<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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: 0-26090
COMPDENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-3185995
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CompDent Corporation
8800 Roswell Road, Suite 244
Atlanta, Georgia 30350
(Address of principal executive offices)
(770) 998-8936
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at May 10, 1996
----- ---------------------------
<S> <C>
Common Stock, $.01 par value 10,056,293
</TABLE>
<PAGE> 2
COMPDENT CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page #
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Other Information
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports Filed on Form 8-K 12
Signatures 14
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,567 $ 40,388
Premiums receivable from subscribers 4,352 3,374
Dental indemnity premiums due and unpaid 716 263
Assets held for sale 519 532
Deferred income taxes 2,223 1,416
Other current assets 285 281
-------- --------
Total current assets 31,662 46,254
-------- --------
Restricted funds 1,463 1,463
Property and equipment, net of accumulated depreciation 2,059 1,937
Excess of purchase price over net assets acquired 96,426 71,063
Noncompetition agreement 1,405 1,521
Unamortized loan fees 155 172
Reinsurance receivable 5,432 6,332
Cash surrender value of officers' life insurance 180 155
Deferred income taxes 441 243
Other assets 466 256
-------- --------
$139,689 $129,396
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Unearned revenue $ 12,531 $ 10,300
Accounts payable and accrued expenses 9,864 7,372
Income taxes payable 1,810 883
Life policy and contract claims reserves 68 37
Dental claims reserves 881 2,437
Other current liabilities 94 12
-------- --------
Total current liabilities 25,248 21,041
-------- --------
Aggregate reserves for life policies and contracts 5,339 5,323
Aggregate reserves for dental contracts 0 172
Notes payable 4,000 0
Deferred compensation expense 370 384
Other liabilities 308 299
-------- --------
Total liabilities 35,265 27,219
-------- --------
Commitments and contingencies (Note 3)
Stockholders' equity:
Common stock 100 100
Additional paid-in capital 95,718 95,707
Retained earnings 8,606 6,370
-------- --------
Total stockholders' equity 104,424 102,177
-------- --------
$139,689 $129,396
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
COMPDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------
1996 1995
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues:
Subscriber premiums $30,831 $22,790
Other revenue 554 240
------- -------
Total revenue 31,386 23,031
Expenses:
Dental care providers' fees and claim costs 16,481 13,700
Commissions 3,013 2,592
Premium taxes 259 324
General and administrative 6,771 3,740
Depreciation and amortization 1,047 565
------- -------
Total expenses 27,572 20,921
------- -------
Operating income 3,814 2,109
------- -------
Other (income) expense:
Interest income (153) (31)
Interest expense 46 949
Other, net (10) 12
------- -------
(117) 929
------- -------
Income before provision for income taxes 3,931 1,180
Income tax provision 1,694 523
------- -------
Net income $ 2,237 $ 658
======= =======
Net income per common share $ 0.22 $ 0.12
======= =======
Weighted average common shares outstanding 10,156 $ 4,254
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
COMPDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1996 1995
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net Income $ 2,237 $ 658
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,065 627
Loss on sale of investments held for sale 0 15
Deferred income tax benefit (43) 0
Changes in assets and liabilities:
Premiums receivable from subscribers (1,357) (253)
Income taxes receivable/payable 939 414
Other assets 764 (258)
Unearned revenue 1,537 438
Accounts payable and accrued expenses 687 (288)
Other liabilities (3,208) (351)
------- ------
Net cash provided by operating activities 2,621 1,001
------- ------
Cash flows from investing activities:
Additions to property and equipment (247) (205)
Proceeds from sales of investments held for sale 0 656
Payments made in connection with proposed
business acquisition (49) (792)
Acquisition of business, net of cash acquired (23,132) 0
Cash surrender value of life insurance (25) (28)
------- ------
Net cash used in investing activities (23,453) (368)
------- ------
Cash flows from financing activities:
Proceeds from (repayment of) notes payable 4,000 (300)
Proceeds from exercise of stock options 11 0
Payments made in connection with proposed
initial public offering 0 (156)
------- ------
Net cash provided by (used in) financing activities 4,011 (456)
------- ------
(Decrease) increase in cash and cash equivalents (16,821) 177
Cash and cash equivalents, beginning of period 40,388 9,680
------- ------
Cash and cash equivalents, end of period $23,567 $9,857
======= ======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 29 $ 644
======= ======
Income taxes $ 729 $ 128
======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
COMPDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
March 31, 1996
1. BASIS OF PRESENTATION
The unaudited consolidated balance sheet as of March 31, 1996 and the
unaudited consolidated statements of operations and cash flows for the three
months ended March 31, 1995 and 1996, in the opinion of management, have been
prepared on the same basis as the audited consolidated financial statements and
include all significant adjustments, consisting of normal recurring
adjustments, necessary for the fair presentation of the results of the interim
periods. The data disclosed in these notes to the financial statements for
these periods are also unaudited. The consolidated financial statements and
notes thereto should be read in conjunction with the consolidated financial
statements and notes thereto for the years ended December 31, 1995, 1994, and
the periods July 1, 1993 to December 31, 1993, and January 1, 1993 to June 30,
1993 included in the 1995 Annual Report of CompDent Corporation and its
subsidiaries, (the "Company", except as the context otherwise requires) on Form
10-K. Operating results of the Company for the three months ended March 31,
1996 are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 1996.
2. BUSINESS COMBINATIONS
Effective July 5, 1995, the Company completed the acquisition of CompDent
Corporation ("CompDent"), a Kentucky-based provider of managed dental care
plans, and affiliated entities for an aggregate purchase price (including
transaction costs) of $33.6 million. The acquisition was financed partially
through borrowings of $25 million under the Company's revolving credit facility
and partially with proceeds remaining from the Company's initial public
offering. The acquisition of CompDent was accounted for using the purchase
method of accounting with the results of operations of the businesses acquired
included from the effective date of the acquisition. The acquisition resulted
in excess of cost over fair value of net assets acquired of $34.3 million which
is being amortized over 40 years.
The following is a summary of assets acquired, liabilities assumed, and
consideration paid in connection with the acquisition:
<TABLE>
<S> <C>
Fair value of assets acquired $37,278,991
Cash paid for assets acquired,
net of cash acquired (29,823,133)
Acquisition costs paid (1,060,156)
-----------
Liabilities assumed $ 6,395,702
===========
</TABLE>
Effective January 8, 1996, the Company completed the acquisition of Texas
Dental Plans, Inc., a Texas-based referral fee-for-service dental company, and
affiliated entities ("Texas Dental"), for an aggregate cash purchase price of
approximately $23.0 million. The acquisition was funded with net proceeds
remaining from the Company's second stock offering. The Texas Dental
acquisition was accounted for using the purchase method of accounting, with the
results of operations of the businesses acquired included from the effective
date of the acquisition. The acquisition resulted in excess of cost over fair
value of net assets acquired of $26.0 million which is being amortized over 40
years.
The following is a summary of assets acquired, liabilities assumed, and
consideration paid in connection with the acquisition:
<TABLE>
<S> <C>
Fair value of assets acquired $27,778,929
Cash paid for assets acquired,
net of cash acquired (23,132,042)
Acquisition costs paid (540,000)
-----------
Liabilities assumed $ 4,106,887
===========
</TABLE>
6
<PAGE> 7
Unaudited pro forma results of operations of the Company for the three
months ended March 31, 1996 and 1995 are included below. Such pro forma
presentation has been prepared assuming that the Texas Dental acquisition had
occurred as of January 1, 1996 and the CompDent and Texas Dental acquisitions
and the initial public offering and second offering had occurred as of January
1, 1995, respectively.
<TABLE>
Three Months Ended Three Months Ended
March 31,1996 March 31, 1995
------------- --------------
<S> <C> <C>
Revenues (in thousands) $31,386 $28,986
======= =======
Income before extraordinary item (in thousands) $ 2,237 $ 1,655
======= =======
Net income (in thousands) $ 2,237 $ 1,114
======= =======
Net income per common share
before extraordinary item $ 0.22 $ 0.18
======= =======
Net income per common share $ 0.22 $ 0.12
======= =======
</TABLE>
The pro forma results include the historical accounts of the Company, and
historical accounts of the acquired businesses and pro forma adjustments
including the amortization of the excess purchase price over the fair value of
the net assets acquired, the amortization for the noncompete agreements entered
into by the former owners of Texas Dental, the elimination of salaries and
benefits paid to the former employee owners of CompDent and Texas Dental who
will not be replaced, the reduction in depreciation expense to reflect the sale
of certain non-operating assets to the former owners of CompDent, the
elimination of interest expense assuming the repayment of debt with offering
proceeds, the elimination of UniLife revenues and expenses in 1995 assuming the
Company's strategy to wind down this business had been completed, and the
applicable income tax effects of these adjustments. The pro forma results of
operations are not necessarily indicative of actual results which may have
occurred had the operations of the acquired companies been combined in prior
periods.
On February 29, 1996, the Company signed a definitive agreement to
purchase Dental Care Plus Management Corporation, an Illinois-based third-party
administrator and managed dental care plan, including its affiliated company
I.H.C.S., Inc. ("Dental Care Plus"). The Company subsequently obtained
regulatory approval for the transaction and completed the acquisition on May 8,
1996. Under the terms of the agreement, CompDent paid $27 million in cash and
assumed $11 million in accrued liabilities for Dental Care Plus. The
acquisition was financed through $38 million in borrowings under the Company's
reducing revolving line of credit. The transaction is subject to approval by
the Illinois Department of Insurance and is expected to be completed in the
second quarter of 1996. Because this acquisition was not completed until the
second quarter of 1996, Dental Care Plus is not included in CompDent's first
quarter results of operations and is not included in the pro forma information
above. The acquisition will be accounted for using the purchase method of
accounting.
3. CONTINGENT LIABILITIES
American Prepaid Professional Services, Inc. ("American Prepaid") and its
Florida subsidiary, American Dental Plan, Inc., are currently defendants to a
civil complaint filed by three participating dentists (one of which has since
withdrawn) who have entered into Participating Dentist Agreements with various
subsidiaries of the Company ("Subsidiaries"). The complaint alleges a breach
of contract and seeks damages based on the failure of each Subsidiary to make
capitation payments to the participating dentists for the period of time
between when affected subscribers enroll and the time at which the subscribers
select a dentist. The plaintiffs are attempting to bring the suit as a class
action. The Company believes its interpretation and administration of the
Participating Dentist Agreements are correct and, therefore, is vigorously
defending the suit. While the ultimate outcome of this lawsuit cannot at this
time be predicted with certainty, management does not expect that this matter
will have a material adverse effect on the consolidated financial position,
cash flows or results of operations of the Company.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached
consolidated financial statements and notes thereto, and with the Company's
audited financial statements and notes thereto for the fiscal year ended
December 31, 1995.
Three months ended March 31, 1996 and 1995
Revenues increased by $8.4 million, or 36.3%, to $31.4 million in the
first quarter of 1996 from $23.0 million in the first quarter of 1995. This
increase was primarily attributable to a net increase of $8.0 million, or
35.3%, in subscriber premiums to $30.8 million in the first quarter of 1996
from $22.8 million in the first quarter of 1995. The addition of CompDent
subscriber premiums following the acquisition of this company in July 5, 1995
accounted for $8.8 million of the overall increase in subscriber premiums.
Texas Dental Plans subscriber premiums provided an additional $2.3 million
following the January 8, 1996 acquisition. An increase in the Company's
existing subscriber base accounted for an additional $1.6 million increase in
subscriber premiums. These increases in subscriber premiums were partially
offset by a decrease of $4.7 million, or 98.6%, in UniLife Insurance Company
("UniLife") premiums to $69,000 in the first quarter of 1996 from $4.8 million
in the first quarter of 1995. Effective October 1, 1995, UniLife reinsured all
of its dental indemnity and life insurance with its dual choice partner. This
completed the Company's strategy upon acquiring UniLife to wind down over time
the stand-alone dental indemnity insurance business and/or to convert such
business to dual choice arrangements whereby subscribers enrolled in UniLife's
indemnity plans were offered the option of enrolling in a managed dental care
plan sponsored by the Company.
Other revenue increased by $314,000, or 131%, to $554,000 in the first
quarter of 1996 from $240,000 in the first quarter of 1995. The increase is
primarily attributable to a $249,000, or 198%, increase in indemnity income to
$375,000 in the first quarter of 1996 from $126,000 in the first quarter of
1995. CompDent's Adminstrative Services Only revenue accounted for the
remaining increase. Administrative Services Only revenue represents fees
collected from self-funded groups in exchange for claims processing.
Dental care providers' fees and claims costs increased $2.8 million, or
20.3%, to $16.5 million in the first quarter of 1996 from $13.7 million in the
first quarter of 1995. Dental care providers' fees represent capitation
payments paid to panel dentists under the Company's managed dental care plans.
Dental claim costs represent amounts payable to dental care providers under the
dental indemnity insurance plans offered by CompDent. Dental care providers'
fees decreased to 52.4% from 55.8% of managed dental care subscriber premiums
in the first quarter of 1996 and 1995, respectively, due to the addition of
Texas Dental premiums with no corresponding capitation. As a referral
fee-for-service dental company, Texas Dental has no capitation payments
associated with its subscriber revenues. The addition of CompDent dental care
providers' fees at 58.8% of subscriber premiums in the first quarter of 1996
partially offset this decrease. Under managed dental care plans, capitation
payments to panel dentists from premiums paid by subscribers are fixed under
the participating dental agreement regardless of the extent of services
provided.
Dental claims decreased $2.7 million, or 385.5%, to $942,000 in the first
quarter of 1996 from $3.6 million in the first quarter of 1995. As discussed
above, effective October 1, 1995 UniLife entered into a reinsurance agreement
and, thus, incurred no claims cost after this date. Dental claims remaining
relate to CompDent business of approximately $4.4 million in annual revenues
whereby dentists are reimbursed for services rendered through claim payments.
Commissions increased $421,000, or 16.2%, to $3.0 million in the first
quarter of 1996 from $2.6 million in the first quarter of 1995. The addition
of CompDent and Texas Dental commissions in 1996 accounted for $470,000 and
$497,000, respectively, of this increase while the elimination of UniLife
commissions in the first quarter of 1996 resulted in a $653,000 decrease. As a
percentage of revenues, commissions decreased to 9.6% of revenues in the first
quarter of 1996 from 11.3% in the quarter of 1995. This decrease related
primarily to the addition of CompDent commissions at 5.3% of subscriber
revenues and the elimination of UniLife commissions at
8
<PAGE> 9
13.3% of subscriber revenues, partially offset by the addition of Texas
Dental commissions at 21.2% of subscriber revenues during the first quarter of
1996.
Commissions on the Company's existing subscriber revenues were 10.2% in
the first quarter of 1996 compared to 11.3% in the first quarter of 1995. This
decrease as a percentage of revenue was attributable to the elimination of
UniLife commissions which represented a higher percentage of revenue than
commissions of the Company's other subsidiaries and an increase in the number
of large employer groups sold. The Company's direct sales force typically
plays an active role in sales and servicing large employer groups which results
in a lower commission rate or no commissions being paid to independent agents
with respect to these accounts. The costs associated with the increased number
of sales representatives employed by the Company were reflected in general and
administrative expense, rather than commissions. Historically CompDent has
relied more heavily on its direct sales force than on independent agents,
resulting in lower commissions as a percentage of revenues for CompDent
compared to the Company's other subsidiaries. Texas Dental has a higher
overall commission rate due to the fact that their independent agents are
generally paid a higher commission rate than independent agents for the
Company's other subsidiaries. Also, Texas Dental's direct sales
representatives are paid a commission which increases Texas Dental's overall
commission rate, whereas costs associated with sales representative employed by
the Company's other subsidiaries are reflected in general and administrative
expense.
Premium taxes decreased as a percentage of revenues to .8% in the first
quarter of 1996 compared to 1.4% in the first quarter of 1995. This decrease
was a result of the addition of Texas Dental revenues and the elimination of
UniLife premium revenue in the first quarter of 1996. Texas Dental is a
referral fee-for-service dental company, and, accordingly, its revenues are not
subject to premium tax. UniLife premiums in 1995 were subject to the Texas
premium tax rate of approximately 2.5%.
General and administrative expenses increased $3.1 million, or 81.0%, to
$6.8 million in the first quarter of 1996 from $3.7 million in the first
quarter of 1995. As a percentage of revenues, this expense increased to 21.6%
in the first quarter of 1996 from 16.2% in the first quarter of 1995. This
increase as a percentage of revenues is due to a higher general and
administrative level added following the July 5, 1995 acquisition of CompDent
and the January 8, 1996 acquisition of Texas Dental Plan.
Depreciation and amortization expense increased $482,000, or 85.3%, to
$1.0 million in the first quarter of 1996 from $565,000 in the first quarter of
1995. This increase is primarily attributable to the additional goodwill
amortization recorded following the CompDent and Texas Dental acquisitions.
Interest income increased $122,000, or 393.5%, to $153,000 in the first
quarter of 1996 from $31,000 in the first quarter of 1995 as a result of the
Company investing excess cash balances remaining from the second stock offering
in August 1995.
Interest expense decreased $903,000, or 95.2%, to $46,000 in the first
quarter of 1996 from $949,000 in the first quarter of 1995. The Company repaid
its existing indebtedness on June 1, 1995, with the proceeds from its initial
public offering. On May 7, 1996, the Company borrowed $38.0 million on its
revolving line of credit to finance its acquisition of Dental Care Plus and
will, therefore, record increased interest expense in the second quarter of
1996. Any future acquisitions may cause the Company to again incur
indebtedness under its revolving credit facility or otherwise.
In the first quarter of 1996, the Company's effective income tax rate
decreased to 43.1% compared to 44.3% in the first quarter of 1995. The
decrease is primarily attributable to tax free interest income included in
pretax income for the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash in the three months ended March 31,
1996 have been operating activities and borrowings under its revolving line of
credit. The primary use of cash for the period was the acquisition of Texas
Dental.
9
<PAGE> 10
Cash flows from operating activities were $2.6 million and $1.0 million
for the first quarter of 1996 and 1995, respectively. Cash flows from
operations consist primarily of subscriber premiums and investment income net
of capitation payments to panel dentists, claims paid, brokers' and agents'
commissions and general and administrative expenses. The Company receives
premium payments in advance of anticipated capitation payments and claims and
invests cash balances in excess of current needs in interest-bearing accounts.
Cash used in investing activities was $23.5 million and $368,000 for the
first quarter of 1996 and 1995, respectively. The increase in cash used in
the first quarter of 1996 relates primarily to $23.1 million used to acquire
Texas Dental on January 8, 1996. The Company expects to make additional
capital expenditures in excess of $3.0 million during the remainder of 1996 for
further enhancements to its computer and telephone equipment and purchases of
furniture and equipment for new office space to be occupied in late 1996.
Cash flows from financing activities in the first quarter of 1996 were
$4.0 million, representing borrowings under the Company's revolving line of
credit to payoff intercompany borrowings to its regulated subsidiary companies
at quarter-end. Cash used in financing activities was $456,000 in the first
quarter of 1995, for debt repayment and payments made in connection with the
initial public offering.
On June 30, 1995, the Company obtained a reducing revolving $35 million
line of credit (the "Credit Facility") from banks and on July 5, 1995, to
partially finance the acquisition of CompDent, the Company borrowed $25 million
under the Credit Facility. During the second quarter of 1996 the Credit
Facility was amended to increase the available line of credit to $65 million.
The Credit Facility as amended requires, beginning at the end of three and
one-half years from the date of closing, a 33% reduction per year in available
and outstanding borrowings. Outstanding indebtedness under the Credit Facility
bears interest, at the Company's option, at a rate equal to the prime rate plus
up to 1/4% or LIBOR plus up to 1 3/4%, with the margin over the prime rate and
LIBOR decreasing as the ratio of consolidated debt to EBITDA decreases.
Currently borrowings under the Credit Facility bear interest at the prime rate.
The Credit Facility prohibits payment of dividends and other distributions and
restricts or prohibits the Company from making certain acquisitions, incurring
indebtedness, incurring liens, disposing of assets or making investments, and
requires it to maintain certain financial ratios on an ongoing basis. The
Credit Facility is collateralized by pledges of the stock of the Company's
direct and indirect subsidiaries. The Company had $4 million of borrowings
outstanding as of March 31, 1996 under the Credit Facility. On May 7, 1996,
the Company borrowed $38 million under the Credit Facility to finance the
acquisition of Dental Care Plus.
The Company believes that cash flow generated by operations will be
sufficient to fund its normal working capital needs and capital expenditures
for at least the next twenty-four months because cash receipts are principally
premium revenue received prior to expected capitation payments and claims for
dental services and the Company's operations are not capital intensive.
Additional financing, under the Credit Facility or otherwise, would be required
in connection with an acquisition or acquisitions which the Company may
consummate in the future.
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 UniLife. The Company may be required from time to time to invest funds in
one or more of its subsidiaries to meet regulatory capital requirements.
Applicable laws generally limit the ability of the Company's subsidiaries to
pay dividends to the extent that required regulatory capital would be impaired,
and dividend payments are further restricted under the Credit Facility.
RECENTLY ISSUED ACCOUNTING STANDARDS
During the first quarter of 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." Implementing the requirements of SFAS No. 121 did not have a material
impact on the financial position, results of operations, or cash flows of the
Company.
Also during the first quarter of 1996, the Company adopted the provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation." In accordance with
the provisions of SFAS No. 123, the Company has chosen to
10
<PAGE> 11
continue to apply the accounting provisions of Accounting Principles Board
(APB) No. 25, "Accounting for Stock Issued to Employees," to its stock-based
employee compensation arrangements. Implementing the disclosure provisions of
SFAS No. 123 which supersede the disclosure requirements of APB No. 25 did not
have any material effect on the Company's financial position, results of
operations, or cash flows.
11
<PAGE> 12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported in the Company's Form 10-K for the period ending
December 31, 1995, the Company's subsidiaries, American Prepaid Professional
Services, Inc. ("American Prepaid") and American Dental Plan, Inc. are
currently defendants to a civil complaint filed on September 8, 1994 in the
Circuit Court of Alachua County, Florida, by three participating dentists (one
of whom has since withdrawn) who have entered into Participating Dentist
Agreements with various subsidiaries of the Company. No material developments
with regard to that action have taken place since the previous report (See
"Notes to Consolidated Unaudited Financial Statements -- Contingent
Liabilities").
The Company is not a party to any other material legal proceeding.
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K
(a) Exhibits.
2.4 Stock Purchase Agreement by and among American Prepaid and
Daniel Heiman, individually and as trustee of each of the Scott
Heiman Trust and the Cynthia Heiman Trust, Barney P. Randol,
Texas Dental Plans, Inc., Dental Plans International, Inc. and
Dental Providers Resources, Inc. dated as of January 8, 1996(1)
2.5 Asset Purchase Agreement by and among American Prepaid and
National Dental Plans, Inc. and certain of its shareholders
dated as of January 8, 1996(1)
2.6 Stock Purchase Agreement by and among American Prepaid and
Theodore Tannebaum, Sven Philip-Sorenson, Dental Care Plus
Management, Corp. and I.H.C.S., Inc. dated as of February 28,
1996, as amended (2)
*10.1 Employment agreement dated February 1, 1996 by and between
CompDent and Bruce A. Mitchell.
*27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
Reports on Form 8-K and Form 8-K/A were filed with the Securities and
Exchange Commission on January 11, 1996 and March 8, 1996,
respectively. The following items were reported in the Forms 8-K.
1. Item 2. Acquisition or Disposition of Assets
2. Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits.
The following historical financial statements (including the
notes thereto) were contained in the Form 8-K/A:
(i) Combined Balance Sheet of Texas Dental Plans, Inc. and
Affiliates as of December 31, 1995;
(ii) Combined Statement of Income of Texas Dental Plans, Inc. and
Affiliates for the year ended December 31, 1995
(iii) Combined Statement of Stockholders' Deficit and Equity of
Texas Dental Plans, Inc. and Affiliates for the year ended
December 31, 1995; and
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<PAGE> 13
(iv) Combined Statement of Cash Flows of Texas Dental Plans, Inc.
and Affiliates for the year ended December 31, 1995.
The following Unaudited Pro Forma Condensed Combined Financial
Statements (including the notes thereto) were contained in the Form
8-K/A:
(i) Unaudited Pro Forma Condensed Consolidated Balance Sheet of
CompDent Corporation as of December 31, 1995; and
(ii) Unaudited Pro Forma Condensed Consolidated Statement of
Income of CompDent Corporation for the year ended December 31,
1995.
___________
(1) Filed as an exhibit to the Registrant's Current Report on Form 8-K filed
with the Securities an Exchange Commission on January 11, 1996 and
incorporated herein by reference thereto.
(2) Filed as an exhibit to the Registrant's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 28, 1996 and
incorporated herein by reference thereto.
* Filed herewith.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements 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.
COMPDENT CORPORATION
Date: May 10, 1996 By: /s/ Sharon S. Graham
-------------------------------------
Sharon S. Graham
Treasurer and Chief Financial Officer
(Signing as duly authorized officer and
chief financial officer)
14
<PAGE> 15
EXHIBIT INDEX
10.1 Employment Agreement dated February 1, 1996 by and between CompDent
Corporation and Bruce A. Mitchell.
27 Financial Data Schedule (for SEC use only).
15
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
Employment Agreement, dated this 1st day of February, 1996, between
CompDent Corporation, Inc. ("CompDent") and Bruce A. Mitchell (the
"Executive").
W I T N E S S E T H
WHEREAS, the Executive has been an officer and key employee of
CompDent; and
WHEREAS, the parties hereto desire to assure that the Executive's
knowledge and familiarity with the business of CompDent will continue to be
available to CompDent after the date hereof.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, the parties hereto agree as follows:
1. Employment. Subject to the provisions of Section 6, CompDent
hereby employs the Executive and the Executive accepts such employment upon the
terms and conditions hereinafter set forth.
2. Term of Employment. The term of the Executive's employment
pursuant to this Agreement shall commence on and as of the date hereof and
shall remain in effect indefinitely thereafter until terminated in accordance
with Section 6. The period during which the Executive serves as an employee of
CompDent in accordance with and subject to the provisions of this Agreement is
referred to in this Agreement as the "Term of Employment." Without the
consent of the Executive, the Company may not transfer the Executive to a
principal place of employment more than thirty miles from the city limits of
Atlanta, Georgia, during the Term of Employment.
3. Duties. During the Term of Employment, the Executive shall
report directly to the Chief Executive Officer of CompDent and (a) shall serve
as Executive Vice President and General Counsel of CompDent, (b) shall perform
such duties and responsibilities as may be reasonably determined by the
Chairman of the Board of Directors of CompDent consistent with the Executive's
position as an executive officer of CompDent, provided that such duties and
responsibilities shall be within the general area of the Executive's experience
and skills, (c) upon the request of the Chairman of the Board of Directors of
CompDent, shall serve as an officer and/or director of CompDent and any of its
subsidiaries; and (d) shall render all services incident to the foregoing. The
Executive agrees to use his beat efforts in, and shall devote his full working
time, attention, skill and energies to, the advancement of the interests of
CompDent and its subsidiaries and
<PAGE> 2
affiliates and the performance of his duties and responsibilities hereunder.
4. Compensation. During the Term of Employment, CompDent shall
pay the Executive a salary (the "Base Salary") at an annual rate as shall be
determined from time to time by the Board of Directors of CompDent, provided,
however, that such rate per annum shall not be less than $180,000. Such salary
shall be subject to withholding under applicable law and shall be payable in
periodic installments in accordance with CompDent's usual practice for Its
senior executives, as in effect from time to time. The Executive shall be paid
a bonus of at least $72,000 in January 1997, provided he is employed by the
Company at such time.
5. Benefits.
(a) During the Term of Employment, the Executive shall be entitled
to participate in any and all bonus plans, medical, pension and dental
insurance plans and disability income plans as in effect from time to time for
senior executives of CompDent. Such participation shall be subject to (i) the
terms of the applicable plan documents, (ii) generally applicable policies of
CompDent and (iii) the discretion of the Board of Directors of CompDent or
administrative or other committee provided for in or contemplated by such plan.
(b) CompDent shall promptly reimburse the Executive for all
reasonable business expenses incurred by the Executive during the Term of
Employment in accordance with CompDent's practices for senior executives of
CompDent, as in effect from time to time.
(c) During the Term of Employment, the Executive shall receive
paid vacation annually in accordance with CompDent's practices for senior
executives of CompDent, as in effective from time to time.
(d) During the Term of Employment, the Executive shall receive a
car allowance of at least $800 per month.
(e) CompDent shall grant the Executive options exercisable for at
least 20,000 shares of its common stock (as adjusted from time to time for
stock splits, stock dividends and similar events), on or about December 31 in
each of the years 1996, 1997, 1998, 1999, and 2000. These options will be
subject to all the terms and conditions of the Company's Incentive Stock Option
Plan, except that notwithstanding any provision of the Company's Incentive
Stock Option Plan to the contrary, if the employment of the Executive is
terminated under the circumstances contemplated by Sections 6(e) or (f) hereof,
all granted options shall immediately
-2-
<PAGE> 3
vest and the Executive shall have one year to exercise the outstanding options;
provided, however, that there shall be no acceleration of the vesting of
options in the event that, in the opinion of CompDent's certified public
accountants, such vesting would preclude the ability to account for a
contemplated business combination as a pooling of interest.
(f) Except as contemplated by Sections 5(c), 5(d), and 5(e),
compliance with provisions of this Section 5 shall in no way create or be
deemed to create any obligation, express or implied, on the part of CompDent or
any parent, subsidiary or affiliate of CompDent with respect to the
continuation of any benefit or other plan or arrangement maintained as of or
prior to the date hereof or the creation and maintenance of any particular
benefit or other plan or arrangement at any time after the date hereof.
Notwithstanding the foregoing, the benefits provided to the Executive during
the Term of Employment will not be materially less favorable in the aggregate
than the benefits in effect for the executives of CompDent as of October 31,
1995.
6. Termination of Employment of the Executive. This Agreement
and the Executive's employment with CompDent and its subsidiaries may be
terminated as follows:
(a) At any time by the mutual consent of the Executive and
CompDent.
(b) At any time for "cause" by CompDent upon written notice to the
Executive. For purposes of this Agreement, a termination shall be for "cause"
if:
(i) the Executive shall commit an act of fraud, embezzlement,
misappropriation or breach of fiduciary duty against CompDent or any of its
subsidiaries or affiliates or shall be convicted by a court of competent
jurisdiction or shall plead guilty or nolo contendere to any felony or crime
involving moral turpitude;
(ii) the Executive shall commit a material breach of any of the
covenants, terms or provisions of Section 7 hereof;
(iii) the Executive shall commit a material breach of any of the
covenants, terms or provisions hereof (other than pursuant to Section 7 hereof)
which breach has not been remedied within thirty (30) days after delivery to
the Executive by CompDent of written notice thereof; or
(iv) the Executive shall have disobeyed written instructions from
CompDent's Board of Directors or shall have
-3-
<PAGE> 4
substantially failed to perform the Executive's duties hereunder, after written
notice and under circumstances effectively constituting a resignation of the
Executive's position with CompDent.
Upon termination for cause as provided in this Section 6(b), (A) all
obligations of CompDent under this Agreement shall thereupon immediately
terminate other than any obligations with respect to earned but unpaid salary;
provided, however, that the Executive shall not be entitled to receive any
bonus from CompDent with respect to the year during which such termination
occurred, and (B) CompDent shall have any and all rights and remedies under
this Agreement and applicable law.
(c) Upon the earlier death or permanent disability (as defined
below) of Executive continuing for a period of ninety (90) days. Upon any such
termination of the Executive's employment, all obligations of CompDent under
this Agreement shall thereupon immediately terminate other than any obligations
with respect to (i) earned but unpaid salary through the date of termination,
(ii) bonus payments with respect to the calendar year which such termination
occurred on the basis of and to the extent contemplated in any bonus plan then
in effect with respect to executive officers of CompDent, pro-rated on the
basis of number of days of the Executive's actual employment hereunder during
such calendar year through such termination, and (iii) in the case of permanent
disability continuation of health insurance benefits until the first
anniversary of the date of termination to the extent permitted under
Executive's group health insurance policy. As used herein, the term "permanent
disability" or "permanently disabled" is hereby defined as the inability of the
Executive, by reason of injury, illness or other similar cause, to perform a
major part of his duties and responsibilities in connection with the conduct of
the business and affairs of CompDent.
(d) At any time by the Executive upon sixty (60) days' prior
written notice to CompDent. Upon termination by the Executive as provided in
this Section 6(d), all obligations of CompDent under this Agreement shall
thereupon immediately terminate other than any obligations with respect to
earned but unpaid salary, it being understood that the Executive shall not be
entitled to receive any bonus from CompDent with respect to the year during
which such termination occurred.
(e) At any time without "cause" (as defined in Section 6(b)) by
CompDent upon written notice to the Executive. In the event of termination of
the Executive by CompDent pursuant to this Section 6(e), CompDent shall (i)
continue to pay the Executive his Base Salary for a period of two years
following the date of
-4-
<PAGE> 5
termination at the rate per annum in effect as of the date of termination,
subject to withholding to the extent required under applicable law and payable
at the same intervals as Base Salary is paid to senior Executives of CompDent
generally, and (ii) continue the Executive's health (i.e., medical and dental)
insurance as provided in Section 5(a) for one year following the date of such
termination to the extent permitted under applicable law and CompDent's group
health insurance policy. The Base Salary payments, pro-rated bonus and
continuation of health benefits contemplated by this Section 6(e), as well as
the acceleration of the vesting of stock options as contemplated by Section
5(e), are agreed by the parties hereto to be in full satisfaction and
compromise of any claim arising out of any termination of the Executive's
employment pursuant to this Section 6(e).
(f) The Executive shall have the right to terminate his employment
hereunder in the event of a material default by CompDent (including, without
limitation, a failure by CompDent to issue options as set forth in this
Agreement) in the performance of its obligations hereunder after the Executive
has given written notice to CompDent specifying such default by CompDent and
giving CompDent a reasonable time, not less than 30 days, to conform its
performance to its obligations hereunder. The rights and obligations of the
parties shall be as set forth in Section 6(e) in the event of any such
termination.
(g) Notwithstanding anything herein to the contrary, in the event
the employment of the Executive terminates pursuant to or under the
circumstances contemplated by any of Section 6(e) or (f) hereof, or as a result
of a material change in the duties of the Executive, within one year following
any "Change of Control" (as hereinafter defined) involving CompDent or any
entity controlling CompDent ("Parent"), then CompDent shall in lieu of the
payments and arrangements specified therein (including without limitation
participation in any bonus plan), (i) pay the Executive severance equal to the
Executive's aggregate salary for the two most recently completed fiscal years
(or twice his annual base salary, if employed for less than two years) payable
in equal monthly installments, for the year following such termination and
subject to withholding, and (ii) continue the Executive's health (i.e., medical
and dental) insurance as provided in Section 5(a) for one year following the
date of such termination to the extent permitted under applicable law and
CompDent's group health insurance policy, in full satisfaction and compromise
of any claims arising out of any such termination of the Executive's
employment. For purposes of this Agreement, a "Change in Control" shall mean
any of the following events occurring after the date hereof: (A) the direct or
indirect beneficial ownership (within the meaning of Section 13(d) of the
Securities Exchange Act of 1934, as amended (the
-5-
<PAGE> 6
"Exchange Act"), and Regulation 13D-G thereunder) of a majority of the
outstanding Common Stock of Parent is acquired or becomes held by any person or
group of persons (within the meaning of Section 13(d)(3) of the Exchange Act)
(a "Group"), (B) the sale, mortgage, lease or other transfer to any person or
Group in one or more transactions not in the ordinary course of business of all
or substantially all of the assets on a consolidated basis of Parent, CompDent
and CompDent, subsidiaries (taken as a whole), or (C) any private sale to any
person or Group by one or more investment funds associated with TA Associates,
Inc., in a single transaction or series of related transactions, of an
aggregate of twenty percent (20%) of the then outstanding Common Stock of
Parent, provided, however, that for purposes of this clause (iii), sales of
Common Stock in reliance on the provisions of Rule 144 promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), and sales pursuant
to an effective registration statement under the Securities Act shall in no
event be deemed to constitute private sales.
(h) Upon termination of the Executive's employment with CompDent
at any time, under this Agreement or otherwise, regardless of the circumstances
thereof, the Executive's obligations under Section 7 hereof shall survive such
termination.
7. Non-Competition.
(a) During any period in which the Executive serves as an employee
of CompDent and for a period of one (1) year after the date of termination of
the Executive's employment at any time, regardless of the circumstance thereof,
the Executive shall not, without the express written consent of CompDent,
directly or indirectly, engage, participate, invest in, be employed by or
assist, whether as owner, part-owner, shareholder, partner, director, officer,
trustee, employee, agent or consultant, or in any other capacity, any Person
(as hereinafter defined) other than CompDent and its affiliates in the
Designated Industry (as hereinafter defined). Without limiting the foregoing,
the foregoing covenant shall prohibit the Executive during the period set forth
above from (i) hiring or attempting to hire for or behalf of any Person in the
Designated Industry any officer or employee of CompDent or any of its
affiliates, (ii) encouraging for or on behalf of any such Person in the
Designated any officer or employee to terminate his or her relationship or
employment with CompDent or any of its affiliates, (iii) soliciting for or on
behalf of any such Person in the Designated Industry any customer of CompDent
or any of its affiliates and (iv) diverting to any such Person in the
Designated Industry any customer of CompDent or any of its affiliates;
provided, however, that nothing herein shall be construed as preventing the
Executive from making passive
-6-
<PAGE> 7
investments in a Person in the Designated Industry if the securities of such
Person are publicly traded and such investment constitutes less than five
percent of the outstanding shares of capital stock or comparable equity
interests of such Person. As of the date of this Agreement, the Executive is
not performing any other duties for, and is not a party to any similar
agreement with, any Person competing with CompDent or any of its affiliates.
(b) In the course of performing services hereunder and otherwise,
the Executive has had, and it is anticipated that the Executive will from time
to time have, access to confidential records, data, customer lists, trade
secrets and similar confidential information owned or used in the course of
business by CompDent and its subsidiaries and affiliates (the "Confidential
Information"). The Executive agrees (i) to hold the Confidential Information
in strict confidence, (ii) not to disclose the Confidential Information to any
Person (other than in the regular business of CompDent), and (iii) not to use,
directly or indirectly, any of the Confidential Information for any competitive
or commercial purpose; provided, however, that the limitations set forth above
shall not apply to any Confidential Information which (A) is then generally
known to the public; (B) became or becomes generally known to the public
through no fault of the Executive; or (C) is disclosed in accordance with an
order of a court of competent jurisdiction or applicable law. Upon the
termination of the Executive's employment with CompDent, all data, memoranda,
customer lists, notes, programs and other papers and items, and reproductions
thereof relating to the foregoing matters in the Executive's possession or
control, shall be returned to CompDent and remain in its possession.
(c) For purposes of this Agreement, (i) the term "Person" shall
mean an individual, a corporation, an association, a partnership, an estate, a
trust, and any other entity or organization, and (ii) the term "Designated
Industry" shall mean (A) the business of providing dental health care services
and any and all activities relating thereto, including, without limitation, the
provision and administration of prepaid dental plans, PPO dental plans and
indemnity dental plans and operation and/or ownership of dental healthcare
practices, and (B) any other business conducted by CompDent, Parent or any of
their respective affiliates.
8. Specific Performance: Severability. It is specifically
understood and agreed that any breach of the provisions of this Agreement
including, without limitation, Section 7 hereof) by the Executive is likely to
result in irreparable injury to CompDent and its subsidiaries and affiliates,
that the remedy at law alone will be an inadequate remedy for such breach and
that, in addition to
-7-
<PAGE> 8
any other remedy it may have, CompDent shall be entitled to enforce the
specific performance of this Agreement by the Executive and to seek both
temporary and permanent injunctive relief (to the extent permitted by law),
without the necessity of proving actual damages. In case any of the provisions
contained in this Agreement shall for any reason be held to be invalid, illegal
or unenforceable in any respect, any such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement, but
this Agreement shall be construed as if such invalid, illegal or unenforceable
provision had been limited or modified (consistent with its general intent) to
the extent necessary to make it valid, legal and enforceable, or if it shall
not be possible to so limit or modify such invalid, illegal or unenforceable
provision or part of a provision, this Agreement shall be construed as if such
invalid, illegal or unenforceable provision or part of a provision had never
been contained in this Agreement.
9. Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered personally or mailed by certified or registered mail
(return receipt requested) as follows:
To CompDent:
American Prepaid Professional Services, Inc.
8800 Roswell Road
Suite 244
Atlanta, GA 30350
Attn: President
To the Executive:
Bruce A. Mitchell
77 East Andrews Drive, #346
Atlanta, Georgia 30305
or to such other address of which any party may notify the other parties as
provided above. Notices shall be effective as of the date of such delivery or
mailing.
10. Miscellaneous. This Agreement shall be governed by and
construed under the laws of the State of Florida, and shall not be amended,
modified or discharged in whole or in part except by an agreement in writing
signed by both of the parties hereto. The failure of either of the parties to
require the performance of a term or obligation or to exercise any right under
this Agreement or the waiver of any breach hereunder shall not prevent
subsequent enforcement of such term or obligation or exercise of such right or
the enforcement at any time of any other right hereunder or be
-8-
<PAGE> 9
deemed a waiver of any subsequent breach of the provision so breached, or of
any other breach hereunder. This Agreement shall inure to the benefit of
successors of CompDent by way of merger, consolidation or transfer of all or
substantially all of the assets of CompDent, and may not be assigned by the
Executive. This Agreement supersedes all prior understandings and agreements
between the parties relating to the subject matter hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement under
seal as of the date first set forth above.
COMPDENT CORPORATION, INC.
By: /s/ David R. Klock
----------------------
Name: David R. Klock
Title: President
/s/ Bruce A. Mitchell
--------------------------
Bruce A. Mitchell
-9-
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 25,030
<SECURITIES> 0
<RECEIVABLES> 5,068
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 31,662
<PP&E> 2,059
<DEPRECIATION> 0
<TOTAL-ASSETS> 139,689
<CURRENT-LIABILITIES> 25,248
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0
0
<COMMON> 100
<OTHER-SE> 104,324
<TOTAL-LIABILITY-AND-EQUITY> 139,689
<SALES> 0
<TOTAL-REVENUES> 31,386
<CGS> 0
<TOTAL-COSTS> 27,572
<OTHER-EXPENSES> (10)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46
<INCOME-PRETAX> 3,931
<INCOME-TAX> 1,694
<INCOME-CONTINUING> 2,237
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