associated with conventional fee-for-service practices. The general and specialty dentists are independent from the Company, providing service to members of the Company's Plans based upon dental practice standards in the community and their contractual arrangements with the Company. The Company requires that its network dentists maintain malpractice insurance and satisfy quality service standards. 8 9 In connection with the OraCare acquisition, the Company acquired a dental management company that has entered into a management agreement with the OraCare dental professional association pursuant to which the management company will furnish the facilities and equipment and certain management services to the dental professional association. In combination, the dental management company and the dental professional association employed 144 employees at December 31, 1997, engaged in providing dental services to members of the general public and members of the Company's prepaid dental plans. The Company's business strategy is dependent to a large extent upon the Company's continued maintenance of a large network of quality general and specialty dentists in each of the Company's markets. Generally, the Company and network dentists enter into nonexclusive contracts that can be terminated by either party with limited notice (generally 90 days). Primarily for such reasons, the Company did not allocate for financial statement purposes any portion of the consideration paid in its acquisitions to the dentist networks of the acquired companies. The Company's business may be adversely affected if the Company is unable to establish and maintain contracts with an adequate number of dentists in any market. MARKETS AND OPERATIONS The Company currently is licensed to sell its prepaid dental plans in 29 states, and its indemnity plan in 28 states including an acquisition that was completed effective January 1, 1997, which added the state of Oklahoma where the Company is licensed to sell both prepaid and indemnity plans. As of December 31, 1997, approximately 79% of all UDC prepaid plan members were located in seven states: Arizona, Texas, New Jersey, Colorado, Florida, Missouri and Oklahoma. The following table shows the approximate number of managed benefits members, indemnity members, referral plan members and total members of the Company as of December 31, 1997.
MANAGED BENEFITS INDEMNITY TOTAL STATE MEMBERS MEMBERS MEMBERS ----- -------- -------- ------- Arizona . . . . . . . . . . . . . . . 408,485 7,860 416,345 Texas . . . . . . . . . . . . . . . . 309,789 19,879 329,668 New Jersey . . . . . . . . . . . . . 175,885 -- 175,885 Colorado . . . . . . . . . . . . . . 166,611 9,113 175,724 Florida . . . . . . . . . . . . . . . 137,124 -- 137,124 Missouri . . . . . . . . . . . . . . 113,544 1,261 114,805 Oklahoma . . . . . . . . . . . . . . 107,501 2,353 109,854 New Mexico . . . . . . . . . . . . . 81,446 2,741 84,187 Ohio . . . . . . . . . . . . . . . . 73,233 1,555 74,788 California . . . . . . . . . . . . . 70,441 14,807 85,248 Washington . . . . . . . . . . . . . 36,136 7,567 43,703 Utah . . . . . . . . . . . . . . . . 30,447 12,688 43,135 Illinois . . . . . . . . . . . . . . 22,539 7,632 30,171 Michigan . . . . . . . . . . . . . . 16,181 -- 16,181 Nevada . . . . . . . . . . . . . . . 12,163 891 13,054 Oregon . . . . . . . . . . . . . . . 11,640 1,635 13,275 Nebraska . . . . . . . . . . . . . . 11,583 -- 11,583 Other States . . . . . . . . . . . . 5,209 456 5,665 Referral members . . . . . . . . . . -- -- 84,689 --------- ------- --------- TOTALS 1,789,957 90,438 1,965,084 ========= ======= =========
The acquisition of US Dental added approximately 163,000 members located in four states where the Company already operated prepaid plans. The acquisition of AHP added approximately 220,000 members, all of whom were located in Arizona. The acquisition of Independent added approximately 10,000 members, all of whom were located in Michigan. The acquisition of Association added approximately 60,000 referral members spread across the United States. The acquisition of OraCare, effective November 1, 1996, added approximately 150,000 prepaid members in New Jersey and Pennsylvania. The KCDC acquisition, also effective November 1, 1996, added approximately 90,000 prepaid members in Kansas and Missouri. The United acquisition, effective January 1, 1997, added approximately 90,000 prepaid and indemnity members. The IDP acquisition, effective June 1, 1997, added approximately 100,000 prepaid members. 9 10 The Company sells its Plans to small, single-market employers and large, multi-state employers, as well as to individuals. No single employer group accounted for more than 5.8% of the Company's revenues for the year ended December 31, 1997. The Company currently maintains its regional customer service centers in Phoenix, Arizona and Dallas, Texas. In addition, the Company maintains 28 local offices with group sales and service representatives and provider relations representatives in its key markets having a significant concentration of members. SALES The Company sells its Plans primarily to employers through agents, brokers and benefit consultants. The Company employs a new group sales force of approximately 50 persons. The sales force primarily works with agents, brokers and consultants to gain new contracts with employer groups. Additionally, the new group sales force makes direct sales to medium and large employers who do not use benefits advisors. Approximately three-fourths of the Company's membership is the result of sales through brokers who receive commissions based on premiums received by the Company from such sales. In addition, the Company sells to medical HMOs to offer the Company's Plans as an additional benefit to HMO members. The Company believes its multiple distribution channel approach is a competitive advantage that provides the flexibility to meet the needs of the full spectrum of customers. The Company's direct sales representatives are compensated by a combination of base salary and commissions based upon membership growth. The Company has implemented a direct sales effort in all of its major markets. The Company has actively pursued alliances with HMOs to offer its Plans to HMO members either on a private label basis or as a separate benefit and currently has 31 such agreements in place. The Company believes that, as HMOs seek to differentiate their services, many will consider contracting for dental benefit plans and that the Company has a competitive advantage in arranging alliances with HMOs as a result of the Company's experience, size and geographic scope. Sales to employers, regardless of distribution channel, involve selling both the employer and its employees. Typically, the employee has the opportunity to select the Company's Plans during an annual open enrollment period. Frequently, representatives of the Company have the opportunity to make presentations directly to the employees, while, in other cases, the employer distributes the Company's marketing materials that explain the features and benefits of the Company's Plan. The Company stresses: (i) the quality and size of its dentist networks; (ii) the comprehensiveness of its Plan, including specialty care coverage; (iii) its integrated customer service approach in responding to member inquiries or complaints, including requests to change general dentists; and (iv) the value of the Plan in relation to Plan premiums and copayments. CUSTOMER SERVICE At December 31, 1997, the Company employed 107 group sales and service representatives, 53 provider relations representatives and 83 customer service representatives with primary responsibility to service the needs of its groups and brokers, general and specialty network dentists and members, respectively. The Company's group sales and service representatives and provider relations representatives are based at the local market level, while the Company's customer service representatives are located at two regional customer service centers in Arizona and Texas. Inquiries or complaints from members are handled over the telephone via 800-telephone numbers by the regional customer service representatives who provide consistent, responsive and efficient member services. The Company believes this integrated approach enables it to respond quickly and personally to group, broker and dentist issues where direct interaction is critical. 10 11 MANAGEMENT INFORMATION SYSTEMS Most administrative, accounting, finance and information services are provided from the Company's administrative offices in Dallas, Texas. The Company maintains certain financial and administrative functions in California and in the non-integrated acquisitions. The Company believes that, in the managed dental benefits industry, an advanced information system can be a significant competitive advantage. Accordingly, in 1995, the Company entered into a contract to acquire an advanced software program specifically designed for the managed dental benefits industry and, subsequently, has acquired the necessary hardware to fully utilize such software. The Company believes its new information system will significantly enhance the Company's capabilities to provide customer service, analyze provider utilization, create opportunities to take advantage of market conditions and support new product development. All of the Company's business is in the process of being converted to the new information system. The conversion of the internally developed systems formerly in use by International Dental Health, Inc. ("IDH") and AHP prior to their respective acquisitions by the Company has been completed. The Company's internally developed system and the systems used by other acquired entities are in the process of being converted. Until the conversion is completed, the Company believes its system and the systems of the acquired entities are adequate for the Company's current needs. The Company expects that all of these systems will be fully converted to the new system by the end of 1998. The Company has an administrative services agreement with R. E. Harrington, Inc. ("Harrington") pursuant to which Harrington provides indemnity claim administrative services to the Company. The Company pays Harrington 5.5% of all claims paid by Harrington, which percentage may be reduced if Harrington does not meet performance guarantees. The term of this agreement is from January 1, 1997 to December 31, 1999, but the Company may terminate the contract with 90-day advance written notice and the payment of a contractual penalty. US DENTAL ACQUISITION The Company entered into a definitive agreement dated July 19, 1995, to purchase all of the outstanding capital stock of US Dental, a managed dental benefits company headquartered in Phoenix, Arizona. The US Dental acquisition closed on November 27, 1995. US Dental operated prepaid dental plans in Arizona, Colorado, Nebraska and New Mexico, and administered a prepaid dental plan owned by a third party in Nevada. The Company also had operations in each state where US Dental operated prepaid dental plans. US Dental had revenues of approximately $13.3 million and $13.0 million for the years ended December 31, 1995 and 1994, respectively. Revenue of $2.2 million was included in the UDC consolidated financial statements for its two months of ownership in 1995. The prepaid dental plans offered by US Dental are similar to the Company's Plans. The consideration given by the Company in connection with the US Dental acquisition was $12.6 million, which included the present value of amounts payable under consulting agreements and non-competition agreements entered into with each of the two former stockholders of US Dental. Each consulting agreement has a term of 50 months and provides for $522,264 in the aggregate to be paid in 48 equal monthly installments commencing the third month after the closing. Each non-competition agreement has a three-year term and provides for $55,991 in the aggregate to be paid in 36 equal monthly installments commencing the month of closing. In addition, at closing, US Dental paid in full loans owed to the two former stockholders of US Dental in the aggregate principal amount of $200,000 and a bank loan in the principal amount of $50,000. Approximately $10.3 million of the purchase price was in the form of a promissory note due January 18, 1996. In allocating, for financial statement purposes, the consideration to be paid by it in connection with the US Dental acquisition, the Company applied the same principles that it applied in previous acquisitions. Approximately $11.7 million of such consideration was allocated to goodwill, approximately $0.2 million was allocated to the non-competition and consulting agreements and the balance of such consideration was allocated to tangible assets. No portion of such consideration was allocated to other intangibles such as the dentist networks and subscriber contracts. ASSOCIATED ACQUISITION The Company executed a definitive stock purchase agreement dated December 14, 1995, to acquire Associated Health Plans, Inc. ("AHP"), a managed dental benefits company, and Associated Companies, Inc. ("ACI"), the management company for AHP (collectively "Associated"). The acquisition became effective as of the close of business on January 31, 1996. 11 12 Associated, headquartered in Tucson, Arizona, operated managed dental benefit plans in Arizona, providing dental benefits to over 220,000 members. AHP had revenues of approximately $14.2 million and $12.6 million for the years ended December 31, 1995 and 1994, respectively. The consideration given by the Company in connection with the Associated acquisition was $18.5 million, which included the present value of amounts payable under non-competition agreements and other arrangements entered into with four former shareholders of Associated which have up to four-year terms payable as services are rendered, commencing February 1996. In allocating, for financial statement purposes, the consideration to be paid by it in connection with the Associated acquisition, the Company will apply the same principles that it applied in previous acquisitions. Approximately $17.6 million of such consideration was allocated to goodwill, approximately $0.6 million was allocated to the non-competition agreements and the balance of such consideration was allocated to tangible assets. INDEPENDENT ACQUISITION On June 28, 1996, the Company entered into an agreement to acquire Independent Dental Plan, Inc. ("Independent"), which operates a prepaid dental plan in Michigan having approximately 10,000 members. Independent had revenues of approximately $1.7 million for the year ended December 31, 1995 and $1.3 million for the nine months ended September 30, 1996. The Independent acquisition was completed effective October 1, 1996. The consideration paid by the Company in connection with the Independent acquisition was approximately $1.3 million. The amount of $1.5 million was allocated to goodwill for financial statement purposes. In addition, in connection with the Independent acquisition, the Company entered into employment agreements with two of the operating officers of Independent. ORACARE ACQUISITION On September 5, 1996, the Company entered into agreements to acquire OraCare DPO, Inc. ("OraCare"), a New Jersey prepaid dental plan having approximately 150,000 members, and approximately 25 "staff-model" dentists obtained through the acquisition of a dental management company affiliated with OraCare. Approximately 75.6% of the OraCare's members were Medicaid members of medical HMOs that contracted with OraCare to provide the dental benefits under their plans. Members of one medical HMO represented approximately 34.4% of OraCare's total membership. 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. The affiliated management company provides management services to both the prepaid dental plan and the dental professional association which, as of December 31, 1996, operated nine dental clinics servicing both members of the OraCare prepaid dental plan and other third-party prepaid and fee-for-service patients. In connection with the OraCare acquisition, the Company entered into employment agreements with two former OraCare stockholders as operating officers of the OraCare management company and two former stockholders as dental directors and dental providers of the dental professional association. The acquisition became effective November 1, 1996. The OraCare entities had combined revenues of $9.2 million and $7.6 million for the years ended December 31, 1995 and 1994, respectively, and $12.0 million for the nine months ended September 30, 1996. The consideration paid by the Company in connection with the OraCare acquisition was $30.5 million 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. Approximately $31.5 million of the initial consideration in the OraCare acquisition was allocated to goodwill for financial statement purposes. Approximately $24.9 million of the purchase price was in the form of a promissory note due January 2, 1997. This promissory note was paid in full in January 1997. In response to certain regulations in New Jersey, the capital stock of the OraCare dental professional association ("OraCare PA") was acquired by a licensed New Jersey dentist designated by the Company. The laws of New Jersey where the dental clinics are located prohibit dentists from sharing fees with non-dentists and prohibits non-dentist entities from practicing dentistry. Although the Company believes the operations of the dental management company are and will be in material compliance with existing applicable laws, the structure of the management relationship between the Company and the dentist has not been the subject of any state regulatory interpretations. Prior to this acquisition, the Company had not previously engaged in the dental practice management business and the OraCare arrangement in substance operates like a staff model HMO as opposed to a PPM company. 12 13 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, 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 statement of operations. KANSAS CITY DENTAL CARE ACQUISITION On September 11, 1996, the Company entered into an agreement to acquire Kansas City Dental Care, Inc. ("KCDC"), which operates prepaid dental plans in Missouri and Kansas having approximately 90,000 members in the aggregate. KCDC had revenues of approximately $8.4 million for the year ended December 31, 1995 and approximately $7.2 million for the nine months ended September 30, 1996. The consideration paid by the Company in connection with the KCDC acquisition is $12.5 million 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. The acquisition became effective November 1, 1996. In 1997, the Company paid $625,000 of contingent payments in connection with the acquisition agreement. Approximately $13.3 million of the consideration paid in the KCDC acquisition was allocated to goodwill for financial statement purposes. In connection with the KCDC acquisition, the Company entered into three-year employment agreements with two management officers of KCDC, one of whom was a stockholder and officer of KCDC and the other of whom was the current chief executive officer (and stock option holder) of KCDC. The company previously operated prepaid dental plans in both states. UICI ACQUISITIONS On September 10, 1996, the Company entered into definitive agreements to acquire the following companies, one of which was wholly owned by UICI, formerly known as United Insurance Companies, Inc., and one of which was majority owned by UICI: (i) United Dental Care, Inc. ("United") which, through an indemnity insurance subsidiary, operates a prepaid dental plan in Oklahoma having approximately 90,000 members; and (ii) International Dental Plans, Inc. ("IDP"), which operates a prepaid dental plan in Florida having approximately 100,000 members. On the same date, the Company agreed to acquire Association Dental Plan, Inc. ("Association"), a wholly owned subsidiary of UICI that operates a multi-state dental referral plan having approximately 60,000 members. United, IDP and Association had combined revenues of approximately $16.6 million for the year ended December 31, 1995 and $13.1 million for the nine months ended September 30, 1996. The acquisition of Association was completed effective October 1, 1996, the acquisition of United became effective January 1, 1997 and the acquisition of IDP became effective June 1, 1997. The consideration paid by the Company in connection with the UICI acquisition was approximately $15.8 million. In connection with the United acquisition, the Company entered into four-year employment agreements with two employees of United. 13 14 ASSOCIATION ACQUISITION On October 1, 1996, the Company completed the acquisition of all the outstanding common stock of Association Dental Plan, Inc. ("Association") for $3.2 million in cash. In the Association acquisition, the Company and two marketing entities affiliated with UICI having approximately 5,000 dedicated agents entered into a marketing agreement pursuant to which such agents will market a multi-state dental referral plan having approximately 80,000 members. Approximately $3.5 million of the initial consideration in the Association acquisition was allocated to goodwill for financial statement purposes. UNITED ACQUISITION 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. 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. INTERNATIONAL DENTAL PLANS ACQUISITION Effective June 1, 1997, the Company completed the acquisition of all the 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. COMPETITION There are numerous competitors wherever the Company conducts business, creating a highly competitive marketplace. The Company's competitors include: (i) large insurance companies with the capability to offer both managed dental benefits and traditional dental indemnity insurance; (ii) HMOs that also offer dental benefits; (iii) self-funded employer programs; (iv) dental PPOs; (v) discounted, fee-for-service membership plans; and (vi) other local or regional companies offering prepaid dental plans. The Company believes that the competition from all of such sources will continue to increase in the future and that insurance companies and HMOs in particular will continue to seek to enter the managed dental benefits business and expand their dental care markets. Many of the Company's competitors are better known to the public and have substantially greater financial and other resources than those of the Company. The Company believes the key factors in selecting a particular managed dental benefits company include: (i) the comprehensiveness and range of prepaid plans offered; (ii) the quality, accessibility and convenience of dentist networks; (iii) the responsiveness of customer service; and (iv) the premium charged. In all of the Company's markets, other prepaid dental plans and insurance companies compete aggressively on all of these factors, particularly in situations where the selection is through a competitive bidding process. In recent years, the Company has seen increasing competition coming from all competitive sectors and the Company anticipates that this trend will continue. Certain markets also have intense price competition that could occur in all markets in the future. Price considerations have been a significant competitive factor in the past and the Company believes pricing will continue to be a significant competitive factor in the future, especially with respect to contracts awarded on the basis of competitive bidding. 14 15 Larger, national indemnity insurance companies that offer both prepaid and indemnity dental coverage may have a competitive advantage over independent dental plans due to availability of multiple product lines, established business relationships, better name recognition and greater financial and information systems resources. The Company believes that it can effectively compete with insurance companies due to the specialized focus of its management team and resources directed towards developing competitive dental benefits plans at generally lower premiums. While some medical HMOs offer their own prepaid dental plans, others contract with independent managed dental plans for those services. The Company believes that it can compete with HMOs that offer dental benefits and pursue opportunities to form alliances with HMOs to offer dental benefits to HMO members. GOVERNMENT REGULATION General State insurance laws and other governmental regulations establish various licensing, operational, financial and other requirements relating to the prepaid dental plan business. State insurance departments and other regulatory agencies are typically empowered to interpret such laws and promulgate regulations applicable to the prepaid dental plan business. The laws and regulations relating to the health care industry in general, and prepaid dental plans specifically, are rapidly developing and have been the subject of numerous past and present proposals which, if adopted, could adversely affect the Company's business. Such proposals have included proposals that would require the Company to admit "any willing provider" to its dental networks, create mandatory minimum capitation payments to dental providers and specify minimum loss ratios or mandate schedules of benefits. In addition, the Company's insurance company subsidiary is subject to numerous laws and regulations applicable to insurance companies generally. The Company is unable to predict the extent to which changes to existing laws and regulations will be adopted or the effect that any such changes may have on the Company's business. The Company's ability to conduct its business in additional states is subject to regulatory approvals required in connection with either acquisitions of existing prepaid dental plan businesses or the application of the Company to conduct its existing business in additional states. Approvals to acquire another licensed prepaid dental plan business often require six months or longer to obtain, while licenses and approvals necessary to commence operations of the Company's existing business in an additional state can require two years or longer to obtain. In addition, no assurance can be given that the Company's applications for any such licenses or approvals will be granted, in which case the Company's plans to expand in additional states would be adversely affected. In circumstances where the Company is unable to obtain licenses to conduct its business in a particular state or pending the grant of a license, the Company would be required to conduct business through contractual arrangements with a licensed insurance company or a licensed HMO, which arrangements are typically less advantageous to the Company than its independent offering of its prepaid dental plans. See "--Business Strategy." In addition to regulatory approvals for acquisitions and additional licenses, various regulatory approvals and filing requirements may apply to ongoing aspects of the Company's business such as approvals for benefits plans offered, premium rates and certain contractual relationships with HMOs and insurance companies. If the Company fails to maintain compliance with all material regulations, regulatory authorities are empowered to take certain actions against the Company such as license revocations that could adversely affect the Company's ability to conduct business. United Dental Care Insurance Company UDCIC is licensed to conduct business in 27 states. UDCIC is a traditional indemnity insurance carrier and therefore assumes underwriting risk. Currently, UDCIC provides the indemnity portion of some of the Company's dual choice and point of service plans. UDCIC has not issued any other form of insurance, and its maximum coverage under each dental insurance policy is generally $1,000. 15 16 UDCIC is regulated by the Arizona Department of Insurance and the departments of insurance of the other states in which UDCIC is licensed to transact insurance business. The Company's ability to expand UDCIC's insurance operations into states in which UDCIC is not currently licensed is dependent, for the most part on prior regulatory approval, which must be sought from the department of insurance in each state in which the Company is applying. Such reviews may take from six months to two years or more. Insurance companies are heavily regulated and require significant cash deposits for capital and surplus. The regulations of the various state insurance departments include specific requirements with regard to such matters as minimum capital and surplus, permitted investments, advertising, policy forms and claims processing requirements. In December 1992, the National Association of Insurance Commissioners approved risk-based capital ("RBC") standards for life and/or health insurance companies, as well as a Model Act (the "RBC Model Act") to apply to such standards at the state level. The RBC Model Act requires an insurance company to submit an annual RBC report which compares its total adjusted capital with its risk-based capital as calculated by an RBC formula which takes into account the risk characteristics of the company's investments and products. The RBC formula includes capital requirements for four categories or risk: asset risk, insurance risk, interest rate risk and business risk, with capital requirements increasing for higher levels of risk. There are four levels of progressively more intense regulatory action against insurance companies whose total adjusted capital does not meet the RBC standards, starting with the company being required to submit a plan to improve its capitalization and ending with the state insurance department placing the company under regulatory control. The State of Arizona adopted the RBC Model Act effective January 1, 1996. At December 31, 1997, UDCIC's total adjusted capital was $5.8 million, or 128.0%, of the "company action level" of the RBC standard of $4.5 million. If the capital and surplus of UDCIC do not exceed the "company action level" at December 31, 1998, UDCIC will be required to submit a business plan to the state regulators. The Company does not believe that compliance with the RBC standards will adversely affect the Company's business since the Company estimates that UDCIC will be able to satisfy such standards without the need for significant capital contributions by the Company. In addition, the Company does not consider that compliance with the RBC standards will adversely affect the ability of the Company to meet its anticipated operating cash requirements. Medicare/Medicaid Programs The Company contracts with certain medical HMOs that provide health services to members under the Medicare or Medicaid programs administered by certain state agencies. The Company provides the dental benefits coverage under such plans of the medical HMOs. The medical HMOs receive reimbursement under either the Medicare or Medicaid programs for the benefits provided. As a result, the availability of such reimbursement or decreases in the level of reimbursement or changes in regulatory requirements could have a significant impact on the decisions of the medical HMOs to continue to offer dental benefits. In addition, in the event that the contracts between such medical HMOs and the state agencies are terminated or not renewed, such termination or nonrenewal would also terminate the Company's contract with such medical HMO as a provider for dental benefits. EMPLOYEES At December 31, 1997, the Company employed approximately 660 employees, of which about 100 were sales personnel, 80 were customer service personnel, 60 were group sales and service representatives, 60 were provider relations personnel, 210 were administrative personnel and 150 were part of the dental professional association and the dental management company in New Jersey. The Company has no collective bargaining agreements with any unions and believes that its overall relations with its employees are good. INSURANCE The Company carries general liability, comprehensive property damage, workers' compensation, professional liability and other insurance coverages that management considers adequate for the protection of the Company's assets and operations. There can be no assurance, however, that the coverage limits of such policies will be adequate. A successful claim against the Company in excess of its insurance coverage could have a material adverse effect on the Company. 16 17 ITEM 2. PROPERTIES The Company leases 45,889 square feet of office space for its corporate offices in Dallas, Texas under a lease expiring March 31, 2002. In addition, the Company leases an aggregate of approximately 97,066 square feet of space for its other regional and local offices with lease terms expiring at various times through July 31, 2002. ITEM 3. LEGAL PROCEEDINGS The Company is, and may be in the future, party to litigation arising in the ordinary course of its business. The Company carries insurance protecting it against liability arising out of, among other things, the provision of dental care services by contracting dentists, who are not employees or agents of the Company. Claims against the Company arising out of the provision of dental care services by contracting dentists historically have been rare, but there can be no assurance that the Company will not become involved in such litigation or otherwise become subject to claims relating to its contracting dentists in the future. While the Company has no significant pending claims, there can be no assurance that the Company's insurance coverage will be adequate to cover all liabilities arising out of such claims or that any such claims will be covered by the Company's insurance. The Company is not currently aware of any claims which are not covered by insurance and which may have a material adverse impact upon the financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS There were no matters submitted to a vote of the security holders of the Company during the fourth quarter of 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS On September 22, 1995, the common stock of the Company began trading on the Nasdaq National Market tier of the Nasdaq Stock Market under the symbol "UDCI." The following table sets forth the range of quarterly high and low closing sale prices on the Nasdaq Stock Market for the periods indicated.
COMMON STOCK CLOSING PRICE --------------------------- TIME PERIOD HIGH LOW ----------- ---- --- January 1 - March 31, 1996 ...................... $ 43.750 $ 34.250 April 1 - June 30, 1996 ......................... $ 44.250 $ 37.250 July 1 - September 30, 1996 ..................... $ 45.750 $ 32.750 October 1 - December 31, 1996 ................... $ 36.250 $ 25.000 January 1 - March 31, 1997 ...................... $ 30.625 $ 27.000 April 1 - June 30, 1997 ......................... $ 28.125 $ 14.375 July 1 - September 30, 1997 ..................... $ 18.375 $ 14.375 October 1 - December 31,1997 .................... $ 15.500 $ 10.625
The last reported sale price per share of common stock as reported by the Nasdaq National Market on July 31, 1998 was $19.125. As of the date of this report, the Company had 8,982,616 shares of common stock outstanding. As of July 31, 1998, the Company estimates that there were approximately 1,900 owners of the Company's common stock, including approximately 200 holders of record and approximately 1,700 persons or entities that hold common stock in nominee name. The Company has not paid or declared any cash dividends on its common stock since its inception. The Company currently intends to retain all future earnings for use in the expansion and operation of its business. In addition, future borrowings may limit the Company's ability to pay cash dividends. Any payments of cash dividends in the future will depend upon the financial condition, capital requirements and earnings of the Company, limitations on dividend payments by subsidiaries of the Company under applicable state laws and such other factors as the board of directors may deem relevant. 17 18 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The Company's selected financial data presented below for the years ended December 31, 1995, 1996 and 1997 and at December 31, 1996 and 1997, 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, 1993 and 1994 and at December 31, 1993, 1994 and 1995 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 (in thousands, except for per share 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:
Year Ended December 31, -------------------------------------------------- 1993 1994(1) 1995(2) 1996(3) 1997 (4) ------- ------- ------- ------- -------- STATEMENT OF OPERATIONS DATA: Revenues: Managed benefits . . . . . . . . . . . . . . . . . $16,805 $31,683 $62,004 $96,786 $150,951 Indemnity . . . . . . . . . . . . . . . . . . . . . -- 5,514 16,622 15,143 18,157 Dental centers. . . . . . . . . . . . . . . . . . . -- -- -- 820 4,857 Interest . . . . . . . . . . . . . . . . . . . . . 173 178 603 899 704 ------- ------- ------- ------- -------- Total revenues . . . . . . . . . . . . . . . . 16,978 37,375 79,229 113,648 174,699 Dental services expense: Managed benefits . . . . . . . . . . . . . . . . . 7,283 15,559 33,068 56,845 97,324 Indemnity . . . . . . . . . . . . . . . . . . . . . -- 4,567 13,682 10,590 18,504 Dental centers . . . . . . . . . . . . . . . . . . -- -- -- 216 7,805 ------- ------- ------- ------- -------- Total dental services expense 7,283 20,126 46,750 67,651 123,633 Sales and marketing . . . . . . . . . . . . . . . . . 3,025 5,756 9,637 12,587 18,847 General and administrative . . . . . . . . . . . . . 3,632 7,062 14,785 18,612 29,932 Depreciation and amortization . . . . . . . . . . . . 159 541 1,190 2,267 5,050 Acquisition-related expenses . . . . . . . . . . . . -- 178 -- -- -- Interest expense . . . . . . . . . . . . . . . . . . -- 360 1,005 536 571 ------- ------- ------- ------- -------- Total expenses 14,099 34,023 73,367 101,653 178,033 Income (loss) before provision for federal income taxes, cumulative effect of a change in accounting principle and extraordinary charge . . . . . . . . . . . . . . . . . . . . . . . 2,879 3,352 5,862 11,995 (3,334) Provision (benefit) for federal income taxes 934 1,256 2,131 4,438 (487) ------- ------- ------- ------- -------- Net income (loss) before cumulative effect of a change in accounting principle and extraordinary charge . . . . . . . . . . . . . . . . 1,945 2,096 3,731 7,557 (2,847) Cumulative effect of a change in accounting principle . . . . . . . . . . . . . . . . . . . . . 44 -- -- -- -- Extraordinary charge . . . . . . . . . . . . . . . . -- -- 142 -- -- ------- ------- ------- ------- -------- Net income (loss) before preferred dividends. . . . . $ 1,901 $ 2,096 $ 3,589 $ 7,557 $ (2,847) ======= ======= ======= ======= ======== PER SHARE AMOUNTS: Net income (loss) before extraordinary charge Basic . . . . . . . . . . . . . . . . . . . . . . . $ 0.52 $ 0.51 $ 0.74 $ 1.04 $ (0.32) Diluted . . . . . . . . . . . . . . . . . . . . . . $ 0.40 $ 0.44 $ 0.68 $ 1.00 $ (0.32) Extraordinary charge per share, net of tax Basic . . . . . . . . . . . . . . . . . . . . . . . -- -- $ (0.03) -- -- Diluted . . . . . . . . . . . . . . . . . . . . . . -- -- $ (0.03) -- -- Net income (loss) per common share Basic . . . . . . . . . . . . . . . . . . . . . . . $ 0.52 $ 0.51 $ 0.71 $ 1.04 $ (0.32) Diluted . . . . . . . . . . . . . . . . . . . . . . $ 0.40 $ 0.44 $ 0.66 $ 1.00 $ (0.32) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (000s) Basic . . . . . . . . . . . . . . . . . . . . . . . . 3,645 4,126 5,051 7,256 8,935 Diluted . . . . . . . . . . . . . . . . . . . . . . . 4,662 4,717 5,449 7,543 8,935 1993 1994 1995 1996 1997 ------- ------- ------- ------- -------- Balance Sheet Data: Working capital. . . . . . . . . . . . . . . . . . . $ 3,907 $ 1,365 $30,892 $25,420 $ 3,288 Total assets . . . . . . . . . . . . . . . . . . . . 7,283 31,404 86,588 165,672 151,440 Total debt including current portion . . . . . . . . ---- 14,558 15,182 28,948 9,384 Stockholders' equity . . . . . . . . . . . . . . . . 6,730 8,947 61,600 125,495 123,048
18 19 - ------------------------ (1) Results of operations for IDH after August 31, 1994 are included in historical results of operations for the Company on a consolidated basis for the years ended December 31, 1994, 1995, 1996 and 1997. See the Company's Consolidated Financial Statements and the Notes thereto. (2) Results of operations for US Dental after October 31, 1995 are included in historical results of operations for the Company on a consolidated basis for the years ended December 31, 1995, 1996 and 1997. See the Company's Consolidated Financial Statements and the Notes thereto. (3) Results of operations for AHP after January 31, 1996, Independent and Association after September 30, 1996 and for KCDC and OraCare after October 31, 1996 are included in historical results of operations for the Company on a consolidated basis for the years ended December 31, 1996 and 1997. See the Company's Consolidated Financial Statements and the Notes thereto. (4) Results of operations for United after December 31, 1996 and for IDP after May 31, 1997 are included in historical results of operations for the year ended December 31, 1997. See the company's Consolidated Financial statements and the Notes thereto. 19 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. OVERVIEW The Company's predecessor began operations in Texas in 1986, and subsequently initiated de novo operations in Ohio in 1990 and in Missouri and Kansas in 1993. The Company entered 15 new states with prepaid members (Arizona, California, Colorado, Idaho, Illinois, Indiana, Iowa, Minnesota, Nebraska, Nevada, New Mexico, Oregon, Utah, Washington and Wyoming) by virtue of the IDH acquisition in 1994. Certain of these additional states have only limited number of prepaid members and are not considered by management to be prime markets for future expansion. 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. Effective November 1, 1995, the Company completed the acquisition of all of the outstanding common stock of US Dental for $1.3 million in cash, deferred payments of $1.0 million (consulting and non-competition agreements) and a promissory note, maturing January 18, 1996, in the amount of $10.3 million (the "Promissory Note"). Effective February 1, 1996, the Company completed the acquisition of all of the outstanding common stock of AHP 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. 20 21 Effective October 1, 1996, the Company completed the acquisitions of all of the outstanding common stock of Independent for $1.3 million in cash and of Association for $3.2 million in cash. Effective November 1, 1996, the Company completed the acquisitions of all of the outstanding common stock of KCDC for $12.5 million in cash and of OraCare for $5.6 million in cash and a promissory note, maturing January 2, 1997, in the amount of $24.9 million (the "OraCare Promissory Note"). The OraCare Promissory Note was paid in full at maturity on January 2, 1997. 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. Effective June 1, 1997, the Company completed the acquisition of all of the outstanding common stock of International Dental Plan, Inc., a Florida corporation ("International"), for $5.0 million in cash. The Company's balance sheet includes an amount designated as goodwill that represents 69.3% of assets and 85.3% of stockholder's equity. Goodwill arises when an acquirer pays more for a business than the fair value of the tangible and separately measurable intangible net assets. GAAP requires that this and all other intangible assets be amortized over the period benefited. Management has determined that period to be not less than 40 years. If management were not to give effect to shorter benefit periods of factors giving rise to a material portion of the goodwill, earnings reporting in periods immediately following the acquisitions would be overstated. In later years, the Company would be burdened by a continuing charge against earnings without the associated benefit to income valued by management in arriving at the consideration paid for the business. Earnings in later years also could be significantly affected if management determined then that the remaining balance of goodwill was impaired. Management has reviewed with its independent accountants all of the factors and related future cash flows which it considered necessary in arriving at the amount incurred to acquire each of the founding companies. Management concluded that the anticipated future cash flows associated with intangible assets recognized in the acquisitions will continue indefinitely, and there is no persuasive evidence that any material portion will dissipate over a period shorter than 40 years. The Company's revenues consist primarily of managed benefits premiums for the prepaid dental plans offered by the Company, such premiums representing 85.1% and 86.4% of total revenues for the years ended December 31, 1997 and 1996, respectively. A secondary source of revenue (representing 13.3% and 10.4% of total revenues for the years ended December 31, 1996 and 1997, respectively) is the indemnity premiums received by a subsidiary of the Company in connection with dual choice plans and individual policies offered by the Company. Dual choice plans permit members to select between the Company's prepaid dental plans and traditional dental indemnity insurance. The dental indemnity insurance subsidiary was acquired effective September 1, 1994, so the Company had no revenue from this source prior to that date. The Company's premium revenues increased from $13.9 million for the year ended December 31, 1992 to $169.1 million for the year ended December 31, 1997, a compound annual growth rate of 64.8%. The increase is primarily related to the growth in the number of members, both from internal growth and from acquisitions, and secondarily due to premium rate increases. IDH had approximately 370,000 prepaid members and 90,000 indemnity members when it was acquired by the Company effective September 1, 1994. The Company had approximately 267,000 prepaid members at that date. Subsequent acquisitions added the following membership:
APPROXIMATE PREPAID ACQUISITION MEMBERSHIP EFFECTIVE DATE ----------- ---------- -------------- US Dental . . . . . . . . . . . . . . 165,000 11/01/95 AHP . . . . . . . . . . . . . . . . . 220,000 02/01/96 Independent . . . . . . . . . . . . . 10,000 10/01/96 Association . . . . . . . . . . . . . 60,000 10/01/96 OraCare . . . . . . . . . . . . . . . 150,000 11/01/96 KCDC . . . . . . . . . . . . . . . . 90,000 11/01/96 United . . . . . . . . . . . . . . . 90,000 01/01/97 IDP . . . . . . . . . . . . . . . . . 100,000 06/01/97
The Company estimates that premium rate increases have generally averaged about 3.5% per year during the five-year period ended December 31, 1997. 21 22 RESULTS OF OPERATIONS 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.
YEAR ENDED DECEMBER 31, --------------------------------- 1995 1996 1997 ------ ------ ------ Revenues: Managed benefits .............................. 78.2% 85.1% 86.4% Indemnity ..................................... 21.0 13.3 10.4 Dental centers ................................ -- 1.4 5.5 Less: intercompany ........................ -- (0.6) (2.7) Interest ...................................... 0.8 0.8 0.4 ------ ------ ------ Total revenues ......................... 100.0% 100.0% 100.0% ------ ------ ------ Expenses: Dental services: Managed benefits .............................. 41.7% 50.6% 58.4% Less: intercompany ........................ -- (0.6) (2.7) Indemnity ..................................... 17.3 9.3 10.6 Dental centers ................................ -- 0.2 4.5 ------ ------ ------ Subtotal .............................. 59.0 59.5 70.8 ------ ------ ------ Gross margin .................................. 41.0 40.5 29.2 Sales and marketing expenses .................. 12.2 11.1 10.8 General and administrative expenses ........... 18.7 16.4 17.1 Depreciation and amortization ................. 1.5 2.0 2.9 Acquisition-related expenses .................. -- -- -- Interest expense .............................. 1.2 0.5 0.3 ------ ------ ------ Total expenses ........................ 92.6 89.5 101.9 ------ ------ ------ Net income (loss) before provision for income taxes and extraordinary charge ...................... 7.4 10.5 (1.9) Provision (benefit) for income taxes .............. 2.7 3.9 (0.3) ------ ------ ------ Net income (loss) before extraordinary charge ..... 4.7 6.6 (1.6) Extraordinary charge .............................. 0.2 -- -- ------ ------ ------ Net income (loss) ................................. 4.5% 6.6% (1.6)% ====== ====== ======
YEARS ENDED DECEMBER 31, 1997 AND 1996 Revenues. Revenues increased by $61.1 million or 53.7%, to $174.7 million in 1997 from $113.6 million in 1996. Of this increase, $58.5 million, or 95.8% was attributable to the operations added through the acquisition of US Dental, AHP, Association, Independent, KCDC, OraCare, United and International. Revenues increased to $116.2 million in 1997 from $93.4 million in 1996 in markets where the Company had operations in both periods. This increase was primarily a result of an increase in the number of members and, to a lesser extent, to premium rate increases. During the year, members increased from 1,729,291 at December 31, 1996 to 1,965,084 at December 31, 1997. In the third quarter of 1997, the Company recorded an increase of $4.5 million in the reserve for estimated uncollectible premiums receivable due to the availability of additional information regarding the collectibility of certain receivables. This cost has been reported as a reduction in the dental services revenue for the year and as a reduction of net premiums receivable as of December 31, 1997. Dental Services. Dental services expense increased by $56.0 million, or 82.8%, to $123.6 million in 1997 from $67.6 million in 1996. Dental services expense as a percentage of total revenues increased to 70.8% in 1997 from 59.5% in 1996. Dental services expense for the Company's managed benefits plans, which consist primarily of capitation payments to general dentists, increased to 67.6% of managed benefits revenues in 1997, from 59.5% in 1996. Dental services expense as a percentage of total revenues was higher in 1997 than 1996 due primarily to (i) higher dental services expense on the Company's fee-for-service products, consisting of indemnity and point-of-service, 22 23 and (ii) the $4.2 million charge recorded in the second quarter of 1997 related to losses associated with the two contracts related to the Company's Arizona Medicaid membership which agreement terminated December 31, 1997. The Company's fee-for-service products consist principally of traditional indemnity and point-of-service plans. Traditional indemnity insurance is generally offered only as a dual choice product to accounts that wish to allow employees an expanded choice of dental providers. During 1997, the Company determined that certain accounts were demonstrating higher fee-for-service utilization than historically realized and that such was principally attributable to certain product offerings and requirements of membership size. During the second quarter, the Company recorded a $4.2 million charge to dental services expense to provide for future estimated losses expected to be incurred for two contracts related to its Arizona Medicaid membership which became effective October 1, 1996 and terminated on December 31, 1997. The reserve was recorded when the Company realized a significantly higher than anticipated utilization of fee-for-service providers rather than capitated service for this membership. The higher fee-for-service utilization was largely attributable to the higher dependent child portion of the Medicaid population which the Company had limited experience in estimating. 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 somewhat to maintain the Company's competitive position and to improve the economics for managed care general dentists. The dental services expense ratio for the Company's fee-for-service products (indemnity and point-of-service) was 98.6% for 1997, as compared to 69.9% for 1996, due to a higher level of claims payments and the $1.9 million addition in reserves charged in the second quarter of 1997 based on an independent actuarial estimate. Sales and Marketing. Sales and marketing expenses increased $6.2 million, or 49.2%, to $18.8 million in 1997 from $12.6 million in 1996. Sales and marketing expenses as a percentage of revenues declined to 10.8% in 1997 from 11.1% in 1996. 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. General and administrative expenses increased $11.3 million, or 60.8%, to $29.9 million in 1997 from $18.6 million in 1996. The increase in general and administrative expenses as a percentage of revenues to 17.1% in 1997 from 16.4% in 1996 was primarily attributable to an increase in salaries and benefits of additional administrative personnel and certain one-time consulting fees incurred during the year. The Company substantially increased such staffing and related expenses through the acquisitions completed within the last year. Until the systems of the acquired entities are fully integrated, the Company will not be able to achieve significant administrative cost reduction. In addition, costs associated with the payment of fee-for-service claims are greater in 1997 due to the larger volume of claims paid relative to revenues during the period as well as an increase in the percentage fee paid to the third-party administrator. Depreciation and Amortization. Depreciation and amortization expenses increased $2.8 million, or 121.0% to $5.1 million in 1997 from $2.3 million in 1996. This increase was the result of amortization of the goodwill and the consulting and non-competition agreements attributable to the acquisitions of Associated, Independent, Association, KCDC, OraCare, United and International and depreciation related to the Company's new computer system. Interest. Interest expense increased to $0.6 million in 1997 from $0.5 million in 1996. The $0.1 million increase was entirely attributable to the imputed interest on the Agreements incurred to finance the IDH, US Dental and AHP acquisitions and the interest on borrowings under the revolving credit facility. The weighted average interest rate for 1997 was 9.4% which includes commitment fees and fees related to letters of credit. YEARS ENDED DECEMBER 31, 1996 AND 1995 Revenues. Revenues increased by $34.4 million or 43.4%, to $113.6 million in 1996 from $79.2 million in 1995. Of this increase, $20.4 million, or 59.3% was attributable to the operations added through the acquisition of AHP, Association, Independent, KCDC and OraCare and $11.2 million was attributable to the ownership of US Dental for the entire twelve months in 1996 versus only two months in 1995. Revenues increased to $82.0 million in 1996 from $79.2 million in 1995 in markets where the Company had operations in both periods. This increase was primarily a result of an increase in the number of members and, to a lesser extent, to premium rate increases. During the year, members increased from 937,355 at December 31, 1995 to 1,729,291 at December 31, 1996. Dental Services. Dental services expenses increased $20.9 million, or 44.7% to $67.6 million in 1996 from $46.7 million in 1995. Total dental services as a percentage of revenues increased to 59.5% in 1996 from 59.0% in 1995 primarily due to the increase in the dental services expenses related to the managed benefits business. Dental service expenses for the Company's managed benefits business (before intercompany eliminations), which consist primarily of capitation to dentists, increased to 59.5% of managed benefits revenues in 1996 from 53.3% in 1995. This increase is attributable to the fact that the managed benefits plans offered by IDH, US Dental and AHP have historically paid dentists a higher percentage of premiums than the Company's pre-existing plans paid. Claims expense for the indemnity business was 70.0% of indemnity revenues. 23 24 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. General and Administrative. General and administrative expenses increased $3.8 million, or 25.7%, to $18.6 million in 1996 from $14.8 million in 1995. The decline in general and administrative expenses as a percentage of revenues to 16.4% in 1996 from 18.7% in 1995 was primarily attributable to efficiencies achieved through the consolidation of executive staffs and accounting departments due to the Company's integration of its acquisitions. In addition, there was a decrease in premium taxes as a percentage of revenue because the Company now generates a greater percentage of its revenues in states that charge lower premium taxes. Depreciation and Amortization. Depreciation and amortization expenses increased $1.1 million, or 91.7% to $2.3 million in 1996 from $1.2 million in 1995. Most of this increase was the result of amortization of goodwill and the Agreements entered into in connection with the acquisitions of IDH, US Dental and AHP and the depreciation of the assets acquired. Interest. Interest expense decreased to $0.5 million in 1996 from $1.0 in 1995. The $0.5 million was entirely attributable to the imputed interest on the Agreements incurred to finance the IDH, US Dental and AHP acquisitions and the interest on the OraCare Promissory Note. The weighted average interest rates on the Agreements and the OraCare Promissory Note during 1996 were 7.9% and 4.8%, respectively. The weighted average interest rate on the Agreements includes the effects of the fees for the related letters of credit. LIQUIDITY AND CAPITAL RESOURCES In September 1995, the Company completed an initial public offering of 2,375,000 shares of its common stock for $22.00 per share (the "Offering"), resulting in net proceeds of $48.0 million. The Company used approximately $9.9 million of such proceeds for the repayment of all outstanding bank indebtedness, which had been incurred in 1994 to finance the acquisition of IDH. In October 1996, the Company completed a public offering of 2,000,000 shares of its common stock for $30.00 per share (the "1996 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 1996 and of United and IDP in 1997. The Company's historical operating cash requirements have been met through cash provided by operations. However, net cash used in operating activities was $1.3 million for the year ended December 31, 1997. The increased use of cash for operating activities in 1997 was a result of reduced net income due to the losses incurred with the Arizona Medicaid contract, the need to increase the indemnity and POS reserves and the writeoff of uncollectible receivables. Additionally, at December 31, 1997, the Company had approximately $1.8 million of income taxes receivable related to current year losses and overpayments of estimated federal income taxes. On September 22, 1997, the Company borrowed $1,630,000 and on September 29, 1997 it borrowed an additional $5,000,000 against the revolving credit facility. The majority of these funds were used to increase the capital surplus at the Company's Arizona indemnity subsidiary, United Dental Care Insurance Company. The revolving credit facility balance was outstanding at December 31, 1997. The Company's primary cash need is for capital expenditures and debt service on the Agreements and bank loans. The principal amount of the outstanding indebtedness of the Company at December 31, 1997 was $9.4 million, consisting of $6.6 million outstanding balance under the revolving credit facility and the liability for the Agreements of $2.8 million. The IDH Agreements require a payment of $0.8 million each year. The US Dental Agreements require monthly payments totaling $0.3 million per year. The AHP agreements require monthly payments totaling $0.2 million per year. The OraCare capital leases require payments of $0.2 million over the next four years. 24 25 On November 14, 1996, the Company signed a revolving credit agreement 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 acquisitions of managed dental benefits companies, (ii) for the issuance of letters of credit, (iii) for capital expenditures and (iv) at the election of the company, a working capital line of credit in an amount up to $5.0 million out of the total amount available under the revolving credit facility. The revolving credit facility has a term of four years, expiring November 30, 2000. Outstanding indebtedness under the revolving line of credit 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 the letters of credit. 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. On June 29, 1997, the Company signed the first amendment to the revolving credit facility. The first amendment modified the Minimum Liquidity Coverage Ratio covenant and allowed the Company to repurchase outstanding shares of its capital stock. The amendment also allowed the Company to exceed the capital expenditure limit for 1997 only. On February 20, 1998, the Company executed the second amendment to the revolving credit facility. The second amendment increased the limit for capital expenditures and working capital not to exceed $15,000,000 in the aggregate at any one time. Additionally, the second amendment provided for certain changes in the financial covenants increasing the availability of advances to the Company. Approximately $8.4 million remained available for working capital and capital expenditures under the revolving credit facility at December 31, 1997. 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 the IDH 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. 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. Capital expenditures were approximately $7.5 million during the year ended December 31, 1997 and $4.5 million in the year ended December 31, 1996. Such expenditures in 1997 primarily consisted of the capitalized costs related to the new information system, expected to be completed in 1998. In June 1995, the Company entered into a contract to acquire a new information system to replace its existing system. The capital cost of the conversion of all current systems is expected to be approximately $10.2 million, of which $8.8 million had been incurred by December 31, 1997. This capital cost includes the capitalization of certain direct internal costs associated with the new system in addition to external costs such as consulting fees and hardware and software expenditures. Management believes that cash flow generated by operations will be sufficient to fund the Company's normal working capital needs and capital expenditures (other than any acquisitions) for at least the next twelve months because the Company's operations are not capital intensive (with exception of the funding of the information system). 25 26 Management believes that the Company's operations are not materially affected by inflation. The Company's principal costs, such as dental services expense and sales and marketing expenses are largely related to membership levels and are, therefore, variably related to premium revenues. Historically, the Company's rate of premium increases has been less than the rate of increase in dental costs in general. YEAR 2000 The Company has reviewed its computer software and hardware for any issues that may occur as a result of the arrival of the year 2000 and has determined that none of its software and hardware require a material expenditure of funds or effort in order to continue functioning properly beyond the year 2000. As discussed above, the Company currently relies upon Harrington as a third-party administrator for the provision of indemnity claims administrative services to the Company. While the Company has received assurances from Harrington that such systems will be modified, at Harrington's expense, before the year 2000 in order to continue functioning properly, there is no assurance that this goal will be achieved, and, while no costs to the Company are expected to arise, costs resulting from any operational difficulties of Harrington or resulting from the Company's change of vendors for this service could nevertheless arise and such amounts could be material. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and supplementary data are set forth herein commencing on page F-1 of this Form 10-K. See Item 14 for the list of documents filed as a part of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTOR OR OFFICER NAME AGE TITLE SINCE ---- --- ----- ------------------- William H. Wilcox 45 President, Chief Executive Officer May 1996 and Director John W. McCarty 42 Senior Vice President, Chief Financial November 1997 Officer, Secretary and Treasurer Peter R. Barnett 46 Senior Vice President, Chief Operations January 1995 Officer Jack R. Anderson 73 Chairman of the Board of Directors December 1985 George E. Bello 62 Director December 1995 James E. Buncher 61 Director February 1996 William H. Longfield 59 Director January 1986 Robert J. Nettinga 47 Director September 1994 James Ken Newman 54 Director January 1986 Donald E. Steen 51 Director May 1996
WILLIAM H. WILCOX has been the President, Chief Executive Officer and a director of the Company since May 1996. From September 1995 to May 1996, Mr. Wilcox served as the President of the Surgery Group of Columbia/HCA Healthcare Corporation and from September 1994 to September 1995 he was President and Chief Executive Officer of the Ambulatory Surgery Division of Columbia/HCA Healthcare Corporation. Prior to assuming this position in 26 27 September 1994, Mr. Wilcox was the Chief Operating Officer and a member of the board of directors of Medical Care America, Inc. from September 1993 to September 1994. Prior to September 1993, Mr. Wilcox was the Chief Operating Officer and a member of the board of directors of Medical Care International, Inc. Medical Care America, Inc. was acquired by Columbia/HCA Healthcare Corporation in September 1994. Mr. Wilcox is a member of the executive committee of the Company's board of directors. JOHN W. MCCARTY has been Senior Vice President and Chief Financial Officer, Treasurer and Secretary of the Company since November 1997. From May 1996 to October 1997, Mr. McCarty served as Executive Vice President and Chief Financial Officer for NovaMed Eyecare Management. From May 1990 to May 1996, Mr. McCarty served in various corporate finance roles for Columbia/HCA Healthcare Corporation after initially joining Humana in May 1990 as Director of Corporate Finance. PETER R. BARNETT, DMD, has been Senior Vice President, Chief Operations Officer of United Dental Care, Inc. since January 1996. He joined the Company in January 1995 as Senior Vice President, Operations. From August 1994 to January 1995, he was the Executive Director of Prudential DMO. From March 1993 to August 1994, he was an independent consultant to managed health care companies. From October 1991 to March 1993, he was employed as a Senior Vice President of Pearle Vision, Inc. He served as a Vice President of Pearle Vision, Inc. from July 1988 to October 1991; and served as Director of Dental Operations for Pearle Health Services from January 1985 to July 1988. Prior to May 1994, Dr. Barnett was an Assistant Professor of Dental Care Systems at the University of Pennsylvania School of Dental Medicine and Assistant Director of Clinic Management. JACK R. ANDERSON has been Chairman of the board of directors of the Company since December 1985. Mr. Anderson has been the President of Calver Corporation, a health care consulting and investment firm, and a private investor since 1982. Mr. Anderson currently serves on the board of directors of Horizon Health Corporation and PacifiCare Health Systems, Inc. Mr. Anderson is a member of the executive committee and the compensation committee of the board of directors of the Company. GEORGE E. BELLO has been Executive Vice President and Controller and a member of the board of directors of Reliance Group Holdings, Inc., an insurance holding company, since August 1981. He has also been President of Prometheus Funding Corporation since November 1992 and a member of the board of directors of that corporation since August 1985. Mr. Bello also serves on the board of directors of Zenith National Insurance Corp., Horizon Health Corporation and Reliance Financial Services Corporation. Mr. Bello is a member of the audit committee of the Company's board of directors. JAMES E. BUNCHER has served as President, Chief Executive Officer and a director of Community Dental Services, Inc., a dental practice management company, since November 1997. He served as President, Health Plans Group of Value Health, Inc., a national specialty managed care company, from September 1995 through September 1997 and as Chairman, President and Chief Executive Officer of Community Care Network, Inc., a Value Health subsidiary, from August 1992 through September 1997. During 1992, he served as a general management consultant to TakeCare, Inc., and, from 1987 through 1991, he served as a general partner in Lake Investments, a Dallas, Texas based investment company. He currently serves on the board of directors of Horizon Health Corporation and Alliance Imaging, Inc. Mr. Buncher is a member of the audit committee of the Company's board of directors. WILLIAM H. LONGFIELD has been the Chairman and Chief Executive Officer of C.R. Bard, Inc., a multi-national developer, manufacturer and marketer of health care products, since September 1995. Mr. Longfield was President and Chief Executive Officer of C.R. Bard Inc. from October 1993 to September 1995, President and Chief Operating Officer from September 1991 to October 1993 and Executive Vice President and Chief Operating Officer from February 1989 to September 1991. Mr. Longfield currently serves on the board of directors of C.R. Bard, Inc., Manor Care, Inc., Horizon Health Corporation, The West Company, Health Industry Manufacturers Association and Atlantic Health Systems. He is currently a Trustee of Centenary College. Mr. Longfield is a member of the compensation committee of the board of directors of the Company. ROBERT J. NETTINGA was a founder of the predecessor to International Dental Health, Inc. ("IDH"), a managed dental benefits company acquired by the Company in September 1994, and served as a director of IDH and its predecessor from 1977 until 1994. Since September 1994, Mr. Nettinga has been a private investor. 27 28 JAMES KEN NEWMAN has been the Chief Executive Officer of Horizon Health Corporation, a contract manager of mental health services for general acute care hospitals, since July 1989 and Chairman since February 1992. From July 1989 until September 1997, he served as President of such corporation. Mr. Newman currently serves on the board of directors of Horizon Health Corporation and Telecare Corporation. Mr. Newman is a member of the executive committee of the board of directors of the Company. DONALD E. STEEN has been the Chairman and Chief Executive Officer of United Surgical Partners International since February 1998. From September 1995 through December 1997 he was the President of the International Group of Columbia/HCA Healthcare Corporation, a health care services corporation primarily involved in the ownership and operation of hospitals and providing related services. From September 1994 to September 1995, he was the President of the Western Group of Columbia/HCA Healthcare Corporation. From August 1981 to September 1994, Mr. Steen was the Chief Executive Officer of Medical Care America, Inc., a corporation that operated ambulatory surgery centers and which was acquired by Columbia/HCA Healthcare Corporation in September 1994. Mr. Steen currently serves on the board of directors of Horizon Health Corporation. ITEM 11. EXECUTIVE COMPENSATION. The "Summary Compensation Table" below includes individual compensation information on the Chief Executive Officer and those executive officers whose compensation for 1997 exceeded $100,000 for services rendered in all capacities during the last fiscal year.
SUMMARY COMPENSATION TABLE LONG-TERM COMPENSATION ANNUAL COMPENSATION ------------ -------------------------------------------- SECURITIES NAME AND OTHER ANNUAL UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY BONUS (1) COMPENSATION OPTIONS (#) COMPENSATION (2) -------------------------------- -------- ---------- ---------- ------------------ ------------ ---------------- William H. Wilcox (3) .......... 1997 $306,296 $ ---- $ ---- 340,000 $ 1,520 President and Chief 1996 190,961 $140,625 ---- ---- 1,624 Executive Officer John W. McCarty (4)............. 1997 21,605 ---- ---- 75,000 ---- Senior Vice President Chief Financial Officer, Secretary and Treasurer Mark E. Pape (5)................ 1997 165,000 ---- ---- 20,000 2,942 Senior Vice President 1996 165,000 82,500 ---- 10,000 3,926 Chief Financial Officer, 1995 137,760 53,400 ---- 40,000 2,467 Secretary and Treasurer Peter R. Barnett, DMD (6)....... 1997 165,000 ---- ---- 30,000 3,143 Senior Vice President, 1996 165,000 82,500 ---- 15,000 3,632 Chief Operations Officer 1995 123,216 51,280 ---- 30,000 2,586
- --------------------- (1) Amounts shown for 1996 represent bonuses earned in the year ended December 31, 1996 and paid in 1997. Amounts shown for 1995 represent bonuses earned in 1995 and paid in 1996. The 1995 bonus amounts exclude deferred bonus payments which were paid in 1997. Such deferred amounts for Mr. Pape and Dr. Barnett were $19,320, and $18,030, respectively. (2) Represents premiums paid by the Company for the employee's health insurance, net of employee's contribution, and for the employee's long-term disability insurance. (3) Mr. Wilcox was elected to the position of President and Chief Executive Officer in May 1996. In August 1996, Mr. Wilcox was granted stock options to purchase 300,000 shares of common stock at $33.75 per share, which options would have vested in five equal installments beginning August 1998. In May, Mr. Wilcox was granted stock options to purchase 100,000 shares of common stock at $22.31 per share, which options vest in five equal installments beginning May 1999. In August 1997, Mr. Wilcox was granted stock options to purchase 240,000 shares of common stock at $17.60 per share upon the cancellation of the August 1996 grant. Under the terms of the August 1997 grant, options vest at the earlier of, certain earnings per share performance criteria at a rate of 16.67% per year of achievement or vest in full in August 2006. (4) Mr. McCarty joined the Company in November 1997, and at such time was granted options to purchase 75,000 shares of common stock at $13.63 per share. The options vest in five equal installments beginning in November 1999. (5) Mr. Pape resigned his position as Senior Vice President, Chief Financial Officer, Secretary and Treasurer in September 1997. Mr. Pape joined the Company in January 1995. In January 1997, Mr. Pape was granted options to purchase 20,000 shares of common stock at $27.00 per share. In January 1996, Mr. Pape was granted options to purchase 10,000 shares of common stock at $37.13 per share. In January 1995, Mr. Pape was granted stock options to purchase 40,000 shares of common stock at $6.00 per share. All options vest in five equal annual installments beginning two years after the grant date. In January 1995, Mr. Pape purchased from the Company warrants to purchase 40,000 shares of common stock. (6) Dr. Barnett joined the Company in January 1995. In August 1997, Dr. Barnett was granted options to purchase 10,000 shares of common stock at $16.00 per share. In January 1997, Dr. Barnett was granted options to purchase common stock at $27.00 per share. In January 1996, Dr. Barnett was granted options to purchase 15,000 shares of common stock at $37.13 per share. In January 1995, Dr. Barnett was granted stock options to purchase 30,000 shares of common stock at $6.00 per share. All options vest in five equal annual installments beginning two years after the grant date. 28 29 STOCK OPTION EXERCISES, YEAR-END VALUES AND GRANTS The following table sets forth certain information concerning stock options exercised in the year ended December 31, 1997 and the number of shares covered by unexercised stock options held by the executive officers of the Company who held stock options as of December 31, 1997. Also reported are values of "in-the-money" stock options representing the difference between the respective exercise prices of such outstanding stock options and the fair market value of the common stock as of December 31, 1997. AGGREGATED OPTION EXERCISES IN LAST FISCAL AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS YEAR END (#) (1) AT FISCAL YEAR END ($) (2) SHARES ACQUIRED VALUE REALIZED -------------------------- --------------------------- NAME ON EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- --------------- -------------- ----------- ------------- ----------- ------------- William H. Wilcox . . . ----- ----- ----- 340,000 $ ----- $ ----- John W. McCarty . . . . ----- ----- ----- 75,000 ----- ----- Mark E. Pape . . . . . ----- ----- ----- 32,000 ----- 152,000 Peter R. Barnett, DMD . ----- ----- 6,000 24,000 28,500 114,000
- ----------------- (1) The options shown for each of the executive officers have a maximum term of ten years, subject to earlier termination in the event of the optionee's cessation of service with the Company. (2) Calculated based on $10.75 per share, the closing sales price of the common stock on The Nasdaq Stock Market on the last business day of 1997 (December 31), less the applicable exercise price. The following table sets forth information regarding the grant of options to purchase shares of common stock to the executive officers of the Company who received such grants in the year ended December 31, 1997. No stock appreciation rights have been granted. OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1997
INDIVIDUAL GRANTS POTENTIAL REALIZABLE ---------------------------------------------------------- VALUE AT ASSUMED NUMBER OF PERCENT OF ANNUAL RATES OF STOCK SECURITIES TOTAL OPTIONS EXERCISE OR PRICE APPRECIATION FOR UNDERLYING OPTIONS GRANTED TO BASE OPTION TERMS (3) GRANTED (1) EMPLOYEES IN PRICE (2) EXPIRATION ---------- ---------- NAME (#) FISCAL YEAR ($/SH) DATE 5% 10% ---- ------------------ ------------- --------- ---------- ---------- ---------- William H. Wilcox (4) . 240,000 41.7% $17.60 08/15/2007 $2,656,451 $6,731,968 William H. Wilcox . . . 100,000 17.4 22.31 05/01/2007 1,403,064 3,555,639 John W. McCarty . . . . 75,000 13.0 13.63 11/01/2007 642,652 1,628,606 Mark E. Pape (5) . . . 20,000 3.5 27.00 01/29/2007 339,603 860,621 Peter R. Barnett, DMD . 10,000 1.7 16.00 08/15/2007 109,623 254,999 Peter R. Barnett, DMD . 20,000 3.5 27.00 01/29/2007 339,603 860,621
(1) The options shown have a maximum term of ten years, subject to earlier termination in the event employment with the Company is terminated. The options vest and are exercisable cumulatively in equal installments over a five year period commencing two years from the date of grant. (2) The exercise price per share of the options equaled or exceeded the fair market value of the underlying shares of common stock on the date the options were granted, as determined by the Company's board of directors. (3) There is no assurance provided to any executive officer or any other holder of the Company's securities that the actual stock price appreciation over the option term will be at the assumed 5% and 10% levels or at any other defined level. Unless the market price of the common stock does in fact appreciate over the option term, no value will be realized from the option grants. The closing sales price on December 31, 1997 for the Company's common stock as reported by Nasdaq was $10.75. (4) In August 1997, Mr. Wilcox was granted options to purchase 240,000 shares of common stock at $17.60 per share upon the cancellation of the August 1996 grant. Under the terms of the August 1997 grant, options vest at the earlier of the satisfaction of certain earnings per share performance criteria at a rate of 16.67% per year of achievement or vest in full in August 2006. (5) Mr. Pape resigned his position as Senior Vice President, Chief Financial Officer, Secretary and Treasurer in September 1997. Mr. Pape remained employed with the Company through early January 1998. Under the terms of his agreement, he may exercise any vested options within 90 days of the termination of his employment. 29 30 1998 EXECUTIVE INCENTIVE PLAN The Company has adopted an incentive bonus plan for its executive and other officers for 1998. Under the bonus plan, officers are entitled to earn certain cash bonuses if specified performance criteria are satisfied. The target bonuses that may be earned by the named executive officers under the bonus plan are: (i) $325,000 for Mr. Wilcox; (ii) $131,250 for Mr. McCarty; and (iii) $123,750 for Dr. Barnett. The bonuses are payable in 1999. OTHER COMPENSATION ARRANGEMENTS In 1996, the Company entered into employment agreements with Mr. Wilcox and Dr. Barnett. In 1997, the Company entered into an employment agreement with Mr. McCarty. Under their employment agreements, Mr. Wilcox, Mr. McCarty and Dr. Barnett are entitled to base salaries that are subject to increase, but not decrease, by the board of directors of the Company. The annual base salaries for Mr. Wilcox, Mr. McCarty and Dr. Barnett were $300,000, $175,000 and $165,000, respectively, as of December 31, 1997. The employment agreements provide that the board of directors will adopt each year a bonus plan under which the employee may earn a bonus with the terms and performance criteria of the bonus plan to be determined by the board of directors. The employment agreements also allow Mr. Wilcox, Mr. McCarty and Dr. Barnett to participate in the insurance and other fringe benefit plans provided to the Company's employees generally from time to time. The employment agreement with Mr. Wilcox has a term ending March 1999. The employment agreement with Mr. McCarty has a term ending December 31, 1998 (see Exhibit 10.49). The employment agreement with Dr. Barnett has a term ending October 1998 (see Exhibit 10.50). Each of the employment agreements is terminable by either party thereto with or without cause upon at least 30 days prior written notice. In addition, either party may terminate the employment agreement "with cause" under certain circumstances. The employee can terminate with cause if the Company materially breaches or fails to perform under the agreement. For such purpose, all employment agreements expressly provide that, in the event of a change of control of the Company, a material breach includes a material decrease in responsibility and authority or the relocation of the Company's principal executive offices without consent. The Company may terminate an employment agreement with cause if the employee thereunder (i) is unable to perform his duties due to illness, injury or incapacity for more than six months, (ii) is convicted of a felony or (iii) breaches or neglects to perform under the agreement. If an employment agreement is terminated without cause by the Company or with cause by the employee thereunder, the terminated employee will be entitled to receive (i) any bonus previously earned; (ii) a severance payment of up to two years' base salary in the case of Mr. Wilcox and one year's base salary in the cases of Mr. McCarty and Dr. Barnett; and (iii) accelerated vesting of certain outstanding stock options and other benefits or bonuses or, alternatively, with respect to any benefits or bonuses that cannot be fully vested pursuant to applicable law, the terminated employee will be entitled to receive, if allowed by law, cash equal to the amount of benefits or bonuses forfeited. The employment agreements contain certain non-competition and non-solicitation covenants binding on the employee during the employment term and for specified periods thereafter, unless the employment agreement is terminated by the Company without cause or by the employee with cause. The employment agreement also contains certain confidentiality and non-disclosure covenants on the part of the employee that survive termination for any reason. BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION General The compensation committee of the board of directors of the Company reviews and approves the salaries and annual incentive bonuses of the officers of the Company at or above the $100,000 annual salary level and all grants of options to purchase shares under the Company's stock option plans to officers and key employees. The compensation committee is composed exclusively of directors who are "disinterested persons" as defined by Securities and Exchange Commission rules, and its members are neither employees nor former employees of the Company nor have such individuals participated in any of the Company executive or other employee compensation programs. During fiscal 1997, the committee was composed of two directors, Messrs. Anderson and Newman for January through July and Messrs. Anderson and Longfield for August through December. United Dental Care's executive compensation policies are intended to provide a competitive compensation program that will enable the Company to attract, incentivize and retain executives who have the abilities and leadership required to effectively discharge their duties. The compensation policy is based on the principle that the financial rewards to the executive should be aligned with the financial interest of the stockholders of the Company. 30 31 The Company's executive compensation program is comprised of three elements: base salary; annual bonus incentive compensation; and long-term incentive compensation (stock options). Base Salary Base salary compensation is based on offering competitive salaries in comparison to market and industry practices. Independent survey data for executive positions in other similarly sized companies is used to establish compensation ranges for each executive position. These ranges may be subjectively adjusted for factors such as local market conditions or unique aspects, responsibilities or qualifications of the position not believed to normally be associated with the position in other similarly sized companies. Base salary ranges are reviewed annually. The base salary for each executive is set after an annual subjective review of performance in areas of the executive's responsibilities, including achievement of specific personal or departmental goals, position requirements and financial performance in relation to expected performance. No specific weighting of factors is used in evaluating overall job performance. Annual Bonus Incentive Compensation The compensation committee authorizes the establishment and payment of discretionary annual bonus incentive compensation based upon an assessment of an executive's exceptional contributions to the Company. Bonuses are based upon the overall achievement in increasing the Company's profitability and its membership as well as improving customer service and are closely aligned with enhancing stockholder value. Stock Option Grants The compensation committee is authorized to grant stock options to key employees and officers of the Company. Such option grants are intended to provide long-term incentive to increase stockholder value by improving overall corporate performance and ensuring that operating decisions are based on long-term results that benefit the Company and ultimately the stockholders. Currently, stock options are not necessarily granted annually, but are granted from time to time. While no specific formula is used, grants are generally based upon a subjective evaluation of the grantee's past contribution to Company performance and expected contribution toward meeting long-term strategic goals of the Company. Members of the Compensation Committee Jack R. Anderson William H. Longfield COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION For 1997, executive officer compensation decisions were made by the compensation committee. Current members of the compensation committee are Messrs. Anderson and Longfield. Mr. Newman served as a member of the Compensation Committee from January through July of 1997 and upon his resignation as a member of such committee, Mr. Longfield was appointed to the committee. None of these individuals was at any time during the year ended December 31, 1997, or at any time prior thereto, an officer or employee of the Company or any of its subsidiaries. No executive officer of the Company served during 1997 as a director or as a member of the compensation committee of any entity in which an executive officer of such entity served as a director of the Company or as a member of the Company's compensation committee. 31 32 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of March 20, 1998, the beneficial ownership of the Company's common stock: (i) by each stockholder known by the Company to own beneficially more than 5% of the outstanding common stock; (ii) by each director; (iii) by the Company's executive officers; and (iv) by all executive officers and directors as a group. Except as otherwise indicated below, each named beneficial owner has sole voting and investment power with respect to the shares of common stock listed.
SHARES OF COMMON STOCK BENEFICIALLY OWNED ---------------------- NAME NUMBER PERCENT ---- ------ ------- T. Rowe Price Associates, Inc. (1)(2) . . . . . . 722,200 8.1 Franklin Mutual Advisors, Inc.(1)(3). . . . . . . 590,700 6.6 Cumberland Associates(1). . . . . . . . . . . . . 580,000 6.5 T. Rowe Price New Horizons Fund, Inc. (1)(2). . . 564,500 6.3 Putnam Investments, Inc.(1)(4) . . . . . . . . . 465,824 5.2 Jack R. Anderson (1)(5) . . . . . . . . . . . . . 1,266,600 14.2 Citibank, N.A. and George E. Bello, Trustees (1)(6) . . . . . . . . . . . . . . . 778,500 8.7 George E. Bello (7) . . . . . . . . . . . . . . . 399,368 4.5 James Ken Newman (8) . . . . . . . . . . . . . . 79,666 * William H. Longfield(9) . . . . . . . . . . . . . 68,000 * Donald E. Steen . . . . . . . . . . . . . . . . 2,000 * James E. Buncher . . . . . . . . . . . . . . . . -- -- Robert J. Nettinga . . . . . . . . . . . . . . . 5,150 * William H. Wilcox . . . . . . . . . . . . . . . . -- -- John W. McCarty . . . . . . . . . . . . . . . . . -- -- Mark E. Pape (10) . . . . . . . . . . . . . . . . 94,695 1.0 Peter R. Barnett (11) . . . . . . . . . . . . . . 16,699 * All directors and executive officers as a group (11 persons)(12). . . . . . . . . . . . 1,932,178 21.3
- --------------- * Less than 1%. (1) The address of T. Rowe Price Associates, Inc. and T. Rowe Price New Horizons Fund, Inc. is 100 E. Pratt Street, Baltimore, MD 21202. The address of Franklin Mutual Advisors, Inc, is 777 Mariners Island Boulevard, San Mateo, CA 94403. The address for Cumberland Associates is 1114 Avenue of the Americas, New York, NY 10036. The address of Putnam Investments, Inc. is One Post Office Square, Boston, MA 02109. The address of Jack R. Anderson is 16475 Dallas Parkway, Suite 735, Dallas, TX 75248. The address of Citibank, N.A. and George E. Bello, Trustees is c/o Citibank, N.A., 153 East 53rd Street, 25th Floor, New York, NY 10043. (2) T. Rowe Price Associates, Inc. and T. Rowe Price New Horizons Fund, Inc. have jointly filed a schedule 13G dated February 12, 1998, which provides that T. Rowe Price Associates, Inc. has sole voting power of 157,700 shares and sole investment power of 722,200 shares and that T. Rowe Price New Horizons Fund, Inc. has sole voting power of 564,000 shares (which shares are included in the aggregate amount reported by T. Rowe Price Associates, Inc.). Both entities disclaim beneficial ownership of all such shares. (3) Franklin Mutual Advisors, Inc. ("FMA"), Franklin Resources, Inc. ("FRI"), the parent holding corporation of FMA, and Rupert H. Johnson, Jr. and Charles B. Johnson, principal shareholders of FRI, have jointly filed a Schedule 13G dated February 6, 1998, which provides that FMA has sole voting and investment power with respect to the number of shares shown in the table and that each of FRI and Messrs. Johnson and Johnson disclaim beneficial ownership of all such shares. 32 33 (4) Putnam Investments, Inc. ("PI"), Marsh & McLennan Companies, Inc. ("MMC"), the parent holding company of PI, and Putnam Investment Management, Inc. and the Putnam Advisory Company, Inc., which are registered investment advisors owned by PI, have jointly filed a Schedule 13G dated December 5, 1996, which provides that PI has shared voting power of 64,224 shares and shared investment power with respect to 465,824 shares. MMC and PI disclaim beneficial ownership of all shares covered by such Schedule 13G. (5) Includes 778,500 shares held by two trusts of which Citibank, N.A. and George E. Bello are trustees. See Note (6) below. Relatives of Jack R. Anderson are beneficiaries of both trusts. Mr. Anderson disclaims beneficial ownership of the shares owned by the trusts. (6) Citibank, N.A. and George E. Bello are trustees having shared voting and investment power under two trusts owning in the aggregate the number of shares shown in the table. Relatives of Mr. Anderson are beneficiaries of both trusts. Mr. Anderson disclaims beneficial ownership of the shares owned by the trusts. (7) Excludes 778,5000 shares of common stock held by the two trusts of which Citibank, N.A. and George E. Bello are trustees. See Note (6) above. Relatives of Mr. Anderson are beneficiaries of both trusts. Messrs. Anderson and Bello disclaim beneficial ownership of the shares owned by the trusts. (8) Includes 8,000 shares of common stock issuable upon exercise of immediately exercisable stock options. Also includes 10,000 shares held by a foundation of which Mr. Newman is a director and officer. (9) Includes 8,000 shares of common stock issuable upon exercise of immediately exercisable stock options. (10) Includes 75,000 shares of common stock issuable upon exercise of immediately exercisable warrants and stock options. (11) Includes 15,000 shares of common stock issuable upon exercise of immediately exercisable stock options. (12) Includes 106,000 shares of common stock issuable upon exercise of immediately exercisable warrants and stock options. CHANGES IN CONTROL On March 10, 1998, the Company entered into an Agreement and Plan of Merger ("the Merger Agreement") with Protective Life Corporation, a Delaware corporation ("Protective"), and PLC Merger subsidiary Corporation, a Delaware corporation and wholly-owned subsidiary of Protective ("MergerSub"), 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 ("Company Common Stock") 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 payable 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 if the price of Protective Common Stock is above $32.50 per share (after adjustment for Protective's stock split). In connection with the Merger Agreement, Protective and Jack R. Anderson entered into a Stockholder Agreement dated as of March 10, 1998, pursuant to which Mr. Anderson agreed to vote his shares of common stock of the Company in favor of the Merger, the adoption of the Merger Agreement and the approval of each of the transactions contemplated by the Merger Agreement. The Merger is subject to approval by the stockholders of the Company, the applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, regulatory approvals and other customary closing conditions, so there can be no assurance as to whether or when the Merger will be completed. 33 34 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has a non-competition agreement with Robert J. Nettinga and The Adaven Group Limited Partnership and a consulting agreement with The Adaven Group Limited Partnership. Mr. Nettinga is the president and principal stockholder of the corporation that is the general partner of the Adaven Group Limited Partnership. Under the non-competition agreement, the Company is obligated to make six annual payments of $554,952.42 each ($3,329,714.50 in the aggregate), the first of which was paid on September 16, 1994. Under the consulting agreement, the Company is obligated to make six annual payments of $200,000 each ($1,200,000 in the aggregate), the first of which was paid on September 16, 1994. The Company has the right to prepay such installments on a discounted present value basis using a discount rate of 5%. The obligations of the Company under the non-competition agreement and the consulting agreement are secured by a letter of credit in the original amount of $4,023,500 which amount declines annually after the payment dates of the annual installments under such agreements. The Company also has a non-competition agreement with Omega Marine Development, Inc. and Paul C. Nettinga under which the Company is obligated to make six annual payments of $91,897.58 ($551,385.48 in the aggregate) and a consulting agreement with Omega Marine Development, Inc. under which the Company is obligated to make six annual payments of $50,000 ($300,000 in the aggregate). Paul C. Nettinga is the brother of Robert J. Nettinga. Paul C. Nettinga is also the president of Omega Marine Development, Inc. The terms of the non-competition agreement and the consulting agreement for Paul C. Nettinga and Omega Marine Development, Inc. are substantially the same as the agreements with Robert J. Nettinga and The Adaven Group Limited Partnership. The non-competition agreements restrict the parties thereto from competing directly or indirectly, with the business of the Company in the continental United States and from soliciting the employment of any employee of the Company until September 16, 2000. Under the consulting agreements, the parties agreed to provide to the Company services as an independent consultant and adviser with respect to such business and financial matters as may be reasonably requested by the Company from time to time for a period of six years. The party providing such consulting services may not be required to render such services outside of the state of residence of such party without the consent of such party or at any time that the rendering of such services would interfere with other business obligations of such party. The Company, certain stockholders of the Company and Robert J. Nettinga entered into a Stockholders Agreement on September 16, 1994 pursuant to which such stockholders agreed to vote shares of common stock of the Company owned by them for the election of Robert J. Nettinga as a director of the Company until the earlier of the expiration of four years from the date of such agreement or the date when all monetary obligations of the Company have been paid under the non-competition agreement and the consulting agreement with Robert J. Nettinga. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following are filed as a part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements Page ---- Index to Consolidated Financial Statements . . . . . . . . . . F-1 Report of Independent Accountants . . . . . . . . . . . . . . F-2 Consolidated Balance Sheets as of December 31, 1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997 . . . . . . . . . . . . . F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1995. 1996 and 1997 . . . F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 . . . . . . . . . . . . . F-6 Notes to Consolidated Financial Statements . . . . . . . . . . F-7
34 35 2. FINANCIAL STATEMENT SCHEDULES 99.2* Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 1997, 1996 and 1995. All other schedules have been omitted because the required information is either inapplicable, insignificant or included in the Consolidated Financial Statements and Notes thereto. 3. LIST OF EXHIBITS 3.01 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). 3.02 Amended and Restated Bylaws of the Company (filed as Exhibit 3.02 to the 1995 Registration Statement and incorporated herein by reference). 4.01 Specimen Common Stock Certificate (filed as Exhibit 4.01 to the 1995 Registration Statement and incorporated herein by reference). 10.01 Non-Competition Agreement dated as of September 16, 1994 among United Dental Care, Inc., The Adaven Group Limited Partnership and Robert J. Nettinga (filed as Exhibit 10.06 to the 1995 Registration Statement and incorporated herein by reference). 10.02 Agreement for Consulting Services dated as of September 16, 1994 between United Dental Care, Inc. and The Adaven Group Limited Partnership (filed as Exhibit 10.07 to the 1995 Registration Statement and incorporated herein by reference). 10.03 Non-Competition Agreement dated as of September 16, 1994 among United Dental Care, Inc., Omega Marine Development, Inc. and Paul C. Nettinga (filed as Exhibit 10.08 to the 1995 Registration Statement and incorporated herein by reference). 10.04 Agreement for Consulting Services dated as of September 16, 1994 between United Dental Care, Inc. and Omega Marine Development, Inc. (filed as Exhibit 10.09 to the 1995 Registration Statement and incorporated herein by reference). 10.05 Stockholders Agreement dated as of September 16, 1994 among United Dental Care, Inc., certain stockholders of United Dental Care, Inc. named therein and Robert J. Nettinga (filed as Exhibit 10.10 to the 1995 Registration Statement and incorporated herein by reference). 10.06 Irrevocable Letter of Credit dated September 16, 1994 in the amount of $4,023,500 in favor of The Adaven Group Limited Partnership (filed as Exhibit 10.11 to the 1995 Registration Statement and incorporated herein by reference). 10.07 Amended and Restated Application and Agreement for $4,023,500 Standby Letter of Credit in favor of The Adaven Group Limited Partnership dated September 16, 1994 by United Dental Care, Inc. to NationsBank of Texas, N.A. (filed as Exhibit 10.09 to the Company's Registration Statement on Form S-1, Registration Number 333-12425 (the "1996 Registration Statement") and incorporated herein by reference). 10.08 Administrative Services Agreement (as amended) dated as of January 1, 1995 between United Dental Care, Inc. and R.E. Harrington, Inc., and Memorandum of Understanding in connection therewith dated as of January 1, 1995 (filed as Exhibit 10.28 to the 1995 Registration Statement and incorporated herein by reference). 10.09 Consulting Agreement dated September 27, 1995, between United Dental Care, Inc. and Dolores A. Kordek (filed as Exhibit 10.9 to the 1995 Form 10-Q and incorporated herein by reference). 10.10 Consulting Agreement dated September 27, 1995, between United Dental Care, Inc. and Christopher A. Jehle (filed as Exhibit 10.10 to the 1995 Form 10-Q and incorporated herein by reference). 10.11 Stock Purchase Agreement dated as of December 14, 1995 among United Dental Care, Inc., R. Bruce Buchanan, Joseph V. Errante, D.D.S., Margaret R. Errante, D.D.S., The Francesca Irena Errante Irrevocable Trust U/A 10/1/95, The Alexandra Nicole Errante Irrevocable Trust U/A 10/1/95, Timothy J. Moncher, Associated Health Plans, Inc. and Associated Companies, Inc. (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed January 22, 1996, File No. 0-26688 (the "Form 8-K"), and incorporated herein by reference). 10.12 First Amendment to Stock Purchase Agreement dated as of January 17, 1996 among United Dental Care, Inc., R. Bruce Buchanan, Joseph V. Errante, D.D.S., Margaret R. Errante, D.D.S., The Francesca Irena Errante Irrevocable Trust U/A 10/1/95, The Alexandra Nicole Errante Irrevocable Trust U/A 10/1/95, Timothy J. Moncher, Associated Health Plans, Inc. and Associated Companies, Inc. (filed as Exhibit 10.2 to the Form 8-K and incorporated herein by reference).
35 36 10.13 Non-Competition Agreement, dated January 22, 1995, between United Dental Care, Inc. and R. Bruce Buchanan (filed as Exhibit 10.3 to the Form 8-K, and incorporated herein by reference). The three other Non-Competition Agreements between United Dental Care, Inc. and Joseph V. Errante, D.D.S., Margaret R. Errante, D.D.S. and Timothy J. Moncher, respectively, are identical in form except as to the parties thereto and are therefore omitted from this filing. 10.15 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, Gilbert G. Finger, Patricia L. Schubring, Edward K. Halstead, Birchtree Enterprises and Binkley & Stewart, P.C., as Sellers, and Independent Dental Plans, Inc. dated as of June 28, 1996 (filed as Exhibit 10.27 to the 1996 Registration Statement and incorporated herein by reference). 10.16 Stock Purchase Agreement between United Dental Care, Inc., as Purchaser, and UICI, as Seller, dated as of September 10, 1996, for all the issued and outstanding shares of capital stock of Association Dental Plan, Inc., a District of Columbia corporation (filed as Exhibit 10.28 to the 1996 Registration Statement and incorporated herein by reference). 10.17 Stock Purchase Agreement between United Dental Care, Inc., as Purchaser, and UICI, as Seller, dated as of September 10, 1996, for all the issued and outstanding shares of capital stock of International Dental Plans, Inc., a Florida corporation (filed as Exhibit 10.30 to the 1996 Registration Statement and incorporated herein by reference). 10.18 Earnest Money Escrow Agreement among United Dental Care, Inc., UICI, and Texas Commerce Bank National Association, dated as of September 10, 1996, regarding the purchase of all the issued and outstanding shares of capital stock of International Dental Plans, Inc., a Florida corporation (filed as Exhibit 10.31 to the 1996 Registration Statement and incorporated herein by reference). 10.19 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and UICI, United Management & Consulting, Inc., United Management & Consulting Retirement Plan, and Marie C. Montgomery Revocable Trust U/T/A March 23, 1992, as Seller, dated as of September 10, 1996, for the purchase of 90% of the issued and outstanding shares of capital stock of United Dental Care, Inc., an Oklahoma corporation (filed as Exhibit 10.32 to the 1996 Registration Statement and incorporated herein by reference). 10.20 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and John E. Carlin, Ph.D., Frank J. Schloegel, III, J. Dennis Dlabal, D.D.S., The John E. Carlin Charitable Remainder Unitrust, UID June 28, 1996, The Frank J. Schloegel Charitable Remainder Unitrust I, UID July 12, 1996, The Frank J. Schloegel Charitable Remainder Unitrust II, UID July 12, 1996, The J. Dennis Dlabal Charitable Remainder Trust UID September 5, 1996, as Sellers, and Kansas City Dental Care, Inc., dated as of September 11, 1996 (filed as Exhibit 10.34 to the 1996 Registration Statement and incorporated herein by reference). 10.21 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and Frank A. Pettisani, D.D.S., Lisa M. Mazzone, Frank A. Pettisani, Jr., D.D.S., Charles A. Costa, and Donna Costa, as Sellers, and OraCare Consultants, Inc., dated as of September 5, 1996 (filed as Exhibit 10.36 to the 1996 Registration Statement and incorporated herein by reference). 10.22 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and Frank A. Pettisani, D.D.S., as Seller, and OraCare Dental Associates, P.A., dated as of September 5, 1996 (filed as Exhibit 10.38 to the 1996 Registration Statement and incorporated herein by reference). 10.23 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and Frank A. Pettisani, D.D.S., Frank A. Pettisani, Jr., D.D.S., Charles A. Costa, and Donna Costa, as Sellers, and OraCare DPO, Inc., dated as of September 5, 1996 (filed as Exhibit 10.39 to the 1996 Registration Statement and incorporated herein by reference). 10.24 Letter Agreement dated November 14, 1996 between United Dental Care, Inc. and Peter R. Barnett, D.M.D., regarding ownership of stock of OraCare Dental Associates, P.A.(filed as Exhibit 10.24 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 Form 10-K") and incorporated herein by reference). 10.25 Management Agreement dated November 14, 1996 between OraCare Consultants, Inc. and OraCare Dental Associates, P.A. (filed as Exhibit 10.25 to the 1996 Form 10-K and incorporated herein by reference). 10.26 Revolving Credit Agreement, dated as of November 14, 1996, between United Dental Care, Inc., NationsBank of Texas, N.A., as Agent for the Lenders named therein, and the Lenders (filed as Exhibit 10.26 to the 1996 Form 10-K and incorporated herein by reference). 10.27 Warrant, dated February 26, 1996, held by Mark E. Pape to purchase Common Stock of the Company (filed as Exhibit 10.27 to the 1996 Form 10-K and incorporated herein by reference).
36 37 10.28 Employment Agreement dated as of May 13, 1996, between United Dental Care, Inc., and William H. Wilcox (filed as Exhibit 10.40 to the 1996 Registration Statement and incorporated herein by reference). 10.29 Employment Agreement dated as of June 1, 1996, between United Dental Care, Inc., and Mark E. Pape (filed as Exhibit 10.41 to the 1996 Registration Statement and incorporated herein by reference). 10.30 Employment Agreement dated as of June 1, 1996, between United Dental Care, Inc. and Peter R. Barnett, D.M.D. (filed as Exhibit 10.42 to the 1996 Registration Statement and incorporated herein by reference). 10.31 Master Software License and Services Agreement dated as of June 20, 1995 between Software Technologies Corporation and United Dental Care, Inc. (filed as Exhibit 10.29 to the 1995 Registration Statement and incorporated herein by reference). 10.32 United Dental Care, Inc. Amended and Restated 1989 Key Employee Stock Option Plan (filed as Exhibit 4.4 to the Company's Registration Statement on Form S-8, Registration Number 333-20043 and incorporated herein by reference). 10.33 United Dental Care, Inc. 1995 Stock Option Plan (filed as Exhibit 4.5 to the Company's Registration Statement on Form S-8, Registration Number 333-20043 and incorporated herein by reference). 10.34 United Dental Care, Inc. Executive Incentive Plans for 1996 for Mr. Wilcox, Mr. Pape and Dr. Barnett (filed as Exhibit 10.47 to the 1996 Registration Statement and incorporated herein by reference). 10.35 United Dental Care, Inc. Executive Incentive Plans for 1997 for Mr. Wilcox, Mr. Pape and Dr. Barnett (Incorporated herein by reference.) 10.36 First Amendment to Revolving Credit Agreement (filed as Exhibit 10.01 to the third quarter Form 10-Q and incorporated herein by reference). 10.37* Stock Option Agreement dated as of August 15, 1997 between United Dental Care, Inc. and William H. Wilcox. 10.38* Employment Agreement dated as of November 1, 1997 between United Dental Care, Inc. and John W. McCarty. 10.39* Stock Option Agreement dated as of November 1, 1997 between United Dental Care, Inc. and John W. McCarty. 10.40* Stock Option Agreement dated as of December 17, 1997 between United Dental Care, Inc. and Jack R. Anderson. 10.41* Stock Option Agreement dated as of December 17, 1997 between United Dental Care, Inc. and George E. Bello. 10.42* Stock Option Agreement dated as of December 17, 1997 between United Dental Care, Inc. and Jamed E. Buncher. 10.43* Stock Option Agreement dated as of December 17, 1997 between United Dental Care, Inc. and Robert J. Nettinga. 10.44* Stock Option Agreement dated as of December 17, 1997 between United Dental Care, Inc. and Donald E. Steen. 10.45* United Dental Care, Inc. Executive Incentive Plans for 1998. 10.46* Family Dentist Agreement dated as of December 31, 1997 between United Dental Care of Arizona, Inc. and Associated Dental Care Providers, P.C., an Arizona professional corporation. 10.47* Second Amendment to Revolving Credit Agreement dated February 20, 1998. 10.48 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 16, 1998 and incorporated herein by reference). 10.49* First Amendment dated March 10, 1997 to the Employment Agreement of November 10, 1997 between United Dental Care, Inc. and John W. McCarty. 10.50* First Amendment dated March 10, 1997 to the Employment Agreement of June 1, 1996 between United Dental Care, Inc. and Peter R. Barnett, DMD. 11.1* Statement Regarding Computation of Per Share Earnings. 21.1* List of Subsidiaries of Registrant. 23.1* Consent of PricewaterhouseCoopers LLP. 27.1* Financial Data Schedule. - ---------------------- * Filed herewith.
(b) Reports on Form 8-K The Company filed no reports on Form 8-K during the last quarter of the period covered by this report. 37 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Dallas, State of Texas, August 3, 1998. UNITED DENTAL CARE, INC. By: /s/ WILLIAM H. WILCOX --------------------------------------- William H. Wilcox, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ WILLIAM H. WILCOX President and Chief Executive Officer August 3, 1998 - ------------------------------------ (Principal Executive Officer) William H. Wilcox /s/ JOHN W. MCCARTY Senior Vice President and Chief August 3, 1998 - ------------------------------------ Financial Officer John W. McCarty (Principal Financial Officer) /s/ PETER R. BARNETT, DMD Senior Vice President, Chief Operations August 3, 1998 - ------------------------------------ Officer Peter R. Barnett, DMD /s/ PAMELA S. ASHWORTH Vice President, Finance August 3, 1998 - ------------------------------------ (Principal Accounting Officer) Pamela S. Ashworth /s/ JACK R. ANDERSON Chairman of the Board of Directors August 3, 1998 - ------------------------------------ Jack R. Anderson /s/ GEORGE E. BELLO Director August 3, 1998 - ------------------------------------ George E. Bello /s/ JAMES E. BUNCHER Director August 3, 1998 - ------------------------------------ James E. Buncher /s/ WILLIAM H. LONGFIELD Director August 3, 1998 - ------------------------------------ William H. Longfield /s/ ROBERT J. NETTINGA Director August 3, 1998 - ------------------------------------ Robert J. Nettinga /s/ JAMES KEN NEWMAN Director August 3, 1998 - ------------------------------------ James Ken Newman /s/ DONALD E. STEEN Director August 3, 1998 - ------------------------------------ Donald E. Steen
38 39 UNITED DENTAL CARE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Consolidated Balance Sheets as of December 31, 1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997 . . . . . . . . . . . . . F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 . . . . . . . . . . . . . F-6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
F-1 40 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of United Dental Care, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of United Dental Care, Inc. and its subsidiaries (collectively "the Company") at December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Dallas, Texas February 23, 1998, except for Note 12, as to which the date is March 11, 1998 F-2 41 UNITED DENTAL CARE, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, --------------------- 1996 1997 -------- --------- ASSETS Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $50,035 $12,427 Premiums receivable, net of allowance for doubtful accounts of $1,809 and $5,729 at December 31, 1996 and 1997, respectively . . . . . . . . . . . . 11,016 10,606 Accrued interest and other current assets . . . . . . . . . . . . . . . . . . 832 4,416 Deferred taxes, current . . . . . . . . . . . . . . . . . . . . . . . . . . . 957 1,592 -------- -------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . 62,840 29,041 Regulatory deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,433 4,005 Furniture and equipment, net of accumulated depreciation of $3,169 and $5,112 at December 31, 1996 and 1997, respectively . . . . . . . . . . . . . . . . . 7,056 12,612 Intangible assets, net of accumulated amortization of $2,202 and $5,218 at December 31, 1996 and 1997, respectively . . . . . . . . . . . . . . . . . . . 91,066 105,479 Pre-operational costs, net of accumulated amortization of $238 and $94 at December 31, 1996 and 1997, respectively . . . . . . . . . . . . . . . . . . . 127 295 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 856 8 Deferred taxes, noncurrent . . . . . . . . . . . . . . . . . . . . . . . . . . . 294 -- -------- -------- TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $165,672 $151,440 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . $5,805 $9,771 Current portion of debt and revolving credit facility . . . . . . . . . . . . 26,191 7,981 Claims reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,172 5,936 Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,177 2,065 Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 75 -- -------- -------- Total current liabilities . . . . . . . . . . . . . . . . . . . . . 37,420 25,753 Deferred taxes, non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . ---- 1,236 Long-term debt - net of current portion . . . . . . . . . . . . . . . . . . . . . 2,757 1,403 Commitments and contingencies (Note 6) -------- -------- Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 40,177 28,392 -------- -------- Stockholders' equity: Preferred stock, $.10 par value; 500,000 shares authorized; no shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- Common stock, $.10 par value; 15,000,000 shares authorized; 8,908,416 shares outstanding issued and outstanding at December 31, 1996 and 8,942,616 at December 31,1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 891 894 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 108,223 108,620 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,381 13,534 -------- -------- Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 125,495 123,048 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . $165,672 $151,440 ======== ========
See accompanying notes. F-3 42 UNITED DENTAL CARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 1995 1996 1997 ------- -------- -------- Revenues: Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . $78,626 $112,749 $173,995 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . 603 899 704 ------- -------- -------- 79,229 113,648 174,699 Costs and expenses: Dental services expense . . . . . . . . . . . . . . . . . . . . . 46,750 67,651 123,633 Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . 9,637 12,587 18,847 General and administrative . . . . . . . . . . . . . . . . . . . . 14,785 18,612 29,932 Depreciation and amortization . . . . . . . . . . . . . . . . . . 1,190 2,267 5,050 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . 1,005 536 571 ------- -------- -------- 73,367 101,653 178,033 Income (loss) before income taxes and extraordinary charge . . . . . 5,862 11,995 (3,334) Provision (benefit) for income taxes . . . . . . . . . . . . . . . . 2,131 4,438 (487) ------- -------- -------- Income (loss) before extraordinary charge . . . . . . . . . . . . . . 3,731 7,557 (2,847) Extraordinary charge, net of tax . . . . . . . . . . . . . . . . . . (142) -- -- ------- -------- -------- Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $3,589 $7,557 $ (2,847) ====== ====== ======== Shares outstanding (in thousands): Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,051 7,256 8,935 Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,449 7,543 8,935 Per share amounts: Net income (loss) per common share before extraordinary charge Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.74 $1.04 $ (0.32) Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.68 $1.00 $ (0.32) Extraordinary charge per share, net of tax Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(0.03) -- -- Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(0.03) -- -- Net income (loss) per common share Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.71 $1.04 $ (0.32) Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.66 $1.00 $ (0.32)
See accompanying notes. F-4 43 UNITED DENTAL CARE, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
PREFERRED STOCK COMMON STOCK ADDITIONAL --------------------------------------- PAID-IN RETAINED SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL --------------- ----------------------- ---------- ---------- --------- Balance, December 31, 1994 ........ 1 -- 4,179,914 $ 418 $ 3,321 $ 5,235 $ 8,974 Conversion of preferred to common stock ............. (1) -- 2 -- -- -- -- Stock options exercised ........ -- -- 343,500 34 431 -- 465 Stock warrants issued .......... -- -- -- -- 80 -- 80 Tax effect of stock options exercised ................... -- -- -- -- 527 -- 527 Shares issued in public offering..................... -- -- 2,375,000 238 47,727 -- 47,965 Net income ..................... -- -- -- -- -- 3,589 3,589 ----- ----- --------- -------- --------- -------- --------- Balance, December 31, 1995 ........ -- -- 6,898,416 690 52,086 8,824 61,600 Stock options exercised ........ -- -- 10,000 1 14 -- 15 Tax effect of stock options exercised ................... -- -- -- -- 125 -- 125 Shares issued in public offering..................... -- -- 2,000,000 200 55,998 -- 56,198 Net income ..................... -- -- -- -- -- 7,557 7,557 ----- ----- --------- -------- --------- -------- --------- Balance, December 31, 1996 ........ -- -- 8,908,416 891 108,223 16,381 125,495 Stock options exercised ........ -- -- 34,200 3 184 -- 187 Tax effect of stock options exercised .................. -- -- -- -- 213 -- 213 Net loss ....................... -- -- -- -- -- (2,847) (2,847) ----- ----- --------- -------- --------- -------- --------- Balance, December 31, 1997 ........ -- -- 8,942,616 $ 894 $ 108,620 $ 13,534 $ 123,048 ===== ===== ========= ======== ========= ======== =========
See accompanying notes. F-5 44 UNITED DENTAL CARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 1995 1996 1997 ------- ------- ------- Operating activities: Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $3,589 $7,557 $(2,847) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization . . . . . . . . . . . . . . . 1,190 2,267 5,050 Changes in operating assets and liabilities, net of effects from purchase of acquisitions: Decrease (increase) in premiums receivable . . . . . . . (1,049) (4,887) 736 (Increase) decrease in accrued interest and other current assets . . . . . . . . . . . . . . . . . . . 134 (286) (3,374) Decrease (increase) in deferred income taxes . . . . . . (27) 661 1,343 (Increase) decrease in other assets . . . . . . . . . . (222) 300 (5,876) Increase (decrease) in accounts payable, accrued expenses and claims reserve . . . . . . . . . . . . . (277) (2,168) 4,979 Decrease in unearned premiums . . . . . . . . . . . . . (417) (2,148) (1,397) ------- ------- ------- Net cash provided by (used in) operating activities . 2,921 1,296 (1,386) Investing activities: Increase in regulatory deposits . . . . . . . . . . . . . . . (408) (38) (222) Purchases of furniture and equipment . . . . . . . . . . . . . (2,176) (4,518) (7,538) Investment in new markets . . . . . . . . . . . . . . . . . . (31) (206) (168) Purchase of acquisitions (net of cash acquired) . . . . . . . 726 (37,560) (8,917) ------- ------- ------- Net cash used in investing activities . . . . . . . . (1,889) (42,322) (16,845) Financing activities: Proceeds from short-term debt . . . . . . . . . . . . . . . . ---- ---- 6,630 Proceeds from long-term debt . . . . . . . . . . . . . . . . . 1,154 ---- ---- Repayment of indebtedness . . . . . . . . . . . . . . . . . . (12,577) (12,092) (26,194) Proceeds from public offering (net) . . . . . . . . . . . . . 47,965 56,198 ---- Stock options exercised . . . . . . . . . . . . . . . . . . . 465 15 187 Issuance of stock warrants . . . . . . . . . . . . . . . . . . 80 ---- ---- ------- ------- ------- Net cash provided by (used in) financing activities . 37,087 44,121 (19,377) ------- ------- ------- Net increase (decrease) in cash and cash equivalents . . . . . . 38,119 3,095 (37,608) Cash and cash equivalents at beginning of period . . . . . . . . 8,821 46,940 50,035 ------- ------- ------- Cash and cash equivalents at end of period . . . . . . . . . . . $46,940 $50,035 $12,427 ======= ======= ======= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest . . . . . . . . . . . . . . . . . . . . . . . . . $989 $400 $434 ======= ======= ======= Income Taxes . . . . . . . . . . . . . . . . . . . . . . . $1,385 $4,104 $1,632 ======= ======= =======
Supplemental Schedule of non-cash investing and financing activities: In 1997, the Company fully amortized previously deferred new market development costs of $214,000. See accompanying notes. F-6 45 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The consolidated financial statements include the accounts of United Dental Care, Inc., and its subsidiaries (the "Company") for all periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company, through its subsidiaries, contracts with independent practitioners to provide dental services to members in the form of prepaid dental health contracts and/or indemnity dental insurance. The Company is currently licensed to market its prepaid dental plans in 29 states and its indemnity plan in 28 states. As of December 31, 1997, approximately 79.0% of all UDC prepaid plan members were located in seven states: Arizona, Texas, New Jersey, Colorado, Florida, Missouri and Oklahoma. REVENUE AND EXPENSE RECOGNITION: Under prepaid dental health agreements the Company contracts with dentists for a set per-member, per month capitation fee to provide dental care for its members. Premium revenue is recognized in the month the membership is entitled to the contracted service. Unearned premiums paid are reflected as liabilities when members pay in the current period for services to be rendered in a subsequent period. INTANGIBLE ASSETS: Goodwill resulting from the Company's acquisitions is being amortized on a straight-line basis over forty years. Also included in intangible assets are noncompetition and consulting agreements related to (a) the IDH acquisition and valued at $0.4 million at acquisition; (b) the US Dental acquisition and valued at $0.2 million at acquisition; (c) the AHP acquisition and valued at $0.6 million at acquisition; and (d) the OraCare acquisition and valued at $0.2 million at acquisition, all of which are being amortized on a straight line basis over the three to six year terms of such agreements. Accumulated amortization related to these agreements at December 31, 1996 and 1997 was $424,000 and $865,059, respectively. The carrying value of long-lived assets and identifiable intangible assets will be evaluated whenever changes in circumstances indicate that the carrying amount of such assets may not be recoverable. In performing such review for recoverability, the Company compares the expected future cash flows to the carrying value. If the expected undiscounted future cash flows are less than the carrying amount of such assets, the Company would recognize an impairment loss for the difference between the carrying amount of the assets and their estimated fair value. If such assets being tested for recoverability were acquired in a business combination accounted for using the purchase method, the goodwill that arose in that transaction is allocated to the assets being tested for recoverability on a pro-rata basis using the relative fair values of the intangible assets acquired at the acquisition date. In estimating future cash flows for determining whether an asset is impaired, and if expected future cash flows are used in measuring assets that are impaired, assets are grouped by operating unit at the state level. These operating units are the lowest level for which there are indentifiable cash flows that are largely independent of the cash flows of other groups of assets. In addition, the carrying value of the goodwill is subject to a separate evaluation. If facts and circumstances were to indicate the carrying amount of goodwill is impaired, the carrying amount would be reduced to an amount representing the present value of estimated expected future cash flows to be generated by the operation. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121"), which became effective for fiscal years beginning after December 15, 1995. FAS 121 establishes standards for determining when impairment losses on long-lived assets have occurred and how impairment losses should be measured. The Company adopted FAS 121 effective December 31, 1995. The financial statement impact of adopting FAS 121 was not material. FURNITURE AND EQUIPMENT: Furniture and equipment are recorded at cost. As discussed more fully in Note 4, depreciation is calculated using the straight-line method over a period of seven to ten years based on the estimated useful life of the related asset. INTERNALLY DEVELOPED SOFTWARE: The Company early adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" as of January 1, 1997, as permitted. The Company acquired software that met the definition of "internal use" and has been developing the software to meet its internal reporting needs. Internal and external costs incurred during the application development stage have been capitalized as these costs were to develop software that allows for access or conversion of old data from acquired systems to the core system. Internal and external training and maintenance costs and other data conversion costs such as purging existing data, reconciling old data and conversion of old data to a new system are expensed as incurred. CLAIMS RESERVE: The reserve for costs expected to be incurred for dental services approved during the year as well as costs incurred but not reported are actuarial estimates based on the Company's historical claims data. The Company also accrues claims processing costs associated with those unpaid health claims that are in the process of settlement as well as those that have been incurred but not yet reported. This accrual is based on the historical relationship between claims handling expenses and incurred claims. RECLASSIFICATIONS: Certain reclassifications have been made to the 1996 consolidated balance sheet to conform to the classifications used for 1997. F-7 46 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, money market investment accounts held by brokers which are readily convertible to cash and certificates of deposit with original maturities of less than 90 days. INCOME TAXES: The Company accounts for income taxes as set forth in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," ("FAS 109"). FAS 109 prescribes an asset and liability method that requires the recognition of deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the financial statement basis and the tax basis of assets and liabilities. See Note 7 for additional information. NET INCOME (LOSS) PER COMMON SHARE: Net income (loss) per common share is presented on the basic and diluted bases in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"), which was issued by the Financial Accounting Standards Board in February 1997 to become effective for periods ending after December 15, 1997. The Company adopted FAS 128 for the year ended December 31, 1997 and has restated net income (loss) per share for 1995 and 1996. Basic net income (loss) per share is calculated by dividing the net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted net income (loss) per share does not include the effect of any potential issuances of common stock that would have the effect of reducing the loss per common share. Net income (loss) per share data are presented in the Statement of Operations, Note 11, and the attached Exhibit 11.1. In addition, pursuant to the requirements of the Securities and Exchange Commission, common stock equivalent shares issued at prices below the original assumed public offering price of $18.00 per share during the twelve months immediately preceding the date of the initial filing of the Registration Statement related to the Company's initial public offering have been included in the calculation of common shares and common equivalent shares using the treasury stock method, as if they were outstanding for all periods presented. EPS amounts for components of net income (loss) may not add to the net income (loss) amounts presented due to rounding. STOCK OPTIONS: The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its employee stock options (see Note 9). Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. New Pronouncements: In June 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"), which establishes standards for the reporting and display of comprehensive income and its components. The Company will adopt the standard for the year ending December 31, 1998, as required. In June 1997, the FASB also issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"), which establishes standards for reporting information about operating segments in annual financial statements and requires the reporting of selected information about operating segments in interim financial reports issued to shareholders. The Company will adopt the standard beginning with the quarter ending March 31, 1998, but, in accordance with the standard, will not begin reporting the information until the Company issues its annual audited financial statements for the year ending December 31, 1998. The financial statement impact of adopting FAS 130 and FAS 131 is not expected to be material. 2. Acquisitions Effective November 1, 1995, the Company completed the acquisition of all of the outstanding common stock of U.S. Dental Management, Inc. ("US Dental") for $12.6 million, composed of $1.3 million in cash at closing, principal payments totaling $1.0 million over the three year period beginning November 30, 1995 and an additional payment of $10.3 million in January 1996 from an amount held in escrow. F-8 47 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued The acquisition has been accounted for as a purchase and the net assets and results of operations of US Dental and its subsidiaries have been included in the Company's consolidated financial statements beginning November 1, 1995. The purchase price has been allocated to assets and liabilities of US Dental based on their estimated respective fair values. The purchase price exceeded the fair value of US Dental's net assets by $11.9 million of which $11.7 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 $4.3 million and $3.6 million, respectively. As of the purchase date, liabilities assumed included estimated amounts accrued of $238,000 for the termination or relocation of employees and other exit costs of the acquired company. As a result of additional information obtained in 1996, the Company increased this liability and the corresponding cost of US Dental by $643,000. 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 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. F-9 48 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued 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 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, 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 statement of operations. 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. F-10 49 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued 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 Plan, 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. The following represents the unaudited pro forma results of operations as if the Company's acquisitions described above had occurred at the beginning of 1995 (in thousands, except per share data):
UNAUDITED YEAR ENDED DECEMBER 31, ---------------------------------------- 1995 1996 1997 -------- -------- -------- Revenues . . . . . . . . . . . . . . . . . . . . . . . . $140,437 $155,334 $177,373 Net income(loss) before extraordinary charge . . . . . . 3,318 8,832 (2,777) Extraordinary charge, net of tax . . . . . . . . . . . . (142) -- -- Net income (loss) . . . . . . . . . . . . . . . . . . . 3,176 8,832 (2,777) Per share amounts: Net income (loss) per share before extraordinary charge Basic . . . . . . . . . . . . . . . . . . . . . . . $ 0.66 $ 1.22 $ (0.31) Diluted . . . . . . . . . . . . . . . . . . . . . . 0.61 1.17 (0.31) Extraordinary charge per share, net of tax Basic . . . . . . . . . . . . . . . . . . . . . . . (0.03) -- -- Diluted . . . . . . . . . . . . . . . . . . . . . . (0.03) -- -- Net income (loss) per common share Basic . . . . . . . . . . . . . . . . . . . . . . . 0.63 1.22 (0.31) Diluted . . . . . . . . . . . . . . . . . . . . . . 0.58 1.17 (0.31)
F-11 50 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued The pro forma information is based on historical information adjusted to give effect to the amortization of goodwill and other intangibles. The pro forma information does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the combined operations. 3. REGULATORY DEPOSITS At December 31, 1997, regulatory deposits were recorded at cost and consisted of $1,734,000 in U.S. government obligations and $2,271,000 in certificates of deposit insured by the Federal Deposit Insurance Corporation. The Company has set aside certificates of deposit bearing interest at variable rates as required by various state statutes. The fair value of all financial instruments, determined by reference to market data, approximated their recorded value at each of the balance sheet dates shown. 4. FURNITURE AND EQUIPMENT The Company's furniture and equipment are summarized as follows (in thousands):
DECEMBER 31, ----------------------- 1996 1997 ------- ------- Internally developed software . . . . . . . . . . $ 4,876 $ 8,283 Purchased software . . . . . . . . . . . . . . . 631 734 Computer equipment . . . . . . . . . . . . . . . 2,198 3,841 Furniture, fixtures, and office equipment . . . . 2,355 4,153 Leasehold improvements . . . . . . . . . . . . . 165 713 ------- ------- Total . . . . . . . . . . . . . . . . . . . . 10,225 17,724 Less accumulated depreciation . . . . . . . . (3,169) (5,112) ------- ------- Total . . . . . . . . . . . . . . . . . . . . . . $ 7,056 $12,612 ======= =======
Furniture and equipment are stated at cost less accumulated depreciation and are depreciated or amortized over estimated useful lives of ten years for furniture and fixtures, the shorter of (a) the life of the lease or (b) ten years for leasehold improvements, seven years for internally developed software and five years for computer equipment and purchased software. 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 of this conversion process are still being incurred by the subsidiaries acquired during 1996 and 1997. All such costs are being depreciated over a seven-year period beginning from the date the core system became functional. Total depreciation and amortization expense relating to furniture and equipment was $575,000, $717,000 and $1,982,000 for 1995, 1996 and 1997, respectively. 5. LONG-TERM DEBT The Company acquired International Dental Health, Inc. ("IDH") in 1994. A portion of the IDH purchase price was deferred and is payable over the period ended January 1, 2000. The payments may be prepaid without penalty and are not contingent upon the future operations of the Company. The present value of the future payments (assuming no voluntary prepayments, discounted at 7.25%) is recorded as long-term debt. One of the former shareholders of IDH was subsequently appointed a director to the Company. The Company entered into a letter of credit facility relating to the deferral agreements that currently requires annual fees of up to 0.85% of the unpaid amounts under these agreements. A portion of the US Dental purchase price was financed by a promissory note in the amount of $10.3 million that was subsequently paid in full on January 18, 1996. In addition, a portion of the US Dental purchase price in the amount of $1.0 million was deferred and is payable over the period ended December 31, 1999. The payments may be prepaid without penalty and are not contingent upon the future operations of the Company. The present value of the future payments (assuming no voluntary prepayments, discounted at 7.50%) is recorded as long-term debt. F-12 51 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued A portion of the AHP purchase price in the amount of $0.6 million was deferred and payable in monthly installments over a three-year period. The payments may be prepaid without penalty and are not contingent upon the future operations of the Company. The interest rate on the deferred purchase price is 5.0% and the total amount of $0.6 million was recorded as long-term debt on the purchase date. On November 14, 1996, in conjunction with the acquisition of OraCare (see Note 2), the Company signed promissory notes in an aggregate amount of $24.9 million. The interest rate on the promissory notes was 4.84% per annum, payable at the notes' maturity on January 2, 1997. The Company paid the notes in full on January 2, 1997. In addition, the Company acquired certain capital leases primarily for dental equipment used by the dental professional association. The following table summarizes the minimum required future principal reductions (dollars in thousands):
DEFERRED DEFERRED DEFERRED IDH US DENTAL AHP PURCHASE PURCHASE PURCHASE ORACARE PRICE PRICE PRICE CAPITAL ANNUAL PAYMENTS PAYMENTS PAYMENTS LEASES TOTAL -------- -------- -------- -------- ------- 1998 . . . . . . . . . $ 790 $ 263 $ 209 $ 89 $ 1,351 1999 . . . . . . . . . 849 251 18 76 1,194 2000 . . . . . . . . . 142 -- -- 52 194 2001 . . . . . . . . . -- -- -- 15 15 2002 and thereafter . . -- -- -- -- -- -------- -------- -------- -------- ------- TOTAL $ 1,781 $ 514 $ 227 $ 232 $ 2,754 ======== ======== ======== ======== =======
On November 14, 1996, the Company signed a revolving credit agreement 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 acquisitions of managed dental benefits companies, (ii) for the issuance of letters of credit, (iii) for capital expenditures and (iv) at the election of the Company, a working capital line of credit in an amount up to $5.0 million out of the total amount available under the revolving credit facility. The revolving credit facility has a term of four years, expiring November 30, 2000. Outstanding indebtedness under the revolving line of credit 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 interest 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 the letters of credit. 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. Approximately $8.4 million remained available for working capital and capital expenditures under the revolving credit facility at December 31, 1997. On June 29, 1997, the Company signed the first amendment to the revolving credit agreement. The first amendment modified the minimum liquidity coverage ratio covenant and allowed the Company to repurchase outstanding shares of its capital stock. The amendment also allowed the Company to exceed the capital expenditure limit for 1997. The second amendment increased the limit for capital expenditures and working capital not to exceed $15,000,000 in the aggregate at any one time. Additionally, the second amendment provided for certain changes in the financial covenants increasing the availability of advances to the Company. F-13 52 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued In September 1997, the Company borrowed a total of $6,630,000 under the revolving credit facility. The majority of these funds was used to increase the capital surplus at the Company's indemnity subsidiary United Dental Care Insurance Company. 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 the IDH 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. 6. COMMITMENTS AND CONTINGENCIES The Company leases office space and certain equipment under operating leases. Rental expense for 1995, 1996 and 1997 was $1,351,000, $1,243,000 and $1,768,000, respectively. Minimum obligations under the operating leases at December 31, 1997 are as follows (dollars in thousands):
YEAR ENDING DECEMBER 31: 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,910 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,548 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,089 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 925 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . ------ $5,715 ======
The Company is, and may be in the future, party to litigation arising in the ordinary course of its business. The Company carries insurance protecting it against liability arising out of, among other things, the provision of dental care services by contracting dentists, who are not employees or agents of the Company. Claims against the Company arising out of the provision of dental care services by contracting dentists historically have been rare, but there can be no assurance that the Company will not become involved in such litigation or otherwise become subject to claims relating to its contracting dentists in the future. While the Company has no significant pending claims, there can be no assurance that the Company's insurance coverage will be adequate to cover all liabilities arising out of such claims or that any such claims will be covered by the Company's insurance. The Company is not currently aware of any claims which are not covered by insurance and which may have a material adverse impact upon the financial condition of the Company. 7. INCOME TAXES The provision (benefit) for income taxes allocated to continuing operations consisted of the following components (dollars in thousands):
1995 1996 1997 ------ ------ ------- Current provision (benefit) . . . . . . . . . . . . . $2,250 $3,744 $ (46) Deferred provision (benefit) . . . . . . . . . . . . (119) 694 (441) ------ ------ ------- Provision (benefit) for income taxes . . . . . . . . $2,131 $4,438 $ (487) ====== ====== =======
The provision for income taxes includes $0, $130,000 and $70,000 for state income taxes for 1995, 1996 and 1997, respectively. The Company pays premium taxes in lieu of state income taxes in several states where it has operations. During 1995, 1996 and 1997 certain employees exercised 343,500, 10,000 and 34,200 nonqualified stock options, respectively, resulting in tax savings of approximately $527,000, $125,000 and $213,000, respectively, and a corresponding increase to capital. F-14 53 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued A reconciliation of the difference between the federal income tax rate and the Company's effective tax rate is as follows:
1995 1996 1997 ----- ----- ----- Federal income tax rate . . . . . . . . . . . 34.0% 34.0% (34.0)% Amortization of goodwill . . . . . . . . . . 2.0 3.0 22.9 Tax exempt interest income . . . . . . . . . (1.2) (1.4) (0.9) Other . . . . . . . . . . . . . . . . . . . . 1.6 1.4 (2.6) ----- ----- ------ Effective tax rate . . . . . . . . . . . 36.4% 37.0% (14.6)% ===== ===== ======
Deferred tax assets (liabilities) were comprised of the following at December 31:
1996 1997 ------ ------ Premium reserve . . . . . . . . . . . . . . . . . . . . . . $ 673 $2,144 Depreciation . . . . . . . . . . . . . . . . . . . . . . . 303 167 Consulting and non-competition agreements . . . . . . . . . -- 100 Accrued acquisition costs . . . . . . . . . . . . . . . . . 942 -- Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 72 ------ ------ Gross deferred tax asset . . . . . . . . . . . . . . . . 1,942 2,483 ------ ------ Consulting and non-competition agreements . . . . . . . . . (691) -- Accrued acquisition costs . . . . . . . . . . . . . . . . . -- (2,127) ------ ------ Gross deferred tax liability . . . . . . . . . . . . . . (691) (2,127) ------ ------ Net deferred tax asset . . . . . . . . . . . . . . . . . . $1,251 $ 356 ====== ======
The deferred tax balances above reflect adjustments made for acquisitions completed in 1997 and prior years. The net effect of these adjustments in 1997 resulted in an increase to goodwill of $1,625,500. The Company believes it will generate sufficient future taxable income to realize its deferred tax asset. However, there can be no assurance that the Company will realize these assets should the merger discussed in Note 12 be finalized. The Company generated a net operating loss for 1997 of approximately $1.6 million, which will be carried back, resulting in a refund of taxes. The Company is currently under examination by the Internal Revenue Service for years 1994 and 1995. Management believes that adequate provision has been made in the financial statements for any adjustments that might be proposed. 8. EXTRAORDINARY CHARGE In September 1995, the Company incurred an extraordinary charge due to the early retirement of debt in the amount of $142,000, net of a tax benefit of $73,000. 9. STOCKHOLDERS' EQUITY On September 21, 1995, the Company completed its initial public offering of common stock, issuing 2,375,000 shares at a price of $22.00 per share before expenses. After deduction of underwriting discounts and expenses of the offering, the aggregate net offering proceeds were $48.0 million. F-15 54 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued On October 28, 1996, the Company completed a public offering of common stock, issuing 2,000,000 shares at a price of $30.00 per share before expenses. After deduction of underwriting discounts and expenses of the offering, the aggregate net offering proceeds were $56.2 million. In January 1995, an executive officer of the Company purchased from the Company warrants to purchase 40,000 shares of common stock at $6.00 per share. The purchase price of the warrants was $2.00 each. The Company had an Incentive Stock Option Plan pursuant to which 200,000 shares of common stock were reserved. During 1994 and 1995, 60,000 and 80,000 stock options were exercised, respectively, at an exercise price of $1.25 per share. These options are considered noncompensatory. The board of directors has terminated the Incentive Stock Option Plan for the purposes of any additional grants thereunder. The Company has a Key Employee Stock Option Plan pursuant to which 222,000 and 187,800 shares were reserved as of December 31, 1996 and December 31, 1997, respectively. During 1996, 10,000 stock options were exercised at an exercise price of $1.50 and, during 1997, 34,200 stock options were exercised at an average exercise price of $5.30. At December 31, 1997, 21,000 of the 187,800 outstanding Key Employee Stock Option Plan options were exercisable at an average exercise price of $5.64. These options are considered compensatory and have terms of five to ten years; the options are exercisable at various times during the terms of the options at exercise prices ranging from $4.00 to $6.00, which amounts, in management's estimation, were equal to or exceeded market value at the date of grant. The board of directors has terminated the Key Employee Stock Option Plan for the purposes of any additional grants thereunder. In 1995, the Company's board of directors adopted a new employee stock option plan (the "1995 Plan") that provides only for the grant of non-qualified stock options. The 1995 Plan originally provided that a total of 300,000 shares of common stock may be issued pursuant to the options granted under the 1995 Plan, and, in 1996, the stockholders approved an increase to 800,000 shares. In addition to discretionary grants of stock options to employees, the 1995 Plan provides for the automatic one-time grant of stock options for 16,000 shares of common stock to certain qualifying non- employee directors who were either serving on the board of directors of the Company when the 1995 Plan was adopted by the board of directors F-16 55 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued or subsequently elected to the board of directors (to the extent that options are available under the 1995 Plan). Such director options are exercisable in 25% increments beginning one year after the date of grant. At December 31, 1997, options for 419,000 shares had been granted under the 1995 Plan, 16,000 of which were exercisable at an option price of $7.00. These options are considered compensatory and have terms of ten years; the options are exercisable at various times during the terms of the options at exercise prices ranging from $11.25 to $37.13, which amounts were equal to or exceeded market value at the date of grant. Option grants to employees other than directors generally vest and are exercisable cumulatively in equal installments over a five year period commencing two years from the date of grant. The combined historical activity in the Company's option plans since December 31, 1994 has been as follows:
1995 1996 1997 --------------------- ---------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE (000) PRICE (000) PRICE (000) PRICE ------- -------- -------- -------- ------- -------- Outstanding at beginning of year . . . 635.5 $3.06 374.0 $ 6.01 617.0 $22.60 Granted . . . . . . . . 112.0 8.60 383.0 34.51 636.0 18.67 Exercised . . . . . . . (343.5) 1.35 (10.0) 1.50 (34.2) 5.30 Forfeited . . . . . . . (30.0) 6.25 (130.0) 11.60 (332.0) 34.11 ------ ------ ----- Outstanding at end of year . . . . . . 374.0 6.01 617.0 22.60 886.8 16.14 ====== ====== ===== Exercisable at end of year . . . . . . -- -- 15.5 6.27 38.5 7.43 Weighted average fair value of options granted during year . . . . $ 2.24 $ 14.80 $8.06
The following table summarizes information about fixed stock options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------- ----------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE EXERCISE CONTRACTUAL EXERCISE EXERCISE PRICE ($) NUMBER LIFE (YEARS) PRICE ($) NUMBER PRICE ($) - ---------- ------- ------------ --------- ------- --------- 4.000 27,000 5.00 4.000 -- -- 5.500 30,000 3.83 5.500 15,000 5.50 6.000 130,800 4.02 6.000 6,000 6.00 7.000 32,000 7.33 7.000 16,000 7.00 11.250 60,000 9.96 11.250 -- -- 13.625 75,000 9.67 13.625 -- -- 16.000 57,000 9.63 16.000 -- -- 17.600 240,000 9.63 17.600 -- -- 22.310 100,000 9.33 22.310 -- -- 27.000 104,000 10.50 27.000 -- -- 37.130 31,000 7.23 37.130 1,500 37.13 -------- ------ 886,800 8.39 16.140 38,500 7.43 ======== ======
The Company has elected to follow APB 25 and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("FAS 123") requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. F-17 56 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued Pro forma information regarding net income and earnings per share is required by FAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of FAS 123. The fair value for each option grant has been estimated at the date of grant using a Black-Scholes multiple option pricing model that treats each option vesting date as a separate option for purposes of the valuation. Thus, the assumptions concerning the risk-free interest rate may vary for each separate vesting date. The expected life of each separate vesting date is determined by estimating the time period between vesting and exercise, taking into account such factors as the age and financial resources of the individual being granted the option. The Company has not paid any dividends and does not anticipate paying dividends at any time during the life of options granted in 1995, 1996 and 1997. The assumed weighted average risk-free interest rate was 7.75%, 6.07% and 6.27% for options granted in 1995, 1996 and 1997, respectively. The assumed weighted average volatility was zero for options granted in 1995 (the Company was privately owned when the options were granted), 35.0% for options granted in 1996 and 31.7% for options granted in 1997. The assumed weighted average expected life was 4.1 years, 5.6 years and 6.0 years for options granted in 1995, 1996 and 1997, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and, because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Forfeitures are recognized as they occur. The Company's pro forma information follows (in thousands except for earnings per share information):
1995 1996 1997 ------ ------ -------- Net income (loss): As reported . . . . . . . . . . . . . $3,589 $7,557 $(2,847) Pro forma . . . . . . . . . . . . . . $3,558 $6,971 $(3,059) Earnings (loss) per share: As reported Basic . . . . . . . . . . . . . . $0.71 $1.04 $(0.32) Diluted . . . . . . . . . . . . . $0.66 $1.00 $(0.32) Pro forma . . . . . . . . . . . . . . Basic . . . . . . . . . . . . . . $0.70 $0.96 $(0.34) Diluted . . . . . . . . . . . . . $0.65 $0.92 $(0.34)
10. STATUTORY NET WORTH COMPARED TO STOCKHOLDERS' EQUITY PER GENERALLY ACCEPTED ACCOUNTING PRINCIPLES Certain assets recognized under generally accepted accounting principles are considered non-admissible under statutory accounting practices as filed and submitted in the annual reports to the states of domicile of the various subsidiaries required to submit such reports. These nonadmitted assets create differences between statutory net worth as reported on the annual filing and total stockholders' equity as recorded under generally accepted accounting principles. F-18 57 UNITED DENTAL CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued Statutory net worth of the Company's subsidiaries that are subject to state insurance regulations totaled approximately $17.0 million and $26.7 million at December 31, 1996 and 1997, respectively. Of these amounts, United Dental Care Insurance Company ("UDCIC") represents $3.8 million and $5.6 million at December 31, 1996 and 1997, respectively. UDCIC is subject to the Arizona insurance statutes and regulations and is required to maintain minimum capital and surplus of $500,000 and without the prior approval of the Arizona Department of Insurance may not pay a dividend greater than the lesser of 10% of capital and surplus as of the end of the prior year or net investment income for the prior year. UDCIC received approval from the Arizona Department of Insurance to pay a dividend of $2.5 million in 1996. Statutory net income of the Company's subsidiaries for 1996 and 1997 was $8.9 million and $3.7 million, respectively. 11. SUPPLEMENTARY FINANCIAL INFORMATION SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 QUARTERS 1997 QUARTERS ------------------------------------ --------------------------------------- FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH ----- ------ ----- ------ ----- ------ ----- ------- Revenues . . . . . . . . . . $24,794 $26,331 $26,713 $35,810 $45,023 $44,203 $41,493 $43,980 Net income (loss) . . . . . . $ 1,411 $ 1,645 $ 1,876 $ 2,625 $ 1,452 $(4,433) $(1,312) $ 1,446 Net income (loss) per share: Basic earnings (loss) per share . . . . . . . . . . $0.20 $0.24 $0.27 $0.32 $0.16 $(0.50) $0.15 $0.16 Diluted earnings (loss) per share . . . . . . . . . . $0.19 $0.23 $0.26 $0.31 $0.16 $(0.50) $0.15 $0.16
There were no extraordinary items in 1996 or 1997. 12. SUBSEQUENT EVENT 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 payable on April 1, 1998 to the holders of Protective Common Stock). The Merger Agreement provides that the Company may terminate the Agreement if the price of Protective Common Stock is below $27.50 per share and Protective may terminate the 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, the applicable requirements of the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended, regulatory approvals and other customary closing conditions; therefore, there can be no assurance as to whether or when the Merger will be completed. F-19 58 EXHIBIT INDEX
Number Exhibit - ----- ------- 3.01 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). 3.02 Amended and Restated Bylaws of the Company (filed as Exhibit 3.02 to the 1995 Registration Statement and incorporated herein by reference). 4.01 Specimen Common Stock Certificate (filed as Exhibit 4.01 to the 1995 Registration Statement and incorporated herein by reference). 10.01 Non-Competition Agreement dated as of September 16, 1994 among United Dental Care, Inc., The Adaven Group Limited Partnership and Robert J. Nettinga (filed as Exhibit 10.06 to the 1995 Registration Statement and incorporated herein by reference). 10.02 Agreement for Consulting Services dated as of September 16, 1994 between United Dental Care, Inc. and The Adaven Group Limited Partnership (filed as Exhibit 10.07 to the 1995 Registration Statement and incorporated herein by reference). 10.03 Non-Competition Agreement dated as of September 16, 1994 among United Dental Care, Inc., Omega Marine Development, Inc. and Paul C. Nettinga (filed as Exhibit 10.08 to the 1995 Registration Statement and incorporated herein by reference). 10.04 Agreement for Consulting Services dated as of September 16, 1994 between United Dental Care, Inc. and Omega Marine Development, Inc. (filed as Exhibit 10.09 to the 1995 Registration Statement and incorporated herein by reference). 10.05 Stockholders Agreement dated as of September 16, 1994 among United Dental Care, Inc., certain stockholders of United Dental Care, Inc. named therein and Robert J. Nettinga (filed as Exhibit 10.10 to the 1995 Registration Statement and incorporated herein by reference). 10.06 Irrevocable Letter of Credit dated September 16, 1994 in the amount of $4,023,500 in favor of The Adaven Group Limited Partnership (filed as Exhibit 10.11 to the 1995 Registration Statement and incorporated herein by reference). 10.07 Amended and Restated Application and Agreement for $4,023,500 Standby Letter of Credit in favor of The Adaven Group Limited Partnership dated September 16, 1994 by United Dental Care, Inc. to NationsBank of Texas, N.A. (filed as Exhibit 10.09 to the Company's Registration Statement on Form S-1, Registration Number 333-12425 (the "1996 Registration Statement") and incorporated herein by reference). 10.08 Administrative Services Agreement (as amended) dated as of January 1, 1995 between United Dental Care, Inc. and R.E. Harrington, Inc., and Memorandum of Understanding in connection therewith dated as of January 1, 1995 (filed as Exhibit 10.28 to the 1995 Registration Statement and incorporated herein by reference). 10.09 Consulting Agreement dated September 27, 1995, between United Dental Care, Inc. and Dolores A. Kordek (filed as Exhibit 10.9 to the 1995 Form 10-Q and incorporated herein by reference). 10.10 Consulting Agreement dated September 27, 1995, between United Dental Care, Inc. and Christopher A. Jehle (filed as Exhibit 10.10 to the 1995 Form 10-Q and incorporated herein by reference). 10.11 Stock Purchase Agreement dated as of December 14, 1995 among United Dental Care, Inc., R. Bruce Buchanan, Joseph V. Errante, D.D.S., Margaret R. Errante, D.D.S., The Francesca Irena Errante Irrevocable Trust U/A 10/1/95, The Alexandra Nicole Errante Irrevocable Trust U/A 10/1/95, Timothy J. Moncher, Associated Health Plans, Inc. and Associated Companies, Inc. (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed January 22, 1996, File No. 0-26688 (the "Form 8-K"), and incorporated herein by reference). 10.12 First Amendment to Stock Purchase Agreement dated as of January 17, 1996 among United Dental Care, Inc., R. Bruce Buchanan, Joseph V. Errante, D.D.S., Margaret R. Errante, D.D.S., The Francesca Irena Errante Irrevocable Trust U/A 10/1/95, The Alexandra Nicole Errante Irrevocable Trust U/A 10/1/95, Timothy J. Moncher, Associated Health Plans, Inc. and Associated Companies, Inc. (filed as Exhibit 10.2 to the Form 8-K and incorporated herein by reference). 10.13 Non-Competition Agreement, dated January 22, 1995, between United Dental Care, Inc. and R. Bruce Buchanan (filed as Exhibit 10.3 to the Form 8-K, and incorporated herein by reference). The three other Non-Competition Agreements between United Dental Care, Inc. and Joseph V. Errante, D.D.S., Margaret R. Errante, D.D.S. and Timothy J. Moncher, respectively, are identical in form except as to the parties thereto and are therefore omitted from this filing.
59 10.15 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, Gilbert G. Finger, Patricia L. Schubring, Edward K. Halstead, Birchtree Enterprises and Binkley & Stewart, P.C., as Sellers, and Independent Dental Plans, Inc. dated as of June 28, 1996 (filed as Exhibit 10.27 to the 1996 Registration Statement and incorporated herein by reference). 10.16 Stock Purchase Agreement between United Dental Care, Inc., as Purchaser, and UICI, as Seller, dated as of September 10, 1996, for all the issued and outstanding shares of capital stock of Association Dental Plan, Inc., a District of Columbia corporation (filed as Exhibit 10.28 to the 1996 Registration Statement and incorporated herein by reference). 10.17 Stock Purchase Agreement between United Dental Care, Inc., as Purchaser, and UICI, as Seller, dated as of September 10, 1996, for all the issued and outstanding shares of capital stock of International Dental Plans, Inc., a Florida corporation (filed as Exhibit 10.30 to the 1996 Registration Statement and incorporated herein by reference). 10.18 Earnest Money Escrow Agreement among United Dental Care, Inc., UICI, and Texas Commerce Bank National Association, dated as of September 10, 1996, regarding the purchase of all the issued and outstanding shares of capital stock of International Dental Plans, Inc., a Florida corporation (filed as Exhibit 10.31 to the 1996 Registration Statement and incorporated herein by reference). 10.19 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and UICI, United Management & Consulting, Inc., United Management & Consulting Retirement Plan, and Marie C. Montgomery Revocable Trust U/T/A March 23, 1992, as Seller, dated as of September 10, 1996, for the purchase of 90% of the issued and outstanding shares of capital stock of United Dental Care, Inc., an Oklahoma corporation (filed as Exhibit 10.32 to the 1996 Registration Statement and incorporated herein by reference). 10.20 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and John E. Carlin, Ph.D., Frank J. Schloegel, III, J. Dennis Dlabal, D.D.S., The John E. Carlin Charitable Remainder Unitrust, UID June 28, 1996, The Frank J. Schloegel Charitable Remainder Unitrust I, UID July 12, 1996, The Frank J. Schloegel Charitable Remainder Unitrust II, UID July 12, 1996, The J. Dennis Dlabal Charitable Remainder Trust UID September 5, 1996, as Sellers, and Kansas City Dental Care, Inc., dated as of September 11, 1996 (filed as Exhibit 10.34 to the 1996 Registration Statement and incorporated herein by reference). 10.21 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and Frank A. Pettisani, D.D.S., Lisa M. Mazzone, Frank A. Pettisani, Jr., D.D.S., Charles A. Costa, and Donna Costa, as Sellers, and OraCare Consultants, Inc., dated as of September 5, 1996 (filed as Exhibit 10.36 to the 1996 Registration Statement and incorporated herein by reference). 10.22 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and Frank A. Pettisani, D.D.S., as Seller, and OraCare Dental Associates, P.A., dated as of September 5, 1996 (filed as Exhibit 10.38 to the 1996 Registration Statement and incorporated herein by reference). 10.23 Stock Purchase Agreement among United Dental Care, Inc., as Purchaser, and Frank A. Pettisani, D.D.S., Frank A. Pettisani, Jr., D.D.S., Charles A. Costa, and Donna Costa, as Sellers, and OraCare DPO, Inc., dated as of September 5, 1996 (filed as Exhibit 10.39 to the 1996 Registration Statement and incorporated herein by reference). 10.24 Letter Agreement dated November 14, 1996 between United Dental Care, Inc. and Peter R. Barnett, D.M.D., regarding ownership of stock of OraCare Dental Associates, P.A.(filed as Exhibit 10.24 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 Form 10-K") and incorporated herein by reference). 10.25 Management Agreement dated November 14, 1996 between OraCare Consultants, Inc. and OraCare Dental Associates, P.A. (filed as Exhibit 10.25 to the 1996 Form 10-K and incorporated herein by reference). 10.26 Revolving Credit Agreement, dated as of November 14, 1996, between United Dental Care, Inc., NationsBank of Texas, N.A., as Agent for the Lenders named therein, and the Lenders (filed as Exhibit 10.26 to the 1996 Form 10-K and incorporated herein by reference). 10.27 Warrant, dated February 26, 1996, held by Mark E. Pape to purchase Common Stock of the Company (filed as Exhibit 10.27 to the 1996 Form 10-K and incorporated herein by reference). 10.28 Employment Agreement dated as of May 13, 1996, between United Dental Care, Inc., and William H. Wilcox (filed as Exhibit 10.40 to the 1996 Registration Statement and incorporated herein by reference). 10.29 Employment Agreement dated as of June 1, 1996, between United Dental Care, Inc., and Mark E. Pape (filed as Exhibit 10.41 to the 1996 Registration Statement and incorporated herein by reference). 10.30 Employment Agreement dated as of June 1, 1996, between United Dental Care, Inc. and Peter R. Barnett, D.M.D. (filed as Exhibit 10.42 to the 1996 Registration Statement and incorporated herein by reference). 10.31 Master Software License and Services Agreement dated as of June 20, 1995 between Software Technologies Corporation and United Dental Care, Inc. (filed as Exhibit 10.29 to the 1995 Registration Statement and incorporated herein by reference). 10.32 United Dental Care, Inc. Amended and Restated 1989 Key Employee Stock Option Plan (filed as Exhibit 4.4 to the Company's Registration Statement on Form S-8, Registration Number 333-20043 and incorporated herein by reference).
60 10.33 United Dental Care, Inc. 1995 Stock Option Plan (filed as Exhibit 4.5 to the Company's Registration Statement on Form S-8, Registration Number 333-20043 and incorporated herein by reference). 10.34 United Dental Care, Inc. Executive Incentive Plans for 1996 for Mr. Wilcox, Mr. Pape and Dr. Barnett (filed as Exhibit 10.47 to the 1996 Registration Statement and incorporated herein by reference). 10.35 United Dental Care, Inc. Executive Incentive Plans for 1997 for Mr. Wilcox, Mr. Pape and Dr. Barnett. (Incorporated herein by reference.) 10.36 First Amendment to Revolving Credit Agreement (filed as Exhibit 10.01 to the third quarter Form 10-Q and incorporated herein by reference). 10.37* Stock Option Agreement dated as of August 15, 1997 between United Dental Care, Inc. and William H. Wilcox. 10.38* Employment Agreement dated as of November 1, 1997 between United Dental Care, Inc. and John W. McCarty. 10.39* Stock Option Agreement dated as of November 1, 1997 between United Dental Care, Inc. and John W. McCarty. 10.40* Stock Option Agreement dated as of December 17, 1997 between United Dental Care, Inc. and Jack R. Anderson. 10.41* Stock Option Agreement dated as of December 17, 1997 between United Dental Care, Inc. and George E. Bello. 10.42* Stock Option Agreement dated as of December 17, 1997 between United Dental Care, Inc. and Jamed E. Buncher. 10.43* Stock Option Agreement dated as of December 17, 1997 between United Dental Care, Inc. and Robert J. Nettinga. 10.44* Stock Option Agreement dated as of December 17, 1997 between United Dental Care, Inc. and Donald E. Steen. 10.45* United Dental Care, Inc. Executive Incentive Plans for 1998. 10.46* Family Dentist Agreement dated as of December 31, 1997 between United Dental Care of Arizona, Inc. and Associated Dental Care Providers, P.C., an Arizona professional corporation. 10.47* Second Amendment to Revolving Credit Agreement dated February 20, 1998. 10.48 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 16, 1998 and incorporated herein by reference). 10.49* First Amendment dated March 10, 1997 to the Employment Agreement of November 10, 1997 between United Dental Care, Inc. and John W. McCarty. 10.50* First Amendment dated March 10, 1997 to the Employment Agreement of June 1, 1996 between United Dental Care, Inc. and Peter R. Barnett, DMD. 11.1* Statement Regarding Computation of Per Share Earnings. 21.1* List of Subsidiaries of Registrant. 23.1* Consent of PricewaterhouseCoopers LLP. 27.1* Financial Data Schedule. 99.2* Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 1997, 1996 and 1995. - ---------------------- * Filed herewith.
EX-10.37 2 STOCK OPTION AGREEMENT - WILLIAM H. WILCOX 1 EXHIBIT 10.37 UNITED DENTAL CARE, INC. STOCK OPTION AGREEMENT - ------------------------------------------------------------------------------- THIS STOCK OPTION AGREEMENT ("Agreement") made as of August 15, 1997 between United Dental Care, Inc. (the "Company"), a Delaware corporation, and William H. Wilcox ("Optionee"), an employee of the Company. WHEREAS, the Compensation Committee of the Board of Directors of the Company (the "Committee") has authorized a stock option plan under its 1995 Stock Option Plan (the "Plan") to the Optionee on the terms and conditions set forth below; NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereto agree as follows: 1. Grant of Option. The Company hereby grants to the Optionee a stock option (the "Option") to purchase, subject to and upon the terms and conditions hereinafter set forth 240,000 shares of the Common Stock, $.10 par value, of the Company. The date of this Agreement is the date of the grant of this Option. 2. Purchase Price. Subject to Section 10 hereof, the purchase price of the Common Stock subject to the Option shall be $17.60 per share (the "Option Price"). 3. Time to Exercise. This Option shall be exercisable in whole or in part at any time on or after August 15, 2006. In addition, the exercisability of this Option shall be accelerated in the manner and subject to the conditions set forth below: Options for 40,000 shares shall be accelerated and become immediately exercisable in whole or in part when earnings per share for the Company (as reported on audited consolidated financial statements) for a calendar year first equal or exceed $1.32; Options for 40,000 shares shall be accelerated and become immediately exercisable in whole or in part when earnings per share for the Company (as reported on audited consolidated financial statements) for a calendar year first equal or exceed $1.52; Options for 40,000 shares shall be accelerated and become immediately exercisable in whole or in part when earnings per share for the Company (as reported on audited consolidated financial statements) for a calendar year first equal or exceed $1.75; 2 EXHIBIT 10.37 Options for 40,000 shares shall be accelerated and become immediately exercisable in whole or in part when earnings per share for the Company (as reported on audited consolidated financial statements) for a calendar year first equal or exceed $2.00; Options for 40,000 shares shall be accelerated and become immediately exercisable in whole or in part when earnings per share for the Company (as reported on audited consolidated financial statements) for a calendar year first equal or exceed $2.30; and Options for 40,000 shares shall be accelerated and become immediately exercisable in whole or in part when earnings per share for the Company (as reported on audited consolidated financial statements) for a calendar year first equal or exceed $2.65. Only one installment may be accelerated with respect to any one calendar year. The foregoing installments shall vest sequentially and once vested shall remain vested irrespective of the financial performance of the Company in future years. The date of the acceleration of the exercisability of any installment shall be the date that the audited financial statements for such respective year are delivered to the Company. The calendar years with respect to which such vesting acceleration provisions shall apply shall be the calendar year ended December 31, 1997 and the following calendar years. To the extent not exercised, accelerated installments shall accumulate and be exercisable, in whole or in part, in any subsequent period. Anything in this Agreement to the contrary notwithstanding, this Option shall terminate and no part of the Option may be exercised after 5:00 p.m. on August 15, 2007. Subject to Plan. This Option and the exercise hereof is subject to the terms and conditions of the Plan, now or hereinafter in effect, which is incorporated herein by reference and made a part hereof, but the terms of the Plan shall not be considered an enlargement of any benefits under this Agreement. Term. (a) If the Optionee voluntarily terminates his employment with the Company or any of its subsidiaries at any time without the consent of the Company (of which the Committee shall be the sole judge), or if the Optionee shall have his employment involuntarily terminated by the Company or its subsidiaries for any reason involving a breach of faith or loyalty to such Company, this option shall terminate immediately as to any unexercised portion on the effective date of termination. (b) If (1) the Optionee voluntarily terminates his employment with the Company and its subsidiaries with the consent of the Company (of which the Committee shall be the sole judge), (2) the Optionee shall have his employment involuntarily terminated by the Company and its subsidiaries for any reason, including disability, not involving a breach of faith or loyalty to such Company, or (3) the Optionee retires from the Company and its 3 EXHIBIT 10.37 subsidiaries, then the Optionee shall have the right for 30 days after termination to exercise this option for the number of shares, or any portion thereof, then exercisable pursuant to Section 3 above. (c) In the event of the death of the Optionee during any period in which he was entitled to exercise this option, this option may be exercised to the extent that the Optionee was entitled to do so on the date of his death, in whole or in part, at any time within twelve (12) months from the date of death of the Optionee or within the unexpired term of this option, whichever is shorter, by the person to whom the Employee's rights under this option shall pass by the Employee's will or by the laws of descent and distribution, whichever is applicable. During the lifetime of the Optionee, the option may be exercised only by the Optionee. 6. Restrictions on Exercise. The Option may not be exercised and no certificates representing shares subject to such Option shall be delivered if any requisite approval or consent of any governmental authority of any kind having jurisdiction over the exercise of Options shall not have been secured. The Option may only be exercised with respect to full shares and not for any fractional shares. 7. Manner of Exercise. Subject to such administrative regulations as the Committee administering the Plan may from time to time adopt, the Optionee shall exercise the option by giving written notice to the Company of the number of shares being purchased and the Option Price to be paid therefor accompanied by the following: (a) full payment in cash of the Option Price; provided, however, that in lieu of cash an Optionee may, upon approval by the Committee, exercise this Option by tendering to the Company shares of the Common Stock of the Company owned by him having a fair market value equal to the cash Option Price, or, by a combination of both cash and stock; (b) an undertaking to furnish or execute such documents as the Company in its discretion shall deem necessary (1) to evidence the exercise, in whole or in part, of the Option evidenced by this Agreement, (2) to determine whether registration is then required under the Securities Act of 1933, as then in effect, under (3) to comply with or satisfy the requirements of the Securities Act of 1933, or any other law, as then in effect and (4) to notify the Company in writing of any disposition made of any shares issued pursuant to the exercise of the Option evidenced by this Agreement within a period of thirty (30) days after the day of the transfer of any such shares by the Optionee. 8. Non-Assignability. This Option is not assignable or transferable by Optionee except by will or by the laws of descent and distribution. 9. Rights as Shareholder. The Optionee shall have no rights as a shareholder with respect to any shares covered by the Option evidenced by this Agreement until the issuance of one or more certificates to him/her for such shares upon due exercise of the Option. Except as provided in Section 10, no adjustment shall be made for dividends or other rights for which the record date is prior to the issuance of certificates. 4 EXHIBIT 10.37 10. Capital Adjustments. The number of shares of Common Stock covered by the unexercised portion of the Option evidenced by this Agreement, and in the Option Price thereof, shall be subject to such adjustment as appropriate or necessary to reflect any stock dividend, stock split, reverse stock split, share combination, exchange of shares, recapitalization, reclassification, merger, consolidation, separation, reorganization, liquidation or the like of or by the Company, so that the rights of the holder hereof shall remain proportionate to the rights held hereunder immediately prior to such event. 11. Acceleration Upon Change In Control. In the event of a Change In Control (as defined below) of the Company, then the holder of the options evidenced by this Agreement shall have the right, immediately prior to the consummation of such transaction constituting the Change In Control, to exercise such options, to the extent not theretofore exercised, without regard to any of the requirements as to the time periods and installments of exercisability set forth in this Agreement if (and only if) such options have not expired or otherwise been terminated prior to such vesting and the date of such transaction. Notwithstanding the foregoing, such acceleration of exercisability shall not apply if at least one-half of the board of directors of the acquiring or surviving corporation (or a parent corporation thereof) immediately after such Change in Control transaction consists of individuals who were members of the board of directors of the Company immediately prior to such transaction and such surviving or acquiring corporation agrees to assume such options in connection with such transaction. For the purposes of this section, a "Change In Control" shall mean: (i) a change of stock ownership of UDC of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A promulgated under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") and any successor Item of a similar nature; or (ii) the acquisition of beneficial ownership, directly or indirectly, by any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) of securities of UDC representing 25% or more of the combined voting power of UDC's then outstanding securities; or (iii) a change during any period of two consecutive years of a majority of the members of the board of directors of UDC for any reason, unless the election or the nomination for election by UDC's shareholders of each director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. Notwithstanding the foregoing, no Change of Control shall be deemed to have occurred in connection with any merger or similar transaction to which UDC is a party if at least one-half of the members of the board of directors of the ultimate parent corporation of the surviving corporate group consists of persons who were members of UDC's board on the date hereof or persons who were elected or nominated for election by such persons. In addition to the foregoing, in the event a Change In Control transaction occurs and the options evidenced by this Agreement become subject to such acceleration of exercisability but the holder of such options elects not to exercise such options, all such options shall terminate upon consummation of such Change In Control transaction. 5 EXHIBIT 10.37 Notwithstanding the above, the terms of the Employment Agreement between the Optionee and the Company dated May 13, 1996 (the "Employment Agreement") shall take precedence over the terms hereof and, specifically, the vesting of this Option shall be further subject to the provisions of Section 9 of the Employment Agreement which are incorporated herein by reference. Investment Purpose. This Option is granted on the condition that the purchases of Common Stock thereunder shall be for investment purposes, and not with a view to resale or distribution except that in the event the Common Stock subject to such Option is registered under the Securities Act of 1933, as amended, or in the event a resale of such stock without such registration would otherwise be permissible such condition shall be inoperative if in the opinion of counsel for the Company such condition is not required under the Securities Act of 1933 or regulation, or rule of any governmental agency. 13. Law Governing. This Agreement is intended to be performed in the State of Texas and shall be construed and enforced in accordance with and governed by the laws of the State of Texas. 14. Binding Effect. This Agreement shall insure to the benefit of and be binding upon the parties hereto and their personal representatives, successors, heirs, and assigns. IN WITNESS WHERE OF, the Company has caused this Agreement to be signed by its duly authorized officers and the Optionee has duly signed this Agreement on the day and year first above written. William H. Wilcox ------------------------ Optionee UNITED DENTAL CARE, INC. Jack R. Anderson ------------------------ Jack R. Anderson Chairman of the Board EX-10.38 3 EMPLOYMENT AGREEMENT - JOHN W. MCCARTY 1 EXHIBIT 10.38 EMPLOYMENT AGREEMENT This Employment Agreement is entered into on November 10, 1997 by and between United Dental Care, Inc., a Delaware corporation, (hereinafter referred to as "UDC"), and John W. McCarty, (hereinafter referred to as "Employee"), with reference to the following facts: RECITALS UDC desires to employ employee in the capacity and on the terms and conditions hereinafter set forth and employee is willing to serve is such capacity and on such terms and conditions. NOW, THEREFORE, it is hereby agreed to as follows: 1. EMPLOYMENT. UDC hereby employs Employee as Senior Vice President and Chief Financial Officer of UDC. References herein to UDC shall be deemed to include references to any and all subsidiaries. 2. DUTIES. During his employment, Employee shall devote substantially all of his working time, energies and skills to the benefit of UDC's business. Employee agrees to serve UDC diligently and to the best of his ability. In his capacity as CFO, Employee shall report to the Chief Executive Officer of UDC and shall have such duties, responsibilities, and authority commensurate with his position as CFO and as typically identified with such position. 3. COMPENSATION. Employee's compensation under this Agreement shall be as follows: (a) BASE SALARY. UDC shall pay Employee a base salary ("Base Salary") of $175,000 per year. In addition, the Board of Directors of UDC shall, in good faith, consider granting increases in such salary based upon such factors as Employee's performance and the growth and/or profitability of UDC, but it shall have no obligation to grant any such increases in compensation. Such Base Salary shall be payable at such times and in such installments as other UDC executives are paid. All payments shall be subject to the deduction of payroll taxes and similar assessments as required by law. (b) BONUS. In addition to the Base Salary, Employee shall be eligible to receive bonus compensation in such amounts and at such times as the Compensation Committee of UDC shall, from time to time, determine. 4. EXPENSES AND BENEFITS. Employee is authorized to incur reasonable expenses in connection with the business of UDC including expenses for entertainment, travel and similar matters. UDC will reimburse Employee for such expenses upon presentation by Employee of such accounts and records as UDC shall from time to time require. UDC also agrees to provide Employee with the following benefits: 2 EXHIBIT 10.38 (a) INSURANCE. Major medical health insurance and disability insurance as currently in place. (b) EMPLOYEE BENEFIT PLANS. Participation in any other employee benefit plans now existing or hereafter adopted by UDC for its employees. (c) OTHER. Such items and benefits as UDC shall, from time to time, consider necessary or appropriate to assist Employee in the performance of his duties. (d) VACATIONS. Employee shall be entitled (in addition to the usual public holidays) to a paid vacation for a period in each calendar year of three weeks, to be taken at such times as may be approved by UDC. 5. TERM. The term of this Agreement shall be from the date of this Agreement to December 31, 1998; provided, however, that either party may terminate this Agreement at any time upon at least 60 days prior written notice. In the event of such termination by UDC, Employee shall be entitled to severance pay based on his Base Salary at the time of termination, plus a bonus (payable monthly on a pro rata basis) at a rate equal to one year of bonus based on the current year expected level as provided in the letter agreement dated October 22, 1997, plus a pro rata bonus for the current year beginning January 1, 1998, up to the latter of the notice of termination or until December 31, 1998, whichever is later. Such severance pay shall be payable in monthly installments and UDC shall continue the benefits set forth is Sections 4(a) and (b) for the period during which such severance payments are to be made. In addition, this Agreement shall terminate as provided for in Section 7 or upon the death of Employee. 6. DISABILITY. (a) In the event that Employee becomes Permanently Disabled (as hereinafter defined) during the term of this Agreement, Employee shall continue in the employ of UDC but his compensation hereunder shall be reduced to three-fourths of the Base Salary then in effect as set forth in Section 3(a) hereof, commencing upon the determination of Employee's Permanent Disability and continuing thereafter until the first to occur of (i) 36 months or (ii) the death of Employee; and during such period of time, Employee shall not be entitled to payment of expenses or benefits specified in Section 4 hereof (except for reimbursement of expenses incurred by Employee prior to becoming Permanently Disabled), except that UDC shall continue to provide Employee with the insurance benefits specified in Section 4(a) hereof. The obligation of UDC for continuation of three-fourths of Employee's Base Salary shall be net of payments to Employee from the disability insurance referred to in Section 4(a) hereof. (b) DEFINITION OF DISABILITY. For purposes of the Agreement, the terms "Permanent Disability" or "Permanently Disabled" shall mean three months of substantially continuous disability. Disability shall be deemed "substantially continuous" if, as a practical matter, Employee, by reason of his mental or physical health, is unable to sustain reasonably long periods of substantial performance of his duties. Frequent long illnesses, though different from the preceding illness and though separated by relatively short periods of performance, shall be deemed to be "substantially continuous." Disability shall be determined in good faith by the Board of Directors, whose decision shall be final and binding upon Employee. Employee hereby consents to medical examinations by such physicians and medical consultant as UDC shall, from time to time, require. 3 EXHIBIT 10.38 7. TERMINATION BY UDC. UDC shall have the right to terminate Employee's employment as hereinafter provided. (a) TERMINATION BY UDC FOR CAUSE. UDC shall have the right to terminate Employee's employment under this Agreement for Cause by an affirmative vote to so terminate by a majority of all of the members of UDC's Board of Directors, in which event, no compensation shall be paid or other benefits furnished to Employee after termination for Cause. Termination for Cause shall be effective immediately upon notice sent or given to Employee. (b) DEFINITION OF CAUSE. For purposes of this Agreement, the term "Cause" shall mean and be strictly limited to: (i) conviction of a crime constituting a felony under state or federal law; (ii) commission of any material act of dishonesty against UDC; or (iii) willful and material breach of this Agreement by Employee. 8. CHANGE OF CONTROL. For purposes of Section 9 of this Agreement, "Change of Control" shall mean: (i) a change of stock ownership of UDC of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and any successor Item of a similar nature; or (ii) the acquisition of beneficial ownership, directly or indirectly, by any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) of securities of UDC representing 25% or more of the combined voting power of UDC's then outstanding securities; or (iii) a change during any period of two consecutive years of a majority of the members of the Board of Directors of UDC for any reason, unless the election, or the nomination for election by UDC's shareholders, of each director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. Notwithstanding the foregoing, no Change of Control shall be deemed to have occurred in connection with any merger or similar transaction to which UDC is a party if at least one-half of the members of the Board of Directors of the ultimate parent corporation of the surviving corporate group consist of persons who were member of UDC's Board or on the date hereof or persons elected or nominated for election by such persons. (a) GOOD REASON. In the event of a Change of Control, Employee's Employment may be terminated by the Employee for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i)the assignment to the Employee of any duties which reflect a material diminution of the employee's position, authority, duties or responsibilities. Whether or not a material diminution of the employee's position, authority, duties or responsibilities has occurred will be determined by the Executive Committee of UDC which is in place prior the "Change of Control." Employee hereby agrees to accept and abide by that determination. 4 (ii)any failure by UDC to comply with any of the provisions of Section 3 of this Agreement, other than an isolated insubstantial and inadvertent failure not occurring in bad faith and which is remedied by UDC promptly after receipt of notice thereof given by the Employee. (b) UDC will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of UDC to assume expressly and agree to perform this Agreement in the same manner and to the same extent that UDC would be required to perform if no such succession had taken place and honor existing option agreements. 9. STOCK OPTIONS. In the event that UDC elects to terminate this Agreement pursuant to Section 5 or in the event of a Change of Control of UDC the Employee's employment is terminated by the Employee for Good Reason (or in the event UDC breaches this Agreement by termination of Employee without the notice required under Section 5 or without Cause under Section 7), then UDC shall amend at least one half of all UDC stock options held by him and all restricted stock awards made to him (whether issued subject to forfeiture or to be issued when and if they become vested) so as to (a) cause to vest, immediately prior to the date of such Change in Control or termination of employment, all such then unvested stock options and restricted stock awards, and (b) provide Employee 90 days to exercise such options (or such greater period as may have been provided in the terms of such options). The Compensation Committee of UDC, in place prior to the "Change in Control," will have the ability to cause more than one-half of these options to vest. Such determination will be made at the sole discretion of the Compensation Committee. In addition, UDC will, consistent with all applicable laws and regulations, use its reasonable efforts to assist Employee in securing independent third party financing of the funds required by employee to exercise all vested but unexercised stock options held by him. If such financing is not so obtained by Employee, then UDC shall loan to Employee the funds required by Employee to exercise such options, which loan shall be repayable one year from the date made, will be secured by UDC's common stock purchased upon exercise of such options and will bear interest at the prime rate (floating) of Bank One - Texas, N.A. To the extent that UDC refuses or is unable to comply with the provisions of Section 9(a) hereof, the time period contemplated in Section 9(b) shall commence on the date UDC complies with the provision of said Section 9(a). 10. CERTAIN REDUCTION OF PAYMENTS BY UDC. (a) Notwithstanding anything to the contrary in Sections 8 and 9 of this Agreement, in no event shall a Stock Option become immediately exercisable or the restrictions relating to Restricted Stock terminate upon the Employee's Termination if such acceleration would (i) cause any payment made to the Employee, whether pursuant to the terms of this Agreement or otherwise (a "Payment") to constitute an "Excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), or (ii) disqualify the transaction constituting the Change of Control from being accounted for as a "pooling of interests" within the meaning of APB No. 16, which would qualify 5 EXHIBIT 10.38 for such accounting treatment in the absence of such acceleration (the "Disqualification"). In the event acceleration of any Option Rights would cause any Payment to constitute an excess parachute payment, or would cause a Disqualification, the Compensation Committee of the UDC Board of Directors shall select the Stock Options which shall remain unexercisable so that no Payment shall constitute an excess parachute payment and/or no Disqualification shall occur. Any Stock Options which remain unexercisable upon the Employee's Termination by reason of this Section 10(a) shall become exercisable as set forth in Section 10(b) below. (b) In the event that any Stock Option which is outstanding on the Employee's Termination has not become exercisable because of the application of this Section 10, such Stock Option will become exercisable in such manner and at such times as the Stock Option would have become exercisable if the Employee had not terminated employment, and the portion of any such Stock Option which becomes exercisable pursuant to this Section 10(b) shall remain exercisable until the earlier of the date which is 90 days following the date on which the Stock Option first becomes exercisable or the original expiration date of the Stock Option. 11. NON-COMPETITION AND CONFIDENTIALITY. (a) NON-COMPETITION. Employee recognizes and understands that in performing the responsibilities of his employment, he will occupy a position of fiduciary trust and confidence, pursuant to which he will develop and acquire experience and knowledge with respect to UDC's business. It is the expressed intent and agreement of Employee and UDC that such knowledge and experience shall be used exclusively in the furtherance of the interests of UDC and not in any manner which would be detrimental to UDC's interests. Employee further understands and agrees that UDC conducts its business within a specialized market segment throughout the United States, and that it would be detrimental to the interests of UDC if Employee used the knowledge and experience which he currently possesses or which he acquires pursuant to his employment hereunder for the purpose of directly or indirectly competing with UDC, or for the purpose of aiding other persons or entities in so competing with UDC, anywhere in the United States. Employee therefore agrees that so long as he is employed by UDC and for a period of the greater of (i) one year from the date of notification by employee of termination (ii) the time Employee is receiving a salary or severance payments or (iii) the time granted under Section 9 to Employee to exercise stock options if options are exercised or (iv) such time as UDC is loaning money or has a loan outstanding to Employee, unless Employee first secures the written consent of UDC, Employee will not directly or indirectly invest, engage or participate in or become employed by any entity in direct or indirect competition with UDC's business (which shall include the ownership and/or operation of managed dental plans) anywhere in the United States, or contract to do so. These non-competition provisions are not to be construed to prohibit Employee from being employed in the health care industry, but rather to permit him to be so employed so long as such employment does not involve Employee's direct or indirect participation in a business which is the same or similar to UDC's business (as defined above). In the event that the provisions of this Section 11 should ever be deemed to exceed the time or geographic limitations permitted by applicable laws, then such provisions shall be reformed to the maximum time or geographic limitations permitted by applicable laws. 6 EXHIBIT 10.38 (b) REMEDIES. Employee acknowledges that the restrictions contained in Section 10(a), in view of the nature of the business in which UDC is engaged, are reasonable and necessary to protect the legitimate interests of UDC. Employee understands that the remedies at law for his violations of any of the covenants or provisions of Section 10(a) will be inadequate, that such violation will cause irreparable injury within a short period of time, and that UDC shall be entitled to preliminary injunctive relief against such violation. Such injunctive relief shall be in addition to, and in no way in limitation of, any and all other remedies UDC shall have in law and equity for the enforcement of those covenants and provisions. 12. General Provisions. (a) NOTICES. Any notice to be given hereunder by either party to the other may be effected by personal delivery, in writing or by mail, registered or certified, postage prepaid with return receipt requested. Mailed notices shall be addressed to the parties at the addresses set forth below, but each party may change his or its address by written notice in accordance with this Section 12(a). Notice deleted personally shall be deemed communicated as of the actual receipt; mailed notices shall be deemed communicated as of three days after mailing. If to Employee: John W. McCarty 6215 Twin Oaks Dallas, Texas 75240 If to UDC: 13601 Preston Road, Suite 500 East Dallas, Texas 75240 Attention: William H. Wilcox, Chief Executive Officer (b) PARTIAL INVALIDITY. If any provision in this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions shall, nevertheless, continue in full force and without being impaired or invalidated in any way. (c) GOVERNING AGREEMENT. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. (d) ATTORNEYS' FEES AND COSTS. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which he or it may be entitled. (e) ASSIGNMENT. This Agreement shall inure to the benefit of and bind the parties hereto and their respective legal representatives, successors and assigns. (f) ENTIRE AGREEMENT. This Agreement supersedes any and all other Agreements, either oral or in writing, between the parties hereto with respect to employment of Employee by UDC and contains all of the covenants and agreements between the parties with respect to such employment. Each party to this Agreement acknowledges that no representations, inducements or agreements, oral or otherwise, have been embodied herein, and no other agreement, statement or promise not contained in this Agreement shall be valid or binding. Any modification of this Agreement will be effective only if it is in writing signed by the party to be charged. 7 EXHIBIT 10.38 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. UNITED DENTAL CARE, INC. By: William H. Wilcox --------------------------- William H. Wilcox, Chief Executive Officer EMPLOYEE: John W. McCarty --------------------------- John W. McCarty EX-10.39 4 STOCK OPTION AGREEMENT - JOHN W. MCCARTY 1 EXHIBIT 10.39 UNITED DENTAL CARE, INC. STOCK OPTION AGREEMENT THIS STOCK OPTION AGREEMENT ("Agreement") made as of November 1, 1997 between United Dental Care, Inc. (the "Company"), a Delaware corporation, and John W. McCarty ("Optionee"), an employee of the Company. WHEREAS, the Compensation Committee of the Board of Directors of the Company has authorized a stock option plan under its 1995 Stock Option Plan (the "Plan") to the Optionee in the terms and conditions set forth below; NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereto agree as follows: 1. Grant of Option. The Company hereby grants to the Optionee a stock option (the "Option") to purchase, subject to and upon the terms and conditions hereinafter set forth, 75,000 shares of the Common Stock, $.10 par value, of the Company. The date of this Agreement is the date of the grant of this Option. 2. Purchase Price. Subject to Section 10 hereof, the purchase price of the Common Stock subject to the Option shall be $13.625 per share (the "Option Price"). 3. Time to Exercise. This Option shall be exercisable in installments as follows: (a) From and after November 1, 1999 - shares 15,000 shares (b) From and after November 1, 2000 - shares 15,000 shares (c) From and after November 1, 2001 - shares 15,000 shares (d) From and after November 1, 2002 - shares 15,000 shares (e) From and after November 1, 2003 - shares 15,000 shares To the extent not exercised, installments shall accumulate and be exercisable, in whole or in part, in any subsequent period. Anything in this Agreement to the contrary notwithstanding, this Option shall terminate and no part of the Option may be exercised after 5:00 p.m. on November 1, 2007. 4. Subject to Plan. This Option and the exercise hereof is subject to the terms and conditions of the Plan, now or hereinafter in effect, which is incorporated herein by reference and made a part hereof, but the terms of the Plan shall not be considered an enlargement of any benefits under this Agreement. 2 EXHIBIT 10.39 5. Term. (a) If the Optionee voluntarily terminates his employment with the Company or any of its subsidiaries at any time without the consent of the Company (of which the Committee shall be the sole judge), or if the Optionee shall have his employment involuntarily terminated by the Company or its subsidiaries for any reason involving a breach of faith or loyalty to such Company, this option shall terminate immediately as to any unexercised portion on the effective date of termination. (b) If (1) the Optionee voluntarily terminates his employment with the Company and its subsidiaries with the consent of the Company (of which the Committee shall be the sole judge), (2) the Optionee shall have his employment involuntarily terminated by the Company and its subsidiaries for any reason, including disability, not involving a breach of faith or loyalty to such Company, or (3) the Optionee retires from the Company and its subsidiaries, then the Optionee shall have the right for 30 days after termination to exercise this option for the number of shares, or any portion thereof, then exercisable pursuant to Section 3 above. (c) In the event of the death of the Optionee during any period in which he was entitled to exercise this option, this option may be exercised to the extent that the Optionee was entitled to exercise this Option on the date of his death, in whole or in part, at any time within twelve (12) months from the date of death of the Optionee or within the unexpired term of this option, whichever is shorter, by the person to whom the Employee's rights under this option shall pass by the Employee's will or by the laws of descent and distribution, whichever is applicable. During the lifetime of the Optionee, the option may be exercised only by the Optionee. 6. Restrictions on Exercise. The Option may not be exercised and no certificates representing shares subject to such Option shall be delivered if any requisite approval or consent of any governmental authority of any kind having jurisdiction over the exercise of Options shall not have been secured. The Option may only be exercised with respect to full shares and not for any fractional shares. 7. Manner of Exercise. Subject to such administrative regulations as the Committee administering the Plan may from time to time adopt, the Optionee shall exercise the option by giving written notice to the Company of the number of shares being purchased and the Option Price to be paid therefor accompanied by the following: 3 EXHIBIT 10.39 (a) full payment in cash of the Option Price; provided, however that in lieu of cash an Optionee may, upon approval by the Committee exercise his Option by tendering to the Company shares of the Common Stock of the Company owned by him having a fair market value equal to the cash Option Price, or, by a combination of both cash and stock; (b) an undertaking to furnish or execute such documents as the Company in its discretion shall deem necessary (1) to evidence the exercise, in whole or in part, of the Option evidenced by this Agreement, (2) to determine whether registration is then required under the Securities Act of 1933, as then in effect, under (3) to comply with or satisfy the requirements of the Securities Act of 1933, or any other law, as then in effect and (4) to notify the Company in writing of any disposition made of any shares issued pursuant to the exercise of the Option evidenced by this Agreement within a period of thirty (30) days after the day of the transfer of any such shares by the Optionee. 8. Non-Assignability. This Option is not assignable or transferable by Optionee except by will or by the laws of descent and distribution. 9. Rights as Shareholder. The Optionee shall have no rights as a shareholder with respect to any shares covered by the Option evidenced by this Agreement until the issuance of one or more certificates to him for such shares upon due exercise of the Option. Except as provided in Section 10, no adjustment shall be made for dividends or other rights for which the record date is prior to the issuance of certificates. 10. Capital Adjustments. The number of shares of Common Stock covered by the unexercised portion of the Option evidenced by this Agreement, and in the Option Price thereof, shall be subject to such adjustment as appropriate or necessary to reflect any stock dividend, stock split, reverse stock split, share combination, exchange of shares, recapitalization, reclassification, merger, consolidation, separation, reorganization, liquidation or the like of or by the Company, so that the rights of the holder hereof shall remain proportionate to the rights held hereunder immediately prior to such event. 11. Acceleration Upon Change In Control. In the event of a Change In Control (as defined below) of the Company, then the holder of the options evidenced by this Agreement shall have the right, immediately prior to the consummation of such transaction constituting the Change In Control, to exercise such options, to the extent not theretofore exercised, without regard to any of the requirements as to the time periods and installments of exercisability set forth in this Agreement if (and only if) such options have not expired or otherwise been terminated prior to such vesting and the date of such transaction. Notwithstanding the foregoing, such acceleration of exercisability shall not apply if a majority of the board of directors of the acquiring or surviving corporation (or a parent corporation thereof) immediately after such Change in Control transaction consists of individuals who constitute a majority of the board of directors of the Company immediately prior to such transaction and such surviving or acquiring corporation agrees to assume such options in connection with such transaction. 4 EXHIBIT 10.39 For the purposes of this section, a "Change In Control" shall constitute (a) a sale of all or substantially all of the assets of the Company, (b) a merger or consolidation involving the Company in which the shareholders of the surviving corporation (or the parent corporation of the surviving corporation) and their proportionate interests in the surviving corporation (or such parent corporation) after such merger or consolidation are not substantially identical to the shareholders of the Company and their proportionate interests in the Company immediately prior to such merger or consolidation, or (c) a transaction in which any person or entity acquires from the shareholders of the Company securities of the Company representing more than fifty percent (50%) of the total combined voting power of all classes of outstanding capital stock of the Company. In addition to the foregoing, in the event a Change In Control transaction occurs and the options evidenced by this Agreement become subject to such acceleration of exercisability but the holder of such options elects not to exercise such options, all such options shall terminate upon consummation of such Change In Control transaction. 12. Investment Purpose. This Option is granted on the condition that the purchases of Common Stock thereunder shall be for investment purposes, and not with a view to resale or distribution except that in the event the Common Stock subject to such Option is registered under the Securities Act of 1933, as amended, or in the event a resale of such stock without such registration would otherwise be permissible such condition shall be inoperative if in the opinion of counsel for the Company such condition is not required under the Securities Act of 1933 or regulation, or rule of any governmental agency. 13. Law Governing. This Agreement is intended to be performed in the State of Texas and shall be construed and enforced in accordance with and governed by the laws of the State of Texas. 14. Binding Effect. This Agreement shall insure to the benefit of and be binding upon the parties hereto and their personal representatives, successors, heirs, and assigns. IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its duly authorized officers and the Optionee has duly signed this Agreement on the day and year first above written. John W. McCarty ---------------------------- OPTIONEE UNITED DENTAL CARE, INC. William H. Wilcox ---------------------------- William H. Wilcox Chief Executive Officer EX-10.40 5 STOCK OPTION AGREEMENT - JACK R. ANDERSON 1 EXHIBIT 10.40 (CONFORMED COPY) UNITED DENTAL CARE, INC. STOCK OPTION AGREEMENT THIS STOCK OPTION AGREEMENT ("Agreement") made as of December 17, 1997 and amended as of March 26, 1998 between United Dental Care, Inc. (the "Company"), a Delaware corporation, and Jack R. Anderson ("Optionee"), a director of the Company. NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereto agree as follows: 1. Grant of Option. The Company hereby grants to the Optionee a stock option (the "Option") to purchase, subject to and upon the terms and conditions hereinafter set forth, 12,000 shares of the Common Stock, $.10 par value, of the Company. The date of this Agreement is the date of the grant of this Option. 2. Purchase Price. Subject to Section 9 hereof, the purchase price of the Common Stock subject to the Option shall be $11.25 per share (the "Option Price"). 3. Time to Exercise. This Option shall vest and be exercisable in installments as follows: (a) Upon the re-election of the Optionee as a Director of the Company at its Annual Meeting held in 1999 3,000 shares (b) Upon the re-election of the Optionee as a Director of the Company at its Annual Meeting held in 2000 3,000 shares (c) Upon the re-election of the Optionee as a Director of the Company at its Annual Meeting held in 2001 3,000 shares (d) Upon the e-election of the Optionee as a Director of the Company at its Annual Meeting held on 2002 3,000 shares To the extent not exercised, installments shall accumulate and be exercisable, in whole or in part, in any subsequent period. Anything in this Agreement to the contrary notwithstanding, this Option shall terminate and no part of the Option may be exercised after 5:00 p.m. on December 17, 2007. 4. Term. (a) If the Optionee shall die while he is a director of the Company holding the Option granted under Section 1 hereof, the Executor or Administrator of the Optionee's estate or the person or persons acquiring the Option upon the death of the 2 EXHIBIT 10.40 Optionee may exercise such Option (to the extent that the Optionee shall have been entitled to do so on the date of his death) at any time within one (1) year after the Optionee's death, subject to the other terms and conditions of the Plan and this Agreement, and any remaining portion of such Option not exercisable by the Optionee on the date of his death shall terminate immediately and cease to exist; provided, however, that no Option shall be exercisable after the time set forth in the last sentence of Section 3 hereof. (b) If the Optionee shall hereafter cease for any reason (other than death, which shall be governed by Section 4(a) hereof) to be a director of the Company, then the Option shall terminate on the effective date of such termination as to any unexercised portion thereof. 5. Restrictions on Exercise. The Option may not be exercised and no certificates representing shares subject to such Option shall be delivered if any requisite approval or consent of any governmental authority of any kind having jurisdiction over the exercise of Options shall not have been secured. The Option may only be exercised with respect to full shares and not for any fractional shares. 6. Manner of Exercise. Subject to such administrative regulations as the Committee administering the Plan may from time to time adopt, the Optionee shall exercise the option by giving written notice to the Company of the number of shares being purchased and the Option Price to be paid therefor accompanied by the following: (a) full payment in cash of the Option Price; provided, however that in lieu of cash an Optionee may, upon approval by the Committee exercise his Option by tendering to the Company shares of the Common Stock of the Company owned by him having a fair market value equal to the cash Option Price, or, by a combination of both cash and stock; (b) an undertaking to furnish or execute such documents as the Company in its discretion shall deem necessary (1) to evidence the exercise, in whole or in part, of the Option evidenced by this Agreement, (2) to determine whether registration is then required under the Securities Act of 1933, as then in effect, under (3) to comply with or satisfy the requirements of the Securities Act of 1933, or any other law, as then in effect and (4) to notify the Company in writing of any disposition made of any shares issued pursuant to the exercise of the Option evidenced by this Agreement within a period of thirty (30) days after the day of the transfer of any such shares by the Optionee. 7. Non-Assignability. This Option is not assignable or transferable by Optionee except by will or by the laws of descent and distribution. 3 EXHIBIT 10.40 8. Rights as Stockholder. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option evidenced by this Agreement until the issuance of one or more certificates to him for such shares upon due exercise of the Option. Except as provided in Section 9, no adjustment shall be made for dividends or other rights for which the record date is prior to the issuance of certificates. 9. Capital Adjustments. The number of shares of Common Stock covered by the unexercised portion of the Option evidenced by this Agreement, and in the Option Price thereof, shall be subject to such adjustment as appropriate or necessary to reflect any stock dividend, stock split, reverse stock split, share combination, exchange of shares, recapitalization, reclassification, merger, consolidation, separation, reorganization, liquidation or the like of or by the Company, so that the rights of the holder hereof shall remain proportionate to the rights held hereunder immediately prior to such event. 10. Acceleration Upon Change In Control. In the event of a Change In Control (as defined below) of the Company, then the holder of the options evidenced by this Agreement shall have the right, immediately prior to the consummation of such transaction constituting the Change In Control, to exercise such options, to the extent not theretofore exercised, without regard to any of the requirements as to the time periods and installments of exercisability set forth in this Agreement if (and only if) such options have not expired or otherwise been terminated prior to such vesting and the date of such transaction. Notwithstanding the foregoing, such acceleration of exercisability shall not apply if a majority of the board of directors of the acquiring or surviving corporation (or a parent corporation thereof) immediately after such Change in Control transaction consists of individuals who constitute a majority of the board of directors of the Company immediately prior to such transaction and such surviving or acquiring corporation agrees to assume such options in connection with such transaction. A Change of Control" means (a) the acquisition by any individual, entity or group (within the meaning of Section 12(d)(3) or 14 (d)(2) of the Exchange Act) (an "Acquiring Person") of beneficial ownership (within the meaning of the rule 13d-e promulgated under the Exchange Act) of 50% or more of either (i) the then outstanding shares of Common Stock of the Corporation (the "Outstanding Corporation common stock") or (ii) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); (b) individuals who, as of the date hereof, constitute the Board (the Incumbent Board) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof, whose election, or nomination for election by the Corporations shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of an Acquiring Person other than the Board; or (c) approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation. 4 EXHIBIT 10.40 In addition to the foregoing, in the event a Change In Control transaction occurs and the options evidenced by this Agreement become subject to such acceleration of exercisability but the holder of such options elects not to exercise such options, all such options shall terminate upon consummation of such Change In Control transaction. 11. Investment Purpose. This Option is granted on the condition that the purchases of Common Stock thereunder shall be for investment purposes, and not with a view to resale or distribution except that in the event the Common Stock subject to such Option is registered under the Securities Act of 1933, as amended, or in the event a resale of such stock without such registration would otherwise be permissible such condition shall be inoperative if in the opinion of counsel for the Company such condition is not required under the Securities Act of 1933 or regulation, or rule of any governmental agency. 12. Law Governing. This Agreement is intended to be performed in the State of Texas and shall be construed and enforced in accordance with and governed by the laws of the State of Texas. 13. Binding Effect. This Agreement shall insure to the benefit of and be binding upon the parties hereto and their personal representatives, successors, heirs, and assigns. 14. Defined Terms. Certain capitalized terms used herein have the meanings as set forth in the Plan. IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its duly authorized officer and the Optionee has duly signed this Agreement on the day and year first above written. Jack R. Anderson ------------------------------------------- OPTIONEE UNITED DENTAL CARE, INC. William H. Wilcox ------------------------------------------- William H. Wilcox Chief Executive Officer EX-10.41 6 STOCK OPTION AGREEMENT - GEORGE E. BELLO 1 EXHIBIT 10.41 (CONFORMED COPY) - -------------------------------------------------------------------------------- UNITED DENTAL CARE, INC. STOCK OPTION AGREEMENT - -------------------------------------------------------------------------------- THIS STOCK OPTION AGREEMENT ("Agreement") made as of December 17, 1997 and amended as of March 26, 1998 between United Dental Care, Inc. (the "Company"), a Delaware corporation, and George E. Bello ("Optionee"), a director of the Company. NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereto agree as follows: 1. Grant of Option. The Company hereby grants to the Optionee a stock option (the "Option") to purchase, subject to and upon the terms and conditions hereinafter set forth, 12,000 shares of the Common Stock, $.10 par value, of the Company. The date of this Agreement is the date of the grant of this Option. 2. Purchase Price. Subject to Section 9 hereof, the purchase price of the Common Stock subject to the Option shall be $11.25 per share (the "Option Price"). 3. Time to Exercise. This Option shall vest and be exercisable in installments as follows: (a) Upon the re-election of the Optionee as a Director of the Company at its Annual Meeting held in 1999 3,000 shares (b) Upon the re-election of the Optionee as a Director of the Company at its Annual Meeting held in 2000 3,000 shares (c) Upon the re-election of the Optionee as a Director of the Company at its Annual Meeting held in 2001 3,000 shares (d) Upon the e-election of the Optionee as a Director of the Company at its Annual Meeting held on 2002 3,000 shares To the extent not exercised, installments shall accumulate and be exercisable, in whole or in part, in any subsequent period. Anything in this Agreement to the contrary notwithstanding, this Option shall terminate and no part of the Option may be exercised after 5:00 p.m. on December 17, 2007. 4. Term. (a) If the Optionee shall die while he is a director of the Company holding the Option granted under Section 1 hereof, the Executor or Administrator of the Optionee's estate or the person or persons acquiring the Option upon the death of the 2 EXHIBIT 10.41 Optionee may exercise such Option (to the extent that the Optionee shall have been entitled to do so on the date of his death) at any time within one (1) year after the Optionee's death, subject to the other terms and conditions of the Plan and this Agreement, and any remaining portion of such Option not exercisable by the Optionee on the date of his death shall terminate immediately and cease to exist; provided, however, that no Option shall be exercisable after the time set forth in the last sentence of Section 3 hereof. (b) If the Optionee shall hereafter cease for any reason (other than death, which shall be governed by Section 4(a) hereof) to be a director of the Company, then the Option shall terminate on the effective date of such termination as to any unexercised portion thereof. 5. Restrictions on Exercise. The Option may not be exercised and no certificates representing shares subject to such Option shall be delivered if any requisite approval or consent of any governmental authority of any kind having jurisdiction over the exercise of Options shall not have been secured. The Option may only be exercised with respect to full shares and not for any fractional shares. 6. Manner of Exercise. Subject to such administrative regulations as the Committee administering the Plan may from time to time adopt, the Optionee shall exercise the option by giving written notice to the Company of the number of shares being purchased and the Option Price to be paid therefor accompanied by the following: (a) full payment in cash of the Option Price; provided, however that in lieu of cash an Optionee may, upon approval by the Committee exercise his Option by tendering to the Company shares of the Common Stock of the Company owned by him having a fair market value equal to the cash Option Price, or, by a combination of both cash and stock; (b) an undertaking to furnish or execute such documents as the Company in its discretion shall deem necessary (1) to evidence the exercise, in whole or in part, of the Option evidenced by this Agreement, (2) to determine whether registration is then required under the Securities Act of 1933, as then in effect, under (3) to comply with or satisfy the requirements of the Securities Act of 1933, or any other law, as then in effect and (4) to notify the Company in writing of any disposition made of any shares issued pursuant to the exercise of the Option evidenced by this Agreement within a period of thirty (30) days after the day of the transfer of any such shares by the Optionee. 7. Non-Assignability. This Option is not assignable or transferable by Optionee except by will or by the laws of descent and distribution. 3 EXHIBIT 10.41 8. Rights as Stockholder. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option evidenced by this Agreement until the issuance of one or more certificates to him for such shares upon due exercise of the Option. Except as provided in Section 9, no adjustment shall be made for dividends or other rights for which the record date is prior to the issuance of certificates. 9. Capital Adjustments. The number of shares of Common Stock covered by the unexercised portion of the Option evidenced by this Agreement, and in the Option Price thereof, shall be subject to such adjustment as appropriate or necessary to reflect any stock dividend, stock split, reverse stock split, share combination, exchange of shares, recapitalization, reclassification, merger, consolidation, separation, reorganization, liquidation or the like of or by the Company, so that the rights of the holder hereof shall remain proportionate to the rights held hereunder immediately prior to such event. 10. Acceleration Upon Change In Control. In the event of a Change In Control (as defined below) of the Company, then the holder of the options evidenced by this Agreement shall have the right, immediately prior to the consummation of such transaction constituting the Change In Control, to exercise such options, to the extent not theretofore exercised, without regard to any of the requirements as to the time periods and installments of exercisability set forth in this Agreement if (and only if) such options have not expired or otherwise been terminated prior to such vesting and the date of such transaction. Notwithstanding the foregoing, such acceleration of exercisability shall not apply if a majority of the board of directors of the acquiring or surviving corporation (or a parent corporation thereof) immediately after such Change in Control transaction consists of individuals who constitute a majority of the board of directors of the Company immediately prior to such transaction and such surviving or acquiring corporation agrees to assume such options in connection with such transaction. A Change of Control" means (a) the acquisition by any individual, entity or group (within the meaning of Section 12(d)(3) or 14 (d)(2) of the Exchange Act) (an "Acquiring Person") of beneficial ownership (within the meaning of the rule 13d-e promulgated under the Exchange Act) of 50% or more of either (i) the then outstanding shares of Common Stock of the Corporation (the "Outstanding Corporation common stock") or (ii) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); (b) individuals who, as of the date hereof, constitute the Board (the Incumbent Board) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof, whose election, or nomination for election by the Corporations shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of an Acquiring Person other than the Board; or (c) approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation. 4 EXHIBIT 10.41 In addition to the foregoing, in the event a Change In Control transaction occurs and the options evidenced by this Agreement become subject to such acceleration of exercisability but the holder of such options elects not to exercise such options, all such options shall terminate upon consummation of such Change In Control transaction. 11. Investment Purpose. This Option is granted on the condition that the purchases of Common Stock thereunder shall be for investment purposes, and not with a view to resale or distribution except that in the event the Common Stock subject to such Option is registered under the Securities Act of 1933, as amended, or in the event a resale of such stock without such registration would otherwise be permissible such condition shall be inoperative if in the opinion of counsel for the Company such condition is not required under the Securities Act of 1933 or regulation, or rule of any governmental agency. 12. Law Governing. This Agreement is intended to be performed in the State of Texas and shall be construed and enforced in accordance with and governed by the laws of the State of Texas. 13. Binding Effect. This Agreement shall insure to the benefit of and be binding upon the parties hereto and their personal representatives, successors, heirs, and assigns. 14. Defined Terms. Certain capitalized terms used herein have the meanings as set forth in the Plan. IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its duly authorized officer and the Optionee has duly signed this Agreement on the day and year first above written. George E. Bello -------------------------------------------- OPTIONEE UNITED DENTAL CARE, INC. William H. Wilcox -------------------------------------------- William H. Wilcox Chief Executive Officer EX-10.42 7 STOCK OPTION AGREEMENT - JAMES E. BUNCHER 1 EXHIBIT 10.42 (CONFORMED COPY) - -------------------------------------------------------------------------------- UNITED DENTAL CARE, INC. STOCK OPTION AGREEMENT - -------------------------------------------------------------------------------- THIS STOCK OPTION AGREEMENT ("Agreement") made as of December 17, 1997 and amended as of March 26, 1998 between United Dental Care, Inc. (the "Company"), a Delaware corporation, and James E. Buncher ("Optionee"), a director of the Company. NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereto agree as follows: 1. Grant of Option. The Company hereby grants to the Optionee a stock option (the "Option") to purchase, subject to and upon the terms and conditions hereinafter set forth, 12,000 shares of the Common Stock, $.10 par value, of the Company. The date of this Agreement is the date of the grant of this Option. 2. Purchase Price. Subject to Section 9 hereof, the purchase price of the Common Stock subject to the Option shall be $11.25 per share (the "Option Price"). 3. Time to Exercise. This Option shall vest and be exercisable in installments as follows: (a) Upon the re-election of the Optionee as a Director of the Company at its Annual Meeting held in 1999 3,000 shares (b) Upon the re-election of the Optionee as a Director of the Company at its Annual Meeting held in 2000 3,000 shares (c) Upon the re-election of the Optionee as a Director of the Company at its Annual Meeting held in 2001 3,000 shares (d) Upon the e-election of the Optionee as a Director of the Company at its Annual Meeting held on 2002 3,000 shares To the extent not exercised, installments shall accumulate and be exercisable, in whole or in part, in any subsequent period. Anything in this Agreement to the contrary notwithstanding, this Option shall terminate and no part of the Option may be exercised after 5:00 p.m. on December 17, 2007. 4. Term. (a) If the Optionee shall die while he is a director of the Company holding the Option granted under Section 1 hereof, the Executor or Administrator of the Optionee's estate or the person or persons acquiring the Option upon the death of the 2 EXHIBIT 10.42 Optionee may exercise such Option (to the extent that the Optionee shall have been entitled to do so on the date of his death) at any time within one (1) year after the Optionee's death, subject to the other terms and conditions of the Plan and this Agreement, and any remaining portion of such Option not exercisable by the Optionee on the date of his death shall terminate immediately and cease to exist; provided, however, that no Option shall be exercisable after the time set forth in the last sentence of Section 3 hereof. (b) If the Optionee shall hereafter cease for any reason (other than death, which shall be governed by Section 4(a) hereof) to be a director of the Company, then the Option shall terminate on the effective date of such termination as to any unexercised portion thereof. 5. Restrictions on Exercise. The Option may not be exercised and no certificates representing shares subject to such Option shall be delivered if any requisite approval or consent of any governmental authority of any kind having jurisdiction over the exercise of Options shall not have been secured. The Option may only be exercised with respect to full shares and not for any fractional shares. 6. Manner of Exercise. Subject to such administrative regulations as the Committee administering the Plan may from time to time adopt, the Optionee shall exercise the option by giving written notice to the Company of the number of shares being purchased and the Option Price to be paid therefor accompanied by the following: (a) full payment in cash of the Option Price; provided, however that in lieu of cash an Optionee may, upon approval by the Committee exercise his Option by tendering to the Company shares of the Common Stock of the Company owned by him having a fair market value equal to the cash Option Price, or, by a combination of both cash and stock; (b) an undertaking to furnish or execute such documents as the Company in its discretion shall deem necessary (1) to evidence the exercise, in whole or in part, of the Option evidenced by this Agreement, (2) to determine whether registration is then required under the Securities Act of 1933, as then in effect, under (3) to comply with or satisfy the requirements of the Securities Act of 1933, or any other law, as then in effect and (4) to notify the Company in writing of any disposition made of any shares issued pursuant to the exercise of the Option evidenced by this Agreement within a period of thirty (30) days after the day of the transfer of any such shares by the Optionee. 7. Non-Assignability. This Option is not assignable or transferable by Optionee except by will or by the laws of descent and distribution. 3 EXHIBIT 10.42 8. Rights as Stockholder. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option evidenced by this Agreement until the issuance of one or more certificates to him for such shares upon due exercise of the Option. Except as provided in Section 9, no adjustment shall be made for dividends or other rights for which the record date is prior to the issuance of certificates. 9. Capital Adjustments. The number of shares of Common Stock covered by the unexercised portion of the Option evidenced by this Agreement, and in the Option Price thereof, shall be subject to such adjustment as appropriate or necessary to reflect any stock dividend, stock split, reverse stock split, share combination, exchange of shares, recapitalization, reclassification, merger, consolidation, separation, reorganization, liquidation or the like of or by the Company, so that the rights of the holder hereof shall remain proportionate to the rights held hereunder immediately prior to such event. 10. Acceleration Upon Change In Control. In the event of a Change In Control (as defined below) of the Company, then the holder of the options evidenced by this Agreement shall have the right, immediately prior to the consummation of such transaction constituting the Change In Control, to exercise such options, to the extent not theretofore exercised, without regard to any of the requirements as to the time periods and installments of exercisability set forth in this Agreement if (and only if) such options have not expired or otherwise been terminated prior to such vesting and the date of such transaction. Notwithstanding the foregoing, such acceleration of exercisability shall not apply if a majority of the board of directors of the acquiring or surviving corporation (or a parent corporation thereof) immediately after such Change in Control transaction consists of individuals who constitute a majority of the board of directors of the Company immediately prior to such transaction and such surviving or acquiring corporation agrees to assume such options in connection with such transaction. A Change of Control" means (a) the acquisition by any individual, entity or group (within the meaning of Section 12(d)(3) or 14 (d)(2) of the Exchange Act) (an "Acquiring Person") of beneficial ownership (within the meaning of the rule 13d-e promulgated under the Exchange Act) of 50% or more of either (i) the then outstanding shares of Common Stock of the Corporation (the "Outstanding Corporation common stock") or (ii) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); (b) individuals who, as of the date hereof, constitute the Board (the Incumbent Board) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof, whose election, or nomination for election by the Corporations shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of an Acquiring Person other than the Board; or (c) approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation. 4 EXHIBIT 10.42 In addition to the foregoing, in the event a Change In Control transaction occurs and the options evidenced by this Agreement become subject to such acceleration of exercisability but the holder of such options elects not to exercise such options, all such options shall terminate upon consummation of such Change In Control transaction. 11. Investment Purpose. This Option is granted on the condition that the purchases of Common Stock thereunder shall be for investment purposes, and not with a view to resale or distribution except that in the event the Common Stock subject to such Option is registered under the Securities Act of 1933, as amended, or in the event a resale of such stock without such registration would otherwise be permissible such condition shall be inoperative if in the opinion of counsel for the Company such condition is not required under the Securities Act of 1933 or regulation, or rule of any governmental agency. 12. Law Governing. This Agreement is intended to be performed in the State of Texas and shall be construed and enforced in accordance with and governed by the laws of the State of Texas. 13. Binding Effect. This Agreement shall insure to the benefit of and be binding upon the parties hereto and their personal representatives, successors, heirs, and assigns. 14. Defined Terms. Certain capitalized terms used herein have the meanings as set forth in the Plan. IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its duly authorized officer and the Optionee has duly signed this Agreement on the day and year first above written. James E. Buncher ------------------------------------------------- OPTIONEE UNITED DENTAL CARE, INC. William H. Wilcox ----------------------------------------------- William H. Wilcox Chief Executive Officer EX-10.43 8 STOCK OPTION AGREEMENT - ROBERT J. NETTINGA 1 EXHIBIT 10.43 (CONFORMED COPY) - -------------------------------------------------------------------------------- UNITED DENTAL CARE, INC. STOCK OPTION AGREEMENT - -------------------------------------------------------------------------------- THIS STOCK OPTION AGREEMENT ("Agreement") made as of December 17, 1997 and amended as of March 26, 1998 between United Dental Care, Inc. (the "Company"), a Delaware corporation, and Robert J. Nettinga ("Optionee"), a director of the Company. NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereto agree as follows: 1. Grant of Option. The Company hereby grants to the Optionee a stock option (the "Option") to purchase, subject to and upon the terms and conditions hereinafter set forth, 12,000 shares of the Common Stock, $.10 par value, of the Company. The date of this Agreement is the date of the grant of this Option. 2. Purchase Price. Subject to Section 9 hereof, the purchase price of the Common Stock subject to the Option shall be $11.25 per share (the "Option Price"). 3. Time to Exercise. This Option shall vest and be exercisable in installments as follows: (a)Upon the re-election of the Optionee as a Director of the Company at its Annual Meeting held in 1999 3,000 shares (b)Upon the re-election of the Optionee as a Director of the Company at its Annual Meeting held in 2000 3,000 shares (c)Upon the re-election of the Optionee as a Director of the Company at its Annual Meeting held in 2001 3,000 shares (d)Upon the e-election of the Optionee as a Director of the Company at its Annual Meeting held on 2002 3,000 shares
To the extent not exercised, installments shall accumulate and be exercisable, in whole or in part, in any subsequent period. Anything in this Agreement to the contrary notwithstanding, this Option shall terminate and no part of the Option may be exercised after 5:00 p.m. on December 17, 2007. 4.Term. (a) If the Optionee shall die while he is a director of the Company holding the Option granted under Section 1 hereof, the Executor or Administrator of the Optionee's 2 EXHIBIT 10.43 estate or the person or persons acquiring the Option upon the death of the Optionee may exercise such Option (to the extent that the Optionee shall have been entitled to do so on the date of his death) at any time within one (1) year after the Optionee's death, subject to the other terms and conditions of the Plan and this Agreement, and any remaining portion of such Option not exercisable by the Optionee on the date of his death shall terminate immediately and cease to exist; provided, however, that no Option shall be exercisable after the time set forth in the last sentence of Section 3 hereof. (b) If the Optionee shall hereafter cease for any reason (other than death, which shall be governed by Section 4(a) hereof) to be a director of the Company, then the Option shall terminate on the effective date of such termination as to any unexercised portion thereof. 5. Restrictions on Exercise. The Option may not be exercised and no certificates representing shares subject to such Option shall be delivered if any requisite approval or consent of any governmental authority of any kind having jurisdiction over the exercise of Options shall not have been secured. The Option may only be exercised with respect to full shares and not for any fractional shares. 6. Manner of Exercise. Subject to such administrative regulations as the Committee administering the Plan may from time to time adopt, the Optionee shall exercise the option by giving written notice to the Company of the number of shares being purchased and the Option Price to be paid therefor accompanied by the following: (a) full payment in cash of the Option Price; provided, however that in lieu of cash an Optionee may, upon approval by the Committee exercise his Option by tendering to the Company shares of the Common Stock of the Company owned by him having a fair market value equal to the cash Option Price, or, by a combination of both cash and stock; (b) an undertaking to furnish or execute such documents as the Company in its discretion shall deem necessary (1) to evidence the exercise, in whole or in part, of the Option evidenced by this Agreement, (2) to determine whether registration is then required under the Securities Act of 1933, as then in effect, under (3) to comply with or satisfy the requirements of the Securities Act of 1933, or any other law, as then in effect and (4) to notify the Company in writing of any disposition made of any shares issued pursuant to the exercise of the Option evidenced by this Agreement within a period of thirty (30) days after the day of the transfer of any such shares by the Optionee. 7. Non-Assignability. This Option is not assignable or transferable by Optionee except by will or by the laws of descent and distribution. 3 EXHIBIT 10.43 8. Rights as Stockholder. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option evidenced by this Agreement until the issuance of one or more certificates to him for such shares upon due exercise of the Option. Except as provided in Section 9, no adjustment shall be made for dividends or other rights for which the record date is prior to the issuance of certificates. 9. Capital Adjustments. The number of shares of Common Stock covered by the unexercised portion of the Option evidenced by this Agreement, and in the Option Price thereof, shall be subject to such adjustment as appropriate or necessary to reflect any stock dividend, stock split, reverse stock split, share combination, exchange of shares, recapitalization, reclassification, merger, consolidation, separation, reorganization, liquidation or the like of or by the Company, so that the rights of the holder hereof shall remain proportionate to the rights held hereunder immediately prior to such event. 10. Acceleration Upon Change In Control. In the event of a Change In Control (as defined below) of the Company, then the holder of the options evidenced by this Agreement shall have the right, immediately prior to the consummation of such transaction constituting the Change In Control, to exercise such options, to the extent not theretofore exercised, without regard to any of the requirements as to the time periods and installments of exercisability set forth in this Agreement if (and only if) such options have not expired or otherwise been terminated prior to such vesting and the date of such transaction. Notwithstanding the foregoing, such acceleration of exercisability shall not apply if a majority of the board of directors of the acquiring or surviving corporation (or a parent corporation thereof) immediately after such Change in Control transaction consists of individuals who constitute a majority of the board of directors of the Company immediately prior to such transaction and such surviving or acquiring corporation agrees to assume such options in connection with such transaction. A Change of Control" means (a) the acquisition by any individual, entity or group (within the meaning of Section 12(d)(3) or 14 (d)(2) of the Exchange Act) (an "Acquiring Person") of beneficial ownership (within the meaning of the rule 13d-e promulgated under the Exchange Act) of 50% or more of either (i) the then outstanding shares of Common Stock of the Corporation (the "Outstanding Corporation common stock") or (ii) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); (b) individuals who, as of the date hereof, constitute the Board (the Incumbent Board) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof, whose election, or nomination for election by the Corporations shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of an Acquiring Person other than the Board; or (c) approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation. 4 EXHIBIT 10.43 In addition to the foregoing, in the event a Change In Control transaction occurs and the options evidenced by this Agreement become subject to such acceleration of exercisability but the holder of such options elects not to exercise such options, all such options shall terminate upon consummation of such Change In Control transaction. 11. Investment Purpose. This Option is granted on the condition that the purchases of Common Stock thereunder shall be for investment purposes, and not with a view to resale or distribution except that in the event the Common Stock subject to such Option is registered under the Securities Act of 1933, as amended, or in the event a resale of such stock without such registration would otherwise be permissible such condition shall be inoperative if in the opinion of counsel for the Company such condition is not required under the Securities Act of 1933 or regulation, or rule of any governmental agency. 12. Law Governing. This Agreement is intended to be performed in the State of Texas and shall be construed and enforced in accordance with and governed by the laws of the State of Texas. 13. Binding Effect. This Agreement shall insure to the benefit of and be binding upon the parties hereto and their personal representatives, successors, heirs, and assigns. 14. Defined Terms. Certain capitalized terms used herein have the meanings as set forth in the Plan. IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its duly authorized officer and the Optionee has duly signed this Agreement on the day and year first above written. Robert J. Nettinga ---------------------------------------------- OPTIONEE UNITED DENTAL CARE, INC. William H. Wilcox ---------------------------------------------- William H. Wilcox Chief Executive Officer EX-10.44 9 STOCK OPTION AGREEMENT - DONALD E. STEEN 1 EXHIBIT 10.44 (CONFORMED COPY) - -------------------------------------------------------------------------------- UNITED DENTAL CARE, INC. STOCK OPTION AGREEMENT - -------------------------------------------------------------------------------- THIS STOCK OPTION AGREEMENT ("Agreement") made as of December 17, 1997 and amended as of March 26, 1998 between United Dental Care, Inc. (the "Company"), a Delaware corporation, and Donald E. Steen ("Optionee"), a director of the Company. NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereto agree as follows: 1. Grant of Option. The Company hereby grants to the Optionee a stock option (the "Option") to purchase, subject to and upon the terms and conditions hereinafter set forth, 12,000 shares of the Common Stock, $.10 par value, of the Company. The date of this Agreement is the date of the grant of this Option. 2. Purchase Price. Subject to Section 9 hereof, the purchase price of the Common Stock subject to the Option shall be $11.25 per share (the "Option Price"). 3. Time to Exercise. This Option shall vest and be exercisable in installments as follows: (a) Upon the re-election of the Optionee as a Director of the Company at its Annual Meeting held in 1999 3,000 shares (b) Upon the re-election of the Optionee as a Director of the Company at its Annual Meeting held in 2000 3,000 shares (c) Upon the re-election of the Optionee as a Director of the Company at its Annual Meeting held in 2001 3,000 shares (d) Upon the e-election of the Optionee as a Director of the Company at its Annual Meeting held on 2002 3,000 shares To the extent not exercised, installments shall accumulate and be exercisable, in whole or in part, in any subsequent period. Anything in this Agreement to the contrary notwithstanding, this Option shall terminate and no part of the Option may be exercised after 5:00 p.m. on December 17, 2007. 4. Term. (a) If the Optionee shall die while he is a director of the Company holding the Option granted under Section 1 hereof, the Executor or Administrator of the Optionee's estate or the person or persons acquiring the Option upon the death of the Optionee may exercise such Option (to the extent that the Optionee 2 EXHIBIT 10.44 shall have been entitled to do so on the date of his death) at any time within one (1) year after the Optionee's death, subject to the other terms and conditions of the Plan and this Agreement, and any remaining portion of such Option not exercisable by the Optionee on the date of his death shall terminate immediately and cease to exist; provided, however, that no Option shall be exercisable after the time set forth in the last sentence of Section 3 hereof. (b) If the Optionee shall hereafter cease for any reason (other than death, which shall be governed by Section 4(a) hereof) to be a director of the Company, then the Option shall terminate on the effective date of such termination as to any unexercised portion thereof. 5. Restrictions on Exercise. The Option may not be exercised and no certificates representing shares subject to such Option shall be delivered if any requisite approval or consent of any governmental authority of any kind having jurisdiction over the exercise of Options shall not have been secured. The Option may only be exercised with respect to full shares and not for any fractional shares. 6. Manner of Exercise. Subject to such administrative regulations as the Committee administering the Plan may from time to time adopt, the Optionee shall exercise the option by giving written notice to the Company of the number of shares being purchased and the Option Price to be paid therefor accompanied by the following: (a) full payment in cash of the Option Price; provided, however that in lieu of cash an Optionee may, upon approval by the Committee exercise his Option by tendering to the Company shares of the Common Stock of the Company owned by him having a fair market value equal to the cash Option Price, or, by a combination of both cash and stock; (b) an undertaking to furnish or execute such documents as the Company in its discretion shall deem necessary (1) to evidence the exercise, in whole or in part, of the Option evidenced by this Agreement, (2) to determine whether registration is then required under the Securities Act of 1933, as then in effect, under (3) to comply with or satisfy the requirements of the Securities Act of 1933, or any other law, as then in effect and (4) to notify the Company in writing of any disposition made of any shares issued pursuant to the exercise of the Option evidenced by this Agreement within a period of thirty (30) days after the day of the transfer of any such shares by the Optionee. 3 EXHIBIT 10.44 7. Non-Assignability. This Option is not assignable or transferable by Optionee except by will or by the laws of descent and distribution. 8. Rights as Stockholder. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option evidenced by this Agreement until the issuance of one or more certificates to him for such shares upon due exercise of the Option. Except as provided in Section 9, no adjustment shall be made for dividends or other rights for which the record date is prior to the issuance of certificates. 9. Capital Adjustments. The number of shares of Common Stock covered by the unexercised portion of the Option evidenced by this Agreement, and in the Option Price thereof, shall be subject to such adjustment as appropriate or necessary to reflect any stock dividend, stock split, reverse stock split, share combination, exchange of shares, recapitalization, reclassification, merger, consolidation, separation, reorganization, liquidation or the like of or by the Company, so that the rights of the holder hereof shall remain proportionate to the rights held hereunder immediately prior to such event. 10. Acceleration Upon Change In Control. In the event of a Change In Control (as defined below) of the Company, then the holder of the options evidenced by this Agreement shall have the right, immediately prior to the consummation of such transaction constituting the Change In Control, to exercise such options, to the extent not theretofore exercised, without regard to any of the requirements as to the time periods and installments of exercisability set forth in this Agreement if (and only if) such options have not expired or otherwise been terminated prior to such vesting and the date of such transaction. Notwithstanding the foregoing, such acceleration of exercisability shall not apply if a majority of the board of directors of the acquiring or surviving corporation (or a parent corporation thereof) immediately after such Change in Control transaction consists of individuals who constitute a majority of the board of directors of the Company immediately prior to such transaction and such surviving or acquiring corporation agrees to assume such options in connection with such transaction. A Change of Control" means (a) the acquisition by any individual, entity or group (within the meaning of Section 12(d)(3) or 14 (d)(2) of the Exchange Act) (an "Acquiring Person") of beneficial ownership (within the meaning of the rule 13d-e promulgated under the Exchange Act) of 50% or more of either (i) the then outstanding shares of Common Stock of the Corporation (the "Outstanding Corporation common stock") or (ii) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); (b) individuals who, as of the date hereof, constitute the Board (the Incumbent Board) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to 4 EXHIBIT 10.44 the date hereof, whose election, or nomination for election by the Corporations shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of an Acquiring Person other than the Board; or (c) approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation. In addition to the foregoing, in the event a Change In Control transaction occurs and the options evidenced by this Agreement become subject to such acceleration of exercisability but the holder of such options elects not to exercise such options, all such options shall terminate upon consummation of such Change In Control transaction. 11. Investment Purpose. This Option is granted on the condition that the purchases of Common Stock thereunder shall be for investment purposes, and not with a view to resale or distribution except that in the event the Common Stock subject to such Option is registered under the Securities Act of 1933, as amended, or in the event a resale of such stock without such registration would otherwise be permissible such condition shall be inoperative if in the opinion of counsel for the Company such condition is not required under the Securities Act of 1933 or regulation, or rule of any governmental agency. 12. Law Governing. This Agreement is intended to be performed in the State of Texas and shall be construed and enforced in accordance with and governed by the laws of the State of Texas. 13. Binding Effect. This Agreement shall insure to the benefit of and be binding upon the parties hereto and their personal representatives, successors, heirs, and assigns. 14. Defined Terms. Certain capitalized terms used herein have the meanings as set forth in the Plan. IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its duly authorized officer and the Optionee has duly signed this Agreement on the day and year first above written. 5 Donald E. Steen --------------------------------------- OPTIONEE UNITED DENTAL CARE, INC. --------------------------------------- William H. Wilcox William H. Wilcox Chief Executive Officer EX-10.45 10 EXECUTIVE INCENTIVE PLANS FOR 1998 1 EXHIBIT 10.45 EXECUTIVE INCENTIVE PLANS FOR 1998
Portion Portion Based on 1998 Based Personal Bonus on EPS Goals Executive Officer Maximum (a) (b) - ----------------------------------------- -------- ------ ---------- William H. Wilcox, President, CEO ...... $325,000 100% 0% John W. McCarty, Senior Vice ........... $131,250 85% 15% Peter R. Barnett, Senior Vice .......... $123,750 85% 15% Jeffrey R. Gullo, Senior Vice .......... $123,750 75% 25% Jeffrey P. Hollansworth, Senior ........ $123,750 75% 25%
NOTES: (a) The percentage in this column reflects the portion of the maximum bonus that may be paid upon achievement of targeted earnings per share. This percentage varies (up or down) based on earnings per share and may be reduced to zero if an established minimum level of earnings per share is not achieved. (b) The percentage in this column reflects the portion of the maximum bonus that may be awarded upon achievement of defined personal objectives. Such objectives are individually designed to reflect the executive's functional responsibilities within the context of the company's strategic and tactical objectives. This percentage may be reduced to zero if the defined personal objectives are not achieved. EX-10.46 11 FAMILY DENTIST AGREEMENT DATED 12/31/97 1 EXHIBIT 10.46 UNITED DENTAL CARE OF ARIZONA, INC. FAMILY DENTIST AGREEMENT This Agreement is made this 31st day of December, 1997, by and between United Dental Care of Arizona, Inc. (the "Plan"), and Associated Dental Care Providers, P.C., an Arizona professional corporation (the "Dental Group"). Background Information A. The Plan has organized a Managed Dental Benefits program in the State of Arizona and desires to make contractual arrangements for its Members (hereinafter defined) under which Dental Group agrees to provide dental care to Members. B. The Plan and the Dental Group (the "Parties") are currently parties to a Family Dentist Agreement dated January 21, 1997 (the "Provider Agreement") and an Agreement Regarding Facility Financing dated January 21, 1997 (the "Facility Financing Agreement"). The Parties desire to modify their relationship for the mutual benefit of each of them and are entering into this Agreement for that purpose. C. Dental Group is willing to enter into this Agreement with the Plan and provide dental care to Members upon the terms and conditions herein contained. Agreement The Parties acknowledge the accuracy of the foregoing Background Information and hereby agree as follows: ARTICLE I - DEFINITIONS 1.1 Dental Group: shall mean Associated Dental Care Providers, P.C., an Arizona professional corporation. 1.2 Dental Director: shall mean the dentist appointed by the Plan to promulgate and maintain professional standards for the dentists contracting with the Plan. 1.3 Dental Service Agreement: shall mean the dental service agreement between the Plan and an employer group or, in the case of an individual, the agreement between a Member and the Plan. 1.4 Emergency Dental Services: shall mean those services required for alleviation of severe pain, bleeding and swelling, or immediate diagnosis and treatment of unforeseen dental conditions which, if not treated, would jeopardize or impair the dental health of the Member. 2 1.5 United Dental Care of Arizona, Inc.: (herein referred to as the "Plan") shall mean an Arizona corporation operating pursuant to statutes and regulations of the state which arranges for the provision of dental services to Members that are set forth herein. 1.6 Member: shall mean subscriber and all eligible dependents enrolled pursuant to Dental Service Agreement. ARTICLE II - RELATIONSHIP OF PARTIES 2.1 Basic Relationship: The Plan and the Dental Group are separate and independent entities. Dental Group shall render its services under this Agreement as an independent contractor. As independent contracting parties, the Plan and the Dental Group maintain separate and independent management, and each has full unrestricted authority and responsibility regarding its own organization and structure. Nothing contained herein shall be deemed or construed to make Dental Group, or any of its employees or other persons acting under its direction or control, an agent, employee, servant, partner, or joint venturer of or with the Plan. ARTICLE III - DUTIES OF DENTAL GROUP 3.1 Duties: Dental Group agrees to: A. Subject to Section 7.4, below, provide those dental services set forth in Exhibit A hereto, for all Members selecting or assigned to Dental Group, subject to any Exclusions and Limitations; B. Refer Members for appropriate specialty care, where needed, and not provided by Dental Group, as set forth in Exhibit A. Any such referrals for specialty care must be in compliance with the Plan's specialty care referral system (as currently in effect and as modified as required by applicable law, with prompt notice of such modification provided in writing to Dental Group, or as mutually agreed upon by the Parties in writing) and authorization in advance by Dental Director or his designee; C. Provide twenty-four (24) hour Emergency Dental Services coverage at all times. In the event that, upon proper notification of Dental Group by a Member requiring Emergency Dental Services, Dental Group is not available to provide any such Emergency Dental Service required by such Member, and the Plan incurs any expenses for such covered Emergency Dental Service, Dental Group will be responsible for reimbursing Plan for any such reasonable expenses, if so deemed by the Plan's Provider Relations Manager or Provider Relations Representative. D. Conduct its relationship with the Plan and Members in a professional and positive manner, and not make untruthful or otherwise disparaging statements regarding its relationship with the Plan, Members or the Plan's business; 3 provided that this provision shall not prevent the Dental Group from making any disclosures or statements required by applicable law. E. Comply with all provisions of the Plan's Dentist Office Reference Manual, as currently in effect and as modified as required by applicable law, with prompt notice of such modification provided in writing to Dental Group, or as mutually agreed upon by the Parties in writing. 3.2 Discrimination: Dental Group shall not differentiate or discriminate in the treatment of its patients by reason of the fact that certain of those patients are Members. Dental Group shall render dental services to Members in the same manner, in accordance with the same standards, and with the same time availability as offered its other patients, subject to any contrary requirements of the Dental Service Agreement or this Agreement. 3.3 Administration. To enable the Plan to implement appropriate quality assurance programs, Dental Group shall: A. Cooperate with the Plan in maintaining and providing such dental, financial, administrative and other records relating to a Member as may be reasonably requested by the Plan. When Plan requests records, the Plan shall have obtained the proper releases from the Patient. When provided to the Plan, these records shall maintain the confidential nature they had while in the possession of Dental Group; B. Cooperate and participate with the Plan in quality assurance, peer review and audit systems, service standards and grievance procedures, as reasonably set forth by the Plan, and, to the extent required by applicable law, comply with all final determinations rendered by the peer review process and grievance resolution process established by the Plan, provided that the Plan hereby acknowledges that, as of the date of this Agreement, Dental Group is in full compliance with the requirements of this Section 3.3B; and C. Cooperate with the Plan in maintaining records and files relating to Dental Group by informing the Plan in writing of any changes to the information provided to the Plan on the Dental Group Application. The foregoing requirements of this section shall be subject in all cases to the requirements of applicable law, including without limitation confidentiality requirements. 3.4 Confidentiality: Dental records of Members shall be treated as confidential in order to comply with all federal and state laws and regulations regarding the confidentiality of patient records. Dental Group and Plan agree to maintain the confidentiality of the Members' records and enrollment information, and prevent unauthorized disclosure, as required by applicable law. 4 3.5 Dental Audit. Subject to the requirements of applicable law, Dental Group agrees to permit, upon reasonable prior notice from the Plan, reasonable inspection and audit of dental records of Members by the Plan, and to comply with reasonable requirements issued as a result of such inspection or audit; provided that Plan shall cause legally adequate permission to inspect dental records to be granted by all Members by their signature on the company Plan enrollment form, in accordance with federal and state laws and regulations. 3.7 Utilization and Specialty Referrals. Dental Group agrees to submit utilization information on at least a monthly basis, in a mutually agreed upon electronic format, and to comply with all material requirements of the Plan's specialty care referral system, as currently in effect and as modified as required by applicable law, with prompt notice of such modification provided in writing to Dental Group, or as mutually agreed upon by the Parties in writing. 3.8 Grievance. Dental Group agrees to comply with the Plan's grievance resolution procedures as currently in effect and as modified as required by applicable law, with prompt notice of such modification provided in writing to Dental Group, or as mutually agreed upon by the Parties in writing; provided that the Plan hereby acknowledges that, as of the date of this Agreement, Dental Group is in full compliance with the requirements of this Section 3.8. Dental Group shall abide by the decisions of the Plan's grievance review committee to the extent required by applicable law. 3.9 License: The Dental Group represents and warrants that the Dental Group and all other dentists, technicians, hygienists and assistants (collectively, "Professional Personnel") at the Dental Group's facilities are duly and appropriately licensed under applicable state law, and shall maintain such licenses in good standing throughout the term of this Agreement; that all equipment used in the rendering of dental services under this Agreement and required to be licensed or certified is duly and appropriately licensed under state law; and that the Dental Group has the staff, personnel and facilities to provide dental services as described in this Agreement and the Dental Service Agreements. If any Professional Personnel not affiliated with Dental Group as of the date of this agreement become affiliated with Dental Group after the date of this agreement (whether as an employee, independent contractor, or otherwise), Dental Group shall, within 30 days after such affiliation begins, provide Plan with evidence that such Professional Personnel are duly and appropriately licensed under applicable state law; provided that Dental Group's obligation under this sentence shall be deemed satisfied, such 30-day period notwithstanding, if Dental Group provides such evidence at any time in compliance with Plan's credentialing policies and procedures as contemplated by other provisions of this agreement. The Parties understand and agree that inclusion of Dental Group on Plan's panel of dentists is not a recommendation of Dental Group. 5 3.10 Telephone Eligibility Confirmation. If a patient claiming to be a Member but not listed in the then-most-recent eligibility list provided by the Plan to the Dental Group requests dental services from the Dental Group, the Dental Group shall telephone the Plan, and the Plan shall inform the Dental Group as to whether the patient is or is not a Member assigned to Dental Group and shall immediately send written confirmation of such to the Dental Group by fax. If the patient is a Member, Plan shall promptly pay Dental Group any unpaid capitation on a per member per month basis for such Member retroactive to the date the Member was assigned to Dental Group. Dental Group shall not unreasonably withhold dental treatment from any Member so verified and shall schedule appointments pursuant to Section 3.2. 3.11 Complaint Ratio. The Dental Group shall have a rate of complaints per Member assigned to Dental Group that does not exceed the customary rate of other dentists located in the community. ARTICLE IV - DUTIES OF THE PLAN 4.1 Eligibility List: The Plan agrees to provide the Dental Group, by the fifth of each calendar month, with a listing of Members eligible for services in the Dental Group's facilities for the current month. In addition, the Plan agrees to provide the Dental Group, from time to time at the reasonable request of the Dental Group, with an audit to validate the accuracy of the eligibility list. 4.2 Eligibility Audit: The Plan agrees to permit the Dental Group, upon reasonable prior notice, to inspect and audit Plan Member's records relating to eligibility and capitation or other payments of the Dental Group, and to comply with reasonable requirements issued as a result of such inspection or audit. 4.3 License: The Plan represents and warrants to the Dental Group that the Plan is a duly licensed prepaid dental plan organization in the State of Arizona with full power and authority to perform its obligations under this Agreement and the Dental Service Agreements and shall continue to be so licensed and maintain such license during the term of this Agreement. ARTICLE V - SELECTION OF DENTIST 5.1 Selection: At the time of enrollment, all Members are requested to select a dentist who will provide or arrange for the provision of all covered dental services. The Plan agrees to list the Dental Group and any affiliated dentists, if applicable, as authorized dentists of the Plan in its materials to all Members, and dentists under the control of Dental Group hereby agree to allow the Plan to so list them. 6 5.2 Acceptance of Members: Dental Group agrees to accept all Members under the Plan's dental benefits plans currently covered by this Agreement and hereafter approved by the Dental Group. In the event that any Dental Group facility becomes too full to accommodate additional new patients, Dental Group may request the Plan to inactivate such facility from further new Member selection (subject to Exhibit A, Paragraph 3). In the event that Dental Group has met all material obligations of this Agreement and continues in material compliance, the Plan shall not unreasonably withhold approval of such a request. Dental Group shall then provide a 90-day inactivation notice to the Plan with respect to such facility and such inactivation shall be effective the first of the month following the completion of the 90-day period, or such earlier date that Dental Group and the Plan may mutually agree in writing. In the event that the Plan authorizes such inactivation for such facility, such facility will then be removed from all future lists of selectable dentists in the Plan's materials, subsequent to the effective date of such notice, and Dental Group may only then refuse to accept Members at such facility other than those who have already selected, or been assigned to, it. Prior to the effective date of any such approval by the Plan and during that 90-day notice period, Dental Group shall accept any and all new Members selecting Dental Group at such facility, and shall render treatment and services to all Members subject to the terms of this Agreement. 5.3 Patient Relationship. The Dental Group shall be solely responsible for all dental advice and services rendered to a Member. The Dental Group shall maintain a dentist-patient relationship, without any interference by the Plan whatsoever, with each Member served. 5.4 Transfer of Patients. Subject to Section 12.2, below, because the dentist-patient relationship is personal and may become unacceptable to either of them, Member or Dental Group may request in writing or via phone call to the customer service center that the Member be transferred to another provider. Where practical, such transfer will be made, as solely determined by the Plan. ARTICLE VI - QUALITY ASSURANCE 6.1 Standards. Dental Group agrees to provide services to Members with the same standards of care, skill and diligence that are customarily used by dentists located in the community where such services are rendered, in accordance with the policies and procedures established by the Dental Director of the Plan as currently in effect and as modified as required by applicable law, with prompt notice of such modification provided in writing to Dental Group, or as mutually agreed upon by the Parties in writing, and in accordance with "Principles of Ethics of the American Dental Association" and the laws of the State of Arizona, provided that the Plan hereby acknowledges that, as of the date of this Agreement, Dental Group is in full compliance with the requirements of this Section 6.1. 6.2 Quality Assurance. The Plan, in consulting with its Dental Director, shall develop, implement and maintain a quality assurance program, policies and procedures and service standards consistent with other programs, policies, procedures and standards required by Plan of other dental care providers in the Plan's provider network. Dental Group shall be 7 bound by and comply with such policies and procedures and service standards as currently in effect and as modified as required by applicable law, with prompt notice of such modification provided in writing to Dental Group, or as mutually agreed upon by the Parties in writing. ARTICLE VII - COMPENSATION 7.1 Eligible Members. The Plan shall determine each Member who is eligible to receive from Dental Group the dental services set forth in Exhibit A of the Agreement. The Plan will notify Dental Group of Members' eligibility. Dental Group's obligations to provide care hereunder shall extend and be limited to those Members who have selected or been assigned to the Dental Group, who have been determined to be eligible by the Plan, and with respect to whom proper capitation payment has been received by Dental Group. 7.2 Fees. In exchange for agreeing to the provision of services to Members, the Plan shall pay the Dental Group the amounts shown on Exhibit A attached. Dental Group further agrees that all the Members are entitled to their Plan benefits regardless of other dental coverage. Accordingly, all Member copayments are due Dental Group at the time service is rendered. Dental Group further agrees not to charge, nor collect from, any Member fees for non-dental service expenses the Dental Group may incur in the normal course of rendering dental treatment services. Such non-dental service items may include, but are not limited to, sterilization methods and materials; office or dental supplies with the exception of gold; any equipment or instruments necessary for treatment; or other general overhead expenses. Dental Group hereby agrees that in no event, including, but not limited to non-payment by the Plan, Plan insolvency or breach of this Agreement, shall Dental Group bill, charge, collect a deposit from, seek compensation, remuneration or reimbursement from, or have any recourse against any Member or person other than the Plan acting on their behalf for services provided pursuant to this Agreement. This provision shall not prohibit collection of supplemental charges or copayments on the Plan's behalf made in accordance with the terms of the Dental Service Agreement. Dental Group further agrees that (1) this provision shall survive the termination of this Agreement regardless of the cause giving rise to termination and shall be construed to be for the benefit of the Plan Member, and (2) this provision supersedes any oral or written contrary agreement now existing between Dental Group, Member or persons acting on their behalf. 7.3 Payment. Payment by the Plan shall be made monthly, by the fifth day of the month for which Member is eligible. Dental Group accepts compensation per Exhibit A and all applicable Member copayments as payment in full for services rendered to such Members. 8 7.4 Additional Plans. The Plan may, from time to time, amend, delete or add to its various Dental Service Agreements, and, in such event, the Plan shall send Dental Group an amended Exhibit A to reflect those amendments, deletions or additions at the address in Section 11.0B. If Dental Group does not agree with any such amendments, deletions or additions, Dental Group shall, within 30 days after receipt of written notification from Plan, notify Plan in writing at the address set forth in Section 11.0A, and, in such event, such amendments, deletions or additions shall not become part of this Agreement. If Dental Group does not so notify Plan, then such amendments, deletions or additions shall become part of this Agreement. ARTICLE VIII - TERM AND TERMINATION OF AGREEMENT 8.1 Term. The Parties' respective obligations pursuant to this Agreement shall begin on January 1, 1998, and shall end on December 31, 2001 (the "Initial Term"), unless sooner terminated pursuant to Section 8.2, below. This Agreement shall automatically renew for successive one-year periods after the Initial Term (each, a "Renewal Term") unless and until terminated pursuant to Section 8.2, below. 8.2 Termination. A. This Agreement may be terminated by either Party only for cause upon written notice, except that either Party may terminate this Agreement at the end of the Initial Term or any Renewal Term without cause upon written notice at least 90 days in advance of the end of such Term. After termination of this Agreement, the Dental Group shall no longer be obligated to provide any dental services pursuant to this Agreement (except as described in Section 8.3B), and the Dental Group's name will be removed from all future printings of Plan materials. During any notice period preceding termination of this Agreement, Dental Group shall render treatment and services to all Members of record subject to the terms of this Agreement. B. For purposes of termination of this Agreement by the Plan, "for cause" shall mean a breach by the Dental Group of the representations and warranties set forth in the first paragraph of Section 3.9, which breach has or is reasonably likely to have a material adverse effect on the Plan and which remains uncured for 30 days after receipt by the Dental Group from the Plan of notice thereof. The termination of this Agreement by Plan shall not be deemed to be an election of remedies and Plan may pursue any or all other rights and/or remedies, either separately or cumulatively. C. For purposes of termination of this Agreement by the Dental Group, "for cause" shall mean the Plan's failure to make any payment provided for by this Agreement within 10 days after it becomes due. The termination of this Agreement by Dental Group shall not be deemed to be an election of remedies and Dental Group may pursue any or all other rights and/or remedies, either separately or cumulatively. 9 D. This Agreement may be terminated at any time upon the mutual written agreement of the Parties. E. The Plan may inactivate Dental Group from further Member selection in the event of notice of termination of this Agreement for any reason permitted by this Agreement. F. The Plan may transfer Members and the corresponding capitation to alternate Plan dentists subsequent to any termination notice but not prior to the termination effective date, unless Plan and Dental Group have mutually agreed to a transfer prior to termination effective date, or if termination is a result of breach by Dental Group of the representations and warranties set forth in Section 3.9. 8.3 Effect of Termination. A. Notwithstanding any other provision in this contract, any termination of this Agreement shall have no effect upon the rights and obligations of the Parties arising out of any transactions occurring prior to the effective date of such termination as set forth herein. B. In the event of the termination of this Agreement, Dental Group shall complete work started prior to the effective date of termination as follows: 1. If tooth preparation has occurred and/or an impression has been taken, Dental Group will complete a fixed or removable denture. 2. On every tooth upon which work has been started by modification of tooth structure. C. In the event of termination of this Agreement, subject to the requirements of applicable law: (i) Dental Group agrees to transfer patient records within the guidelines and precedence of the Dental Group's community at the request of the Member's newly-assigned dentist; (ii) copies of all Member patient records and x-rays shall be sent within 30 days after such request; (iii) Dental Group shall be able to charge a reasonable fee for duplication of records and x-rays; and (iv) Dental Group further agrees to return all Plan materials to the Plan including the Dental Office Reference Manual. D. Dental Group agrees to notify Members who may continue to seek treatment from Dental Group, subsequent to the Dental Group's termination date that Dental Group is no longer a participating Plan provider, prior to rendering any service. If such 10 notice is not given to the Member, Dental Group agrees to charge the Member no more for its services than would have been payable by the Member had this Agreement not terminated. ARTICLE IX - INSURANCE AND INDEMNIFICATION 9.1 Liability Insurance. Dental Group shall carry malpractice insurance in amount of not less than $300,000 in the aggregate covering all dentists, technicians, hygienists, assistants and other employees and contractors engaged at the facility. At any time upon the request of Plan, Dental Group shall provide Plan with a Certificate of Insurance evidencing such coverage and providing for not less than thirty (30) days notice of reduction in limits, cancellation or non-renewal. Failure to deliver such certificate of insurance to Plan or failure to inform Plan immediately of reduction in limits, cancellation, or non-renewal of coverage shall be cured by Dental Group within 10 days. 9.2 Indemnity. The Plan agrees to indemnify and hold Dental Group harmless with regards to any claim, demand, liability, judgment, suit, cause of action, or costs and expenses (including without limitation reasonable attorneys' fees) arising in connection with claims made by any persons that the Plan or its agents acted illegally, negligently or improperly or misrepresented any material fact. In addition, Dental Group agrees to indemnify and hold Plan harmless with regards to any claim, demand, liability, judgment, suit, cause of action, or costs and expenses (including without limitation reasonable attorneys' fees) arising out of, or made by any person or persons in connection with the professional services or other acts performed by dentist and/or failure of dentist to complete professional services undertaken by Dental Group. ARTICLE X - GENERAL PROVISIONS 10.1 Waiver. The waiver by either Party of any breach of any provision hereof on the part of the other shall not be construed to operate as a waiver of any other or subsequent breach of the same or any other term, condition or covenant contained in the Agreement. All rights and remedies of each Party under this Agreement shall be cumulative and in addition to all other rights and remedies which may be available to that Party from time to time, whether under any other agreement, at law, or in equity. 10.2 Entire Agreement. This Agreement represents the entire understanding between the Parties and supersedes any prior agreements or understandings with respect to the subject matter hereof, including without limitation the Provider Agreement and the Facility Financing Agreement, which are hereby terminated as of the commencement of the Initial Term. All amendments or modifications hereto shall be mutually agreed to in writing by the Plan and Dental Group, except as specified in Section 7.4. 11 10.3 Invalidity. The invalidity or unenforceability of any term or provision of this Agreement shall not invalidate or render unenforceable any other term or provision of this Agreement. 10.4 Successors; Assignment. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by and against the Parties and their respective successors and assigns, including without limitation any successor to either Party pursuant to a change in control of such Party. This Agreement shall not be assigned in whole or in part by either Party without the written consent of both Parties, which shall not be unreasonably withheld. 10.5 Terms. For simplicity of expression, pronouns and other terms are sometimes expressed in one number and gender, but where appropriate to the context these terms shall be deemed to include each of the other numbers and genders. 10.6 Headings. The underlined headings are for convenience and shall not be deemed to include each of the other numbers and genders. 10.7 Governing Law. This Agreement is governed by and shall be construed according to Arizona laws. Any action to enforce this Agreement shall be brought in Superior Court of Arizona in Pima County. 10.8 Financial Records. Dental Group and the Plan shall cooperate in keeping financial statistical records which may be necessary for the proper administration of the Plan or as required by state or federal laws and regulations. Such records shall be retained for a period of 5 years. Such obligations shall not terminate upon termination of the Agreement whether by rescission or otherwise. 10.9 Surcharges. Dental Group is not permitted to surcharge any Member for covered services and shall, whenever a surcharge has erroneously occurred, upon notice by that Member or the Plan, refund such charge within 5 days. 10.10 Service After Termination. Upon termination of the Agreement, the Plan shall be liable for covered services rendered by Dental Group (other than for copayments) to Members who retain eligibility in the Plan subject to the limitations of Section 8.3D or by operation of law who are under the care of Dental Group at the time of such dentally-appropriate provisions for the assumption of such services by another contracting dentist. Dental Group shall request prior approval of the Plan to perform any such services above. 10.11 Patient Records. Subject to the requirements of applicable law: (i) Dental Group shall maintain up-to-date records in accordance with accepted professional standards, sound dental accounting procedures and sound internal practices; (ii) said records shall reflect the date each Member was seen, the procedures followed, and the name, address, and specialty of each specialist or another dentist to whom he was referred; (iii) such records shall be made available for inspection by the Plan during regular business hours and other reasonable times; and (v) the Plan shall from time to time provide forms for keeping utilization records, which shall be submitted to the Plan as requested by the Plan. 12 10.12 Non-Solicitation. Dental Group agrees that, during the term of this Agreement and for the one-year period following termination of this Agreement (other than termination by Dental Group for cause pursuant to Section 8.2C), Dental Group shall not solicit or otherwise approach then current Members of the Plan to become members in a prepaid dental plan, preferred provider organization or any other managed dental delivery system (other than the Plan) to which Dental Group is a provider or has an ownership interest, nor shall Dental Group in any fashion encourage any Member to terminate from the Plan; provided that Dental Group shall not be prohibited from soliciting any Member for the purpose of providing dental services to such Member on a fee-for-service basis; and provided further that this Section 10.12 shall not prohibit Dental Group from soliciting then current Members at any time after the Plan has been given notice of termination of the Dental Service Agreement applicable to such Member. 10.13 Dentist Manual. Dental Group acknowledges that prior to or concurrent with the execution of this Agreement Dental Group received a Dental Office Reference Manual. Dental Group understands and agrees that Manual is proprietary to Plan and confidential in nature. Dental Group agrees not to reproduce any portion of the Manual or otherwise disclose any of its terms or provisions to any person not directly affiliated with the facility absent the express written permission of the Plan. Upon termination of this Agreement, Dental Group agrees to promptly return Dental Group's copy of the Manual, and any and all supplements, to the Plan. 10.14 Radiology Equipment. If Dental Group utilizes radiological or radiographic equipment at its facilities in rendering services pursuant to this Agreement, Dental Group shall have such equipment regularly checked by local or state health authorities or a radiation physicist to insure that such equipment is environmentally safe and technologically accurate. Any hazards identified by such inspections or at any time shall be promptly corrected. Dental Group shall maintain equipment maintenance and calibration records and all inspection certificates or reports which shall be available for review by Plan upon request. 10.15 Arizona Regulatory Matters. Dental Group understands and acknowledges that, pursuant to applicable Arizona law, the Plan is required to file this agreement with the Arizona Department of Insurance (or such other Arizona government agency as may be appropriate) (the "Arizona DOI"). In the event that the Arizona DOI makes a determination based on such filing that this agreement is unlawful, or in the event of any change in any statute, law, regulation, legislation, rule, policy, or general instruction subject to the administration of the Arizona DOI (collectively, a "ruling"), which materially and adversely affects, or is reasonably likely so to affect, the manner in which either Party is to perform or be compensated for its services under this agreement or which shall make this agreement unlawful, the Parties shall immediately use their best efforts to enter in a new agreement that complies with such determination or ruling and approximates as closely as possible the obligations and economic position of the Parties prior to such determination or ruling. 13 ARTICLE XI - NOTICES 11.0 Notices. All notices and other communications under this agreement to any Party shall be in writing and shall be deemed given when delivered personally, telecopied (which is confirmed) to that Party at the telecopy number for that Party set forth below, mailed by certified mail (return receipt requested) to that Party at the address for that Party (or at such other address for such Party as such Party shall have specified in notice to the other Party) or delivered to Federal Express, UPS, or any similar express delivery service for delivery to that Party at that address: A. If to the Plan: United Dental Care of Arizona, Inc. 1702 E. Highland Avenue, Suite 110 Phoenix, AZ 85016 Telecopy: (602) 263-0187 Or: United Dental Care, Inc. 13601 Preston Road, Suite 500 Dallas, Texas 75240 Attn: President Telecopy: (972) 458-7963 B. If to the Dental Group: Joseph V. Errante, D.D.S. Associated Dental Care Providers, P.C. 2100 N. Kolb Rd., Ste. 105 Tucson, Arizona 85715 Telecopy: (520) 290-9317 With a copy to: Gregory A. Serrao, President American Dental Partners, Inc. 301 Edgewater Place, Suite 320 Wakefield, Massachusetts 01880-1249 Telecopy: (781) 224-4216 ARTICLE XII - ADDITIONAL PROVISIONS 12.1 Prior Loans. Plan hereby forgives the outstanding principal balance on the loans made pursuant to the Facility Financing Agreement. 14 12.2 Assignment of Additional Members. The Parties agree and acknowledge that, as of the date of this Agreement, there are approximately 32,000 Members assigned to the Dental Group's current facilities. By April 1, 1998, Plan shall assign at least 20,000 additional Members to Dental Group's current facilities. Both Parties shall cooperate in the selection of Dental Group facilities to which such additional Members are assigned, and, except at the Member's request, Plan shall not reassign any Member that has selected one of Dental Group's facilities and/or a dentist employed by or associated with Dental Group. 12.3 Maintenance of Provider Network. Dental Group shall continue to support Plan's efforts to maintain an attractive provider network in Arizona and shall assist Plan in increasing its membership. 12.4 Non-Exclusivity. Except as described in Exhibit A, Paragraph 7, the Parties' relationship pursuant to this Agreement shall not be exclusive. 12.5 Contingency. Each Party's obligations under this Agreement shall be contingent upon completion of the purchase of all of the outstanding capital stock of Innovative Practice Concepts, Inc., an Arizona corporation, by American Dental Partners, Inc., a Delaware corporation, and in the event such purchase is not completed the Provider Agreement and Facility Financing Agreement shall not be terminated and shall remain in full force and effect. THIS AGREEMENT is executed in several counterparts. Each is hereby declared to be an original; however, all shall constitute but one and the same Agreement. IN WITNESS WHEREOF, the Parties have duly executed this Agreement on the day and year first written above. UNITED DENTAL CARE OF ARIZONA, INC. ASSOCIATED DENTAL CARE PROVIDERS, P.C. By William H. Wilcox By Joseph V. Erante ----------------------------------- ----------------------------------- Its Director Its Secretary ---------------------------------- ---------------------------------- 15 EXHIBIT A TO UNITED DENTAL CARE CONTRACT Effective January 1, 1998 1. Dental Services to be provided, or arranged for, by Dental Group include all those dental services specified in the applicable Dental Service Agreements and schedules thereto, as currently in effect, as those schedules are applicable to any and all Members who select, or are assigned to, Dental Group. 2. Dental Group will arrange for, but not be required to perform, specialty dental services for the Plan's Members. The specialty dental services shall include, but not be limited to, difficult endodontic therapy, periodontal osseous or soft tissue surgery, difficult oral surgery, difficult pediatric dental procedures, orthodontics and any other procedure not routinely performed by Dental Group. Such specialty care shall not be paid for by Dental Group. 3. Subject to Section 5.2 of the attached Agreement, Dental Group will remain on active status. Notwithstanding Section 5.2, however, between January 1, 1998 and December 31, 1999, Dental Group shall remain on active status until the Standard Capitation (as defined in Paragraph 6, below) exceeds $265,000. 4. The Plan shall pay the Dental Group the following amounts per month for each member who selects or is assigned to the Dental Group:
Employee Employee and Family Only One Dependent - ----------------------------- ----------- ------------- ----------- All Members current and future covered under an $8.00* $12.50* $17.25* AHP Plan All current Members under plans formally sold by no change** no change** no change** entities then named U.S. Dental Plan All current Members under plans formally sold by no change** no change** no change** entities then named National Dental Health Plan
* These capitation rates will be paid to Dental Group for all Members, current and future. If employer groups covered under AHP plans as of January 21, 1997, are switched to United 16 Dental Care, Inc., National Dental Plan, U.S. Dental Plan, or any other plan under Plan's control, this capitation rate will be in force. For new Members in these employer groups selecting or assigned to Dental Group this capitation rate will be in force. As these employer groups renew to UDC Arizona Plans, Members will be capitated at the then-prevailing UDC capitation rates. ** "no change" denotes that the currently used capitation will be paid on those Members covered under these plans currently. If any additional members are accepted under these plans it would be at the AHP capitation rate unless mutually agreed to by Plan and Dental Group. 5. With respect to all patients of Dental Group that as of January 21, 1997 were Members of UDC Arizona Plans under group agreements existing as of that date the capitation rates then in effect between Dental Group and Plan (or any subsidiaries of Plan) for such Members shall remain in effect until, with respect to each such group agreement, the expiration date of the current term thereof. Upon renewal of each such group agreement with any of the UDC Arizona Plans set forth on the chart below, the capitation rate for Members subject to such group agreement shall be as set forth on the chart below for such UDC Arizona Plan.
UDC Arizona Plans Per Member Per Month Capitation Payment - ----------------------------------- -------------------- 185-A $5.00 PMPM 355AZ $4.10 PMPM 385AZ $3.90 PMPM 555-A $4.30 PMPM 555AZ-A $4.30 PMPM 555AZ-B $4.30 PMPM
6. Notwithstanding the foregoing provisions of this Exhibit A or the attached Agreement to the contrary: A. The Plan shall pay Dental Group according to the following monthly schedule of guaranteed capitation payments: 17 1. For the period beginning January 1, 1998 and ending December 31, 1999, Plan shall pay Dental Group the greater of $265,000 per month or the Standard Capitation for such month. For purposes of this Agreement, "Standard Capitation" shall mean, for any given month, the sum of the per member per month rates, determined as provided pursuant to the preceding provisions of this Exhibit A or, if greater, pursuant to Plan's then-current applicable provider payment schedules, for all Members assigned to Dental Group's facilities. 2. After January 1, 2000, the Plan shall pay Dental Group, per month, the greater of 80% of the monthly premium received by Plan or any of its affiliates for all Members assigned to Dental Group's facilities or the Standard Capitation for such month. B. Plan shall permit Dental Group, at all reasonable times and upon the request of Dental Group, to inspect Plan's books and records relating to the determination or calculation of payments due or made to Dental Group under this Agreement. 7. Agreements with Competing Plans. Notwithstanding Section 12.4 of the attached Agreement, if, during the 24-month period from January 1, 1998 through December 31, 1999: (a) the Dental Group enters into an agreement with either Employers Dental Service, Inc. or United Concordia Companies, Inc. (each, a "Competing Company") for the provision of dental care to members of plans of such Competing Company ("Competing Plans"); (b) after the date of any such agreement, an employer group terminates its Dental Service Agreement with the Plan and enters into a dental service agreement with a Competing Plan; and (c) any Members belonging to such employer group are, at the time of such termination, assigned to any facilities of the Dental Group; then, for the remainder of such 24-month period, the minimum monthly payment guaranteed to the Dental Group under Section 6A1, above, shall be reduced by the amount of the monthly premium in effect between the employer group and the Plan at the time of such termination; provided that (1) if no Members belonging to such employer group are, at the time of such termination, assigned to any facilities of the Dental Group, there shall be no such reduction of such minimum monthly payment guarantee; and (2) if, after entering into an agreement for the provision of dental care with Dental Group, a Competing Company enters into any acquisition, merger, consolidation, joint venture, or other business combination with any person or entity that is, at that time, a party to a dental care provision agreement with Dental Group (an "Acquisition") which results in such Competing Company's shareholders immediately before the consummation of such Acquisition owning, immediately after the consummation of such 18 Acquisition, less than 50% of the issued and outstanding capital stock of such Competing Company, the provisions of this Paragraph 7 shall no longer apply with respect to such Competing Company. UNITED DENTAL CARE OF ARIZONA, INC. ASSOCIATED DENTAL CARE PROVIDERS, P.C. By William H. Wilcox By Joseph V. Errante ----------------------------------- ----------------------------------- Its Director Its Secretary ---------------------------------- ---------------------------------- EX-10.47 12 2ND AMENDMENT TO REVOLVING CREDIT AGREEMENT 1 EXHIBIT 10.47 SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT THIS SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT (this "Amendment") is entered into as of February 20, 1998 between UNITED DENTAL CARE, INC., a Delaware corporation ("Borrower"), each lender which is a signatory to this Amendment (collectively, the "Lenders"), and NATIONSBANK OF TEXAS, N.A., a national banking association, as agent for Lenders ("Agent"). Borrower, Agent, and Lenders are parties to the Revolving Credit Agreement (as modified, amended, renewed, and extended from time-to-time, the "Credit Agreement") dated as of November 14, 1996, providing for a $35,000,000.00 revolving credit facility (a) to support Borrower's and its Subsidiaries' capital expenditures and working capital needs (not to exceed $5,000,000.00 in the aggregate at any one time outstanding), (b) to finance Permitted Acquisitions, (c) for the issuance of letters of credit, and (d) for the redemption of shares of Borrower's common stock. Borrower and Lenders have agreed, upon the following terms and conditions, to amend the Credit Agreement to, among other things, increase the sub-limit on Borrower's working capital (which amount may be subsequently reduced by the amount of any Advances used to redeem Borrower's common stock) and add certain amounts representing extraordinary items back to EBITDA when calculating the Funded Debt to EBITDA Ratio in Section 7.16 of the Credit Agreement. Accordingly, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Lenders agree as follows: 1. Terms and References. Unless otherwise stated in this Amendment (a) terms defined in the Credit Agreement have the same meanings when used in this Amendment, and (b) references to "Sections" are to the Credit Agreement's sections. 2. Amendments to the Credit Agreement. (a) The first recital is hereby deleted in its entirety and replaced with the following: 1.Borrower has requested that Lenders provide to Borrower a revolving credit facility of up to $35,000,000.00 (a) to support Borrower's and its Subsidiaries's capital expenditures and working capital needs (but not to exceed $15,000,000.00 in the aggregate at any one time outstanding (less an amount equal to all Advances used by Borrower to redeem shares of its common stock permitted under Section 7.4 herein)), (b) to finance Permitted Acquisitions (defined below), (c) for the issuance of letters of credit required in connection with such working capital needs (subject to the limitations described in (a) above), the OraCare Acquisition (defined below), or Permitted Acquisitions, and (d) to allow Borrower to redeem shares of its issued and outstanding stock (provided that Advances for such purposes may not exceed $10,000,000.00 in the aggregate). (b) The following definition is added to Section 1.1: "Extraordinary Expense" has the meaning set forth in Section 7.16. (c) Section 7.15 is hereby deleted in its entirety and replaced with the following: 2 7.15 Fixed Charge Coverage. Borrower shall not, as of the last day of each fiscal quarter of Borrower during the periods set forth below, permit the ratio of (a) the sum of (i) Consolidated Adjusted Net Income, (ii) depreciation and amortization expense, (iii) operating lease expenses, (iv) rent expenses, (v) Interest Expense, (vi) income taxes deducted from Consolidated Adjusted Net Income in accordance with GAAP, and (vii) Extraordinary Expense, to (b) the sum of (i) Interest Expense, (ii) Assumed Debt Service, (iii) operating lease expenses, and (iv) rent expenses, in each case for the Companies and for the four (4) fiscal quarters ending on the date of determination, to be less than the ratio set forth opposite such period below:
Period Ratio - ------------------------------------- ----------- Date hereof through December 31, 1996 1.10 to 1.0 January 1, 1997 through December 31, 1997 1.25 to 1.0 January 1, 1998 through December 31, 1998 1.35 to 1.0 January 1, 1999 through December 31, 1999 1.50 to 1.0 January 1, 2000 and thereafter 1.75 to 1.0
(d) Section 7.16 is hereby deleted in its entirety and replaced with the following: 7.16 Funded Debt to EBITDA. Borrower shall not, as of any date during the term of this Agreement, permit the Funded Debt to EBITDA Ratio to exceed 3.0 to 1.0. For the purpose of this Section 7.16 only, EBITDA for the four (4) fiscal quarters ending on each date set forth below shall be increased by the amount set forth opposite such date below (each such amount, an "Extraordinary Expense"):
For the Period Ending: Extraordinary Expense ====================== ===================== September 30, 1997 $3,875,000.00 December 31, 1997 $4,955,000.00 March 31, 1998 $5,765,000.00 June 30, 1998 $5,675,000.00
3. Ratifications. Borrower (a) ratifies and confirms all provisions of the Loan Documents as amended by this Amendment, (b) ratifies and confirms that all guaranties, assurances, and Liens granted, conveyed, or assigned to Agent and Lenders under the Loan Documents are not released, reduced, or otherwise adversely affected by this Amendment and continue to guarantee, assure, and secure full payment 3 and performance of the present and future Obligation, and (c) agrees to perform such acts and duly authorize, execute, acknowledge, deliver, file, and record such additional documents, and certificates as Agent may request in order to create, perfect, preserve, and protect those guaranties, assurances, and Liens. 4. Representations. Borrower represents and warrants to Agent and Lenders that as of the date of this Amendment: (a) this Amendment and the other Loan Documents to be delivered under this Amendment have been duly authorized, executed, and delivered by Borrower; (b) no action of, or filing with, any Governmental Authority is required to authorize, or is otherwise required in connection with, the execution, delivery, and performance by Borrower of this Amendment; (c) the Loan Documents, as amended by this Amendment, are valid and binding upon Borrower and are enforceable against Borrower in accordance with their respective terms, except as limited by Debtor Laws; (d) the execution, delivery, and performance by Borrower of this Amendment do not require the consent of any other Person and do not and will not constitute a violation of any laws, agreements, or understandings to which Borrower is a party or by which Borrower is bound; (e) all representations and warranties in the Loan Documents are true and correct in all material respects except to the extent that (i) any of them speak to a different specific date or (ii) the facts on which any of them were based have been changed by transactions contemplated or permitted by the Credit Agreement; and (f) after giving effect to this Amendment, no Event of Default or Potential Default exists. 5. Conditions Precedent. This Amendment shall not be effective unless and until: (a) Agent receives counterparts of this Amendment executed by each party listed below; (b) the representations and warranties in the Credit Agreement, as amended by this Amendment, and each other Loan Document are true and correct in all material respects on and as of the date of this Amendment as though made as of the date of this Amendment; and (c) Agent receives an officer's certificate executed by an authorized officer of Borrower, certifying to (i) the resolutions adopted by its board of directors authorizing the transactions contemplated by this Amendment, (ii) incumbency of officers of Borrower, and (iii) changes in its articles of incorporation and bylaws, if any, since November 14, 1996. 6. Continued Effect. Except to the extent amended hereby, all terms, provisions, and conditions of the Credit Agreement and the other Loan Documents, and all documents executed in connection therewith, shall continue in full force and effect and shall remain enforceable and binding in accordance with their respective terms. 7. Miscellaneous. Unless stated otherwise (a) the singular number includes the plural and vice versa and words of any gender include each other gender, in each case, as appropriate, (b) headings and captions may not be construed in interpreting provisions, (c) this Amendment must be construed -- and its performance enforced -- under Texas law, (d) if any part of this Amendment is for any reason found to be unenforceable, all other portions of it nevertheless remain enforceable, and (e) this Amendment may be executed in any number of counterparts with the same effect as if all signatories had signed the same document, and all of those counterparts must be construed together to constitute the same document. 4 8. Entireties. The Credit Agreement as amended by this Amendment represents the final agreement between the parties about the subject matter of the Credit Agreement as amended by this Amendment and may not be contradicted by evidence of prior, contemporaneous, or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties. 9. Parties. This Amendment binds and inures to Borrower, Agent, Lenders, and their respective successors and permitted assigns. EXECUTED as of the date first stated above. BORROWER: UNITED DENTAL CARE, INC., a Delaware corporation By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- AGENT: NATIONSBANK OF TEXAS, N.A., a national banking association By /s/ Sueanna Miraranda -------------------------------------- Sueanna Miranda Vice President LENDERS: NATIONSBANK OF TEXAS, N.A., a national banking association By /s/ Sueanna Miraranda -------------------------------------- Sueanna Miranda Vice President EX-10.49 13 1ST AMENDMENT TO EMPLOYMENT AGREEMENT - MCCARTY 1 EXHIBIT 10.49 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This First Amendment (the "Amendment") to the Employment agreement (the "Agreement") entered into on November 10, 1997, by and between United Dental Care, Inc., a Delaware corporation ("UDC"), and John W. McCarty, an individual ("Employee"), is dated as of the 10th day of March, 1998. The Agreement is attached hereto as Exhibit A. Pursuant to Section 12(f) of the Agreement, UDC and Employee agree to amend, and hereby amend, the Agreement as follows: 1. The first sentence of Section 5 of the Agreement is deleted in its entirety and replaced with the following revised first sentence: "The term of this Agreement shall be from the date of this Agreement to December 31, 1998; provided, however, if the Effective Time (as defined in the Agreement and Plan of Merger (the "Merger Agreement") dated as of March 10, 1998, by and among Protective Life Corporation, a Delaware corporation ("Protective"), PLC Merger Subsidiary Corporation, a Delaware corporation, and UDC has not occurred before October 1, 1998, and the Merger Agreement has not terminated, then the term of this Agreement shall be extended to the later of (i) ninety (90) days after the Effective Time, or (ii) ninety (90) days after the termination of the Merger Agreement without a Closing (as defined in the Merger Agreement)." 2. In the first sentence of Section 9 of the Agreement, the following words are deleted: "...the event that UDC elects to terminate this Agreement pursuant to Section 5 or in..." 3. In the first sentence of Section 9 of the Agreement, the following words are deleted: "...without the notice required under Section 5 or..." 4. Subpart (i) in the fourth sentence of Section 11(a) is deleted in its entirety and replaced with the following revised subpart (i): "...(i) one year from the date Employee terminates his employment with UDC, if such termination occurs before the end of the term of this Agreement as set forth in Section 5..." 6. Except as modified by this Amendment, the agreement shall remain in full force and effect. 2 IN WITNESS WHEREOF, the parties have executed and delivered this Amendment as of the 10th day of March, 1998. United Dental Care, Inc. By: /s/ William H. Wilcox --------------------------- William H. Wilcox Chief Executive Officer EMPLOYEE /s/ John W. McCarty ------------------------------ John W. McCarty EX-10.50 14 1ST AMENDMENT TO EMPLOYMENT AGREEMENT - BARNETT 1 EXHIBIT 10.50 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This First Amendment (the "Amendment") to the Employment Agreement (the "Agreement") entered into on June 1, 1996, by and between United Dental Care, Inc., a Delaware corporation ("UDC"), and Peter R. Barnett, DMD, an individual ("Employee"), is dated as of the 10th day of March, 1998. The Agreement is attached hereto as Exhibit A. Pursuant to Section 12(f) of the Agreement, UDC and Employee agree to amend, and hereby amend, the Agreement as follows: 1. The first sentence of Section 5 of the agreement is deleted in its entirety and replaced with the following revised first sentence: "The term of this Agreement shall be from the date of this Agreement to the later of (i) October 1, 1998, or (ii) ninety (90) days after the Effective Time (as defined in the Agrement and Plan of Merger (the "Merger Agreement") dated as of March 10, 1998, by and among Protective Life Corporation, a Delaware corporation ("Protective"), PLC Merger Subsidiary Corporation, a Delaware corporation and UDC). However, if the Merger Agreement terminates as provided therein without a Closing (as defined in the Merger Agreement), then this Agreement shall terminate ninety (90) days after the Merger Agreement so terminates." 2. In the first sentence of Section 9 of the Agreement, the following words are deleted: "...the event that UDC elects to terminate this Agreement pursuant to Section 5 or in..." 3. In the first sentence of Section 9 of the Agreement, the following words are deleted: "...without the notice required under Section 5 or..." 4. The fourth sentence of Section 11(a) shall be deleted in its entirety and replaced with the following revised fourth sentence: "...Employee therefore agrees that so long as he is employed by UDC and for the period of time (if any) (i) Employee is receiving from UDC a salary under Section 6(a) of this Agreement due to Employee's disability, (ii) the time granted under Section 9 to Employee to exercise stock options if options are exercised, or (iii) such time as UDC is loaning money or has a loan outstanding to Employee, unless Employee first secures the written consent of UDC, 2 Employee will not directly or indirectly invest, engage or participate in or become employed by any entity in direct or indirect competition with UDC's business (which shall include the ownership and/or operation of managed dental plans) anywhere in the United States, or contract to do so." 5. In subsection (b) of Section 11 of the Agreement, all references to "Section 10(a)" are deleted and replaced with the phrase "Section 11(a)." 6. For a period of one (1) year from the termination of Employee's employment with UDC, Employee shall not attempt, either directly or indirectly, on his own behalf or on behalf of anyone else, to employ, divert or otherwise solicit for employment, or attempt to employ, divert or otherwise solicit for employment, any employee of OraCare Professional Associates, P.A., a New Jersey professional association. 7. Except as modified by this Amendment, the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed and delivered this Amendment as of the 10th day of March, 1998. United Dental Care, Inc. By: /s/ William H. Wilcox -------------------------------- William H. Wilcox Chief Executive Officer EMPLOYEE /s/ Peter R. Barnett ----------------------------------- Peter R. Barnett, DMD EX-11.1 15 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.1 UNITED DENTAL CARE, INC. AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS (in thousands, except per share amounts)
For Year Ended December 31, ------------------------------------ 1995 1996 1997 ------- ------- --------- I. Reported net earnings Net income (loss) before extraordinary charge ................. $ 3,731 $ 7,557 $ (2,847) Extraordinary charge, net of tax .............................. (142) -- -- ------- ------- --------- Net income (loss) ........................................... $ 3,589 $ 7,557 $ (2,847) ======= ======= ========= II. Basic earnings per share A. Shares outstanding Weighted average number of shares outstanding during the period .................................................. 5,051 7,256 8,935 ======= ======= ========= B. Computation of net earnings (loss) per share Net income (loss) before extraordinary charge ........... $ 0.74 $ 1.04 $ (0.32) Extraordinary charge, net of tax ........................ (0.03) -- -- ------- ------- --------- Net income (loss) ..................................... $ 0.71 $ 1.04 $ (0.32) ======= ======= ========= III. Diluted earnings per share (see NOTE below) A. Shares outstanding Weighted average number of shares outstanding during the period ................................................. 5,051 7,256 8,935 Shares potentially issuable upon the assumed exercise of stock options and conversion of warrants, net of assumed repurchase using the Treasury Stock method ..... 398 287 -- ------- ------- --------- Total common shares and common equivalent shares ....... 5,449 7,543 8,935 ======= ======= ========= B. Computation of net earnings (loss) per share Net income (loss) before extraordinary charge .......... $ 0.68 $ 1.00 $ (0.32) Extraordinary charge, net of tax ....................... (0.03) -- -- ------- ------- --------- Net income (loss) .................................... $ 0.66 $ 1.00 $ (0.32) ======= ======= =========
NOTE: Shares potentially issuable upon exercise of stock options are not applicable for any period in which their inclusion would have the effect of decreasing the loss-per-share amount for such period. EPS amounts for components of net income (loss) may not improve the net income (loss) per share amounts presented due to rounding. EX-21.1 16 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT NAME OF CORPORATION 1. United Dental Care of Texas, Inc., a Texas corporation. 2. UDC Ohio, Inc. (d/b/a United Dental Care of Ohio, Inc.), an Ohio corporation. 3. United Dental Care of Pennsylvania, Inc., a Pennsylvania corporation. 4. United Dental Care of Missouri, Inc., a Missouri corporation. 5. UDC Services, Inc., a Delaware corporation. 6. UDC Dental California, Inc., a California corporation. 7. UDC Preferred, Inc., an Arizona corporation. 8. United Dental Care Insurance Company, an Arizona corporation. 9. United Dental Care of Arizona, Inc., an Arizona corporation. 10. United Dental Care of Colorado, Inc., a Colorado corporation. 11. United Dental Care of Indiana, Inc., an Indiana corporation. 12. United Dental Care of Nebraska, Inc., a Nebraska corporation. 13. United Dental Care of New Mexico, Inc., a New Mexico corporation. 14. United Dental Care of North Carolina, Inc., a North Carolina corporation. 15. United Dental Care of Utah, Inc., a Utah corporation. 16. United Dental Care of Washington, Inc., a Washington corporation. 17. United Dental Care of Michigan, Inc., a Michigan corporation. 18. Association Dental Plan, Inc., a District of Columbia corporation. 19. OraCare Consultants, Inc., a New Jersey corporation. 20. OraCare DPO, Inc., a New Jersey corporation. 21. Kansas City Dental Care, Inc., a Missouri corporation. 22. United Dental Care, Inc., an Oklahoma corporation. 23. International Dental Plans, Inc., a Florida corporation. EX-23.1 17 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (number 333-20043) of United Dental Care, Inc., of our report dated February 23, 1998, except for Note 12, as to which the date is March 11, 1998, appearing on page F-2 of this Form 10-K/A. We also consent to the application of such report to the Financial Statement Schedule for the three years ended December 31, 1997 appearing as Exhibit 99.2 to this Form 10-K/A when such schedule is read in conjunction with the financial statements referred to in our report. PRICEWATERHOUSECOOPERS LLP Dallas, Texas July 31, 1998 EX-27.1 18 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 12,427 0 10,606 0 0 29,041 12,612 0 150,204 25,162 0 0 0 894 122,176 150,204 0 174,699 0 178,033 0 0 571 (3,334) (487) (2,847) 0 0 0 (2,847) (.32) (.32)
EX-99.2 19 SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS 1 EXHIBIT 99.2
- -------------------------------------------------------------------------------------------------------------------- UNITED DENTAL CARE, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN 000S) - -------------------------------------------------------------------------------------------------------------------- ADDITIONS CHARGED BALANCE BALANCE AT TO DEDUCTIONS AT BEGINNING COSTS AND ACQUIRED OR WRITE- END OF OF PERIOD EXPENSES BALANCES OFFS PERIOD - -------------------------------------------------------------------------------------------------------------------- Allowance for loss on premiums receivable: - -------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1995 $ 210 $ 239 $ -- $ (142) $ 307 - -------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1996 307 250 1,545 (293) 1,809 - -------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1997 1,809 7,346 106 (3,532) 5,729 - --------------------------------------------------------------------------------------------------------------------
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