<PAGE> 1
COMPDENT CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
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Page #
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Part I. Financial Information
Item 1. Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II. Other Information
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports Filed on Form 8-K 15
Signatures 16
</TABLE>
<PAGE> 2
PART I. FINANCIAL INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The Company's actual
results could differ materially from those set forth in the forward-looking
statements. Certain factors that might cause such a difference include, among
others, risk associated with the successful completion of new acquisitions, the
effective integration of new acquisitions, general competitive and pricing
pressures in the marketplace, and continued growth in the dental coverage
marketplace. Other risk factors are listed in the Company's Prospectus and in
required filings with the U.S. Securities and Exchange Commission.
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
COMPDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 25,688 $ 40,388
Premiums receivable from subscribers 4,865 3,374
Dental indemnity premiums due and unpaid 450 263
Income taxes receivable 539 0
Assets held for sale 0 532
Deferred income taxes 3,546 1,416
Other current assets 773 281
--------- ---------
Total current assets 35,861 46,254
--------- ---------
Restricted funds 2,063 1,463
Property and equipment, net of accumulated depreciation 2,861 1,937
Excess of purchase price over net assets acquired 135,929 71,063
Noncompetition agreements 1,102 1,521
Unamortized loan fees 217 172
Reinsurance receivable 5,517 6,332
Cash surrender value of officers' life insurance 121 155
Deferred income taxes 2,027 243
Other assets 1,431 256
--------- ---------
$ 187,129 $ 129,396
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Unearned revenue $ 11,392 $ 10,300
Accounts payable and accrued expenses 12,370 7,372
Accrued interest payable 342 0
Income taxes payable 0 883
Life policy and contract claims reserves 68 37
Dental claims reserves 1,811 2,437
Other current liabilities 1,720 12
--------- ---------
Total current liabilities 27,703 21,041
--------- ---------
Aggregate reserves for life policies and contracts 5,322 5,323
Aggregate reserves for dental contracts 0 172
Notes payable 43,919 0
Deferred compensation expense 348 384
Other liabilities 344 299
--------- ---------
Total liabilities 77,636 27,219
--------- ---------
Commitments and contingencies (Note 3)
Stockholders' equity:
Common stock 101 100
Additional paid-in capital 95,772 95,707
Retained earnings 13,620 6,370
--------- ---------
Total stockholders' equity 109,493 102,177
--------- ---------
$ 187,129 $ 129,396
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
COMPDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------ ------------
1996 1995 1996 1995
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Subscriber premiums $35,443 $31,463 $ 99,658 $77,491
Other revenue 1,704 409 3,635 888
------- ------- -------- -------
Total revenue 37,147 31,872 103,293 78,379
------- ------- -------- -------
Expenses:
Dental care providers' fees and claim costs 19,196 18,802 53,644 46,334
Commissions 2,949 3,115 9,053 8,381
Premium taxes 264 375 787 1,052
General and administrative 7,964 5,721 22,566 13,362
Depreciation and amortization 1,389 818 3,723 1,916
------- ------- -------- -------
Total expenses 31,762 28,831 89,773 71,045
------- ------- -------- -------
Operating income 5,385 3,041 13,520 7,334
------- ------- -------- -------
Other (income) expense:
Interest income (117) (181) (415) (308)
Interest expense 697 352 1,177 1,931
Other, net 96 (23) (213) (18)
------- ------- -------- -------
676 148 549 1,605
------- ------- -------- -------
Income before provision for income
taxes and extraordinary item 4,709 2,893 12,971 5,729
Income tax provision 2,103 1,246 5,721 2,478
------- ------- -------- -------
Income before extraordinary item 2,606 1,647 7,250 3,251
Extraordinary loss, net of applicable
tax benefit of $305 0 0 0 (498)
------- ------- -------- -------
Net income $ 2,606 $ 1,647 $ 7,250 $ 2,753
======= ======= ======== =======
Income per common share:
Income before extraordinary item $ 0.26 $ 0.18 $ 0.71 $ 0.47
Extraordinary loss $ 0.00 $ 0.00 $ 0.00 $ (0.08)
------- ------- -------- -------
Net income per common share $ 0.26 $ 0.18 $ 0.71 $ 0.39
======= ======= ======== =======
Weighted average common shares outstanding 10,163 9,041 10,167 6,411
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
COMPDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
1996 1995
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 7,250 $ 2,753
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,790 2,038
(Gain) loss on sale of assets held for sale (309) 8
Extraordinary loss 0 803
Deferred income tax expense (benefit) 1,086 (402)
Changes in assets and liabilities:
Premiums receivable from subscribers (380) (523)
Income taxes receivable/payable (1,427) 394
Other assets (438) (400)
Unearned revenue 365 684
Accounts payable and accrued expenses (1,833) (916)
Other liabilities (2,563) 441
------- -------
Net cash provided by operating activities 5,541 4,880
------- -------
Cash flows from investing activities:
Additions to property and equipment (1,779) (761)
Increase in restricted cash (600) 0
Proceeds from sales of assets held for sale 911 1,161
Acquisition of businesses, net of cash acquired (62,471) (31,188)
Cash surrender value of life insurance 34 (28)
------- -------
Net cash used in investing activities (63,905) (30,816)
------- -------
Cash flows from financing activities:
Repayment of notes payable 0 (26,600)
Borrowing under credit agreement 43,804 25,000
Repayments under credit agreement 0 (25,000)
Repayment of subordinated notes 0 (7,947)
Retirement of preferred stock 0 (5,377)
Loan fees paid (112) (241)
Proceeds from issuance of common stock 0 93,489
Proceeds from exercise of stock options 66 0
Payments made in connection with proposed public offering (94) 0
------- -------
Net cash provided by financing activities 43,664 53,324
------- -------
(Decrease) increase in cash and cash equivalents (14,700) 27,388
Cash and cash equivalents, beginning of period 40,388 9,680
------- -------
Cash and cash equivalents, end of period $25,688 $37,068
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 835 $ 1,925
======= =======
Income taxes $ 6,061 $ 2,056
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
COMPDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. BASIS OF PRESENTATION
The unaudited consolidated balance sheet as of September 30, 1996 and the
unaudited consolidated statements of operations and cash flows for the three
and nine months ended September 30, 1996 and 1995, 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 and 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 nine months or the three months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1996.
2. BUSINESS COMBINATIONS
Effective May 8, 1996, the Company acquired all of the outstanding capital
stock and options of Dental Care Plus Management, Corp. ("Dental Care"). The
aggregate purchase price for Dental Care and its wholly-owned subsidiary, IHCS,
Inc. ("IHCS") was $38.0 million, of which the Company paid approximately $27.0
million in cash and assumed approximately $11.0 million in accrued liabilities.
Dental Care and its subsidiary IHCS are based in Chicago, Illinois and provide
managed dental care services through a network of dental care providers.
Dental Care also acts as a third party administrator and provides management
services to Health Care Systems, a non-profit dental company. The Company
financed the purchase of Dental Care as well as satisfaction of the assumed
liabilities by drawing down the Company's revolving credit facility. The
acquisition of Dental Care 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
cost over fair value of net assets acquired of $39.7 million which is being
amortized over 40 years. During the third quarter, the Company finalized its
allocation of the purchase price of Dental Care which resulted in an increase
to excess of purchase price over net assets acquired of $1.5 million to $41.2
million.
The following is a summary of assets acquired, liabilities assumed, and
consideration paid in connection with the acquisition:
<TABLE>
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Fair value of assets acquired $ 46,769,816
Cash paid for assets acquired,
net of cash acquired (26,836,356)
Acquisition costs paid (842,535)
------------
Liabilities assumed $ 19,090,925
============
</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.
<PAGE> 7
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>
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 $25.0 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>
Unaudited pro forma results of operations of the Company for the nine
months ended September 30, 1996 and 1995 are included below. Such pro forma
presentation has been prepared assuming that the Dental Care and Texas Dental
acquisitions had occurred as of January 1, 1996 and the Dental Care, Texas
Dental, and CompDent acquisitions and the initial public offering and second
offering had occurred as of January 1, 1995, respectively.
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
----------------- ------------------
<S> <C> <C>
Revenues (in thousands) $109,468 $100,416
======== ========
Income before extraordinary item (in thousands) $ 6,097 $ 4,613
======== ========
Net income (in thousands) $ 6,097 $ 4,115
======== ========
Net income per common share
before extraordinary item $ 0.60 $ 0.46
======== =========
Net income per common share $ 0.60 $ 0.41
======== =========
</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 reduction of revenues for an
intercompany management fee charged by Dental Care to its subsidiary IHCS, the
reductions of revenues for UniLife business reinsured effective October 1,
1995, the elimination of consulting costs incurred by Dental Care under various
contractual arrangements with related entities of Dental Care which were
terminated upon the Company's purchase of Dental Care, 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
<PAGE> 8
proceeds, 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.
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. In an order issued July 22, 1996, the trial court ruled that the case
could not proceed as a class action. The plaintiffs have appealed this order
denying class certification.
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.
<PAGE> 9
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 September 30, 1996 and 1995
Revenues increased by $5.3 million, or 16.6%, to $37.1 million in the third
quarter of 1996 from $31.9 million in the third quarter of 1995. This increase
was primarily attributable to a net increase of $4.0 million, or 12.6%, in
subscriber premiums to $35.4 million in the third quarter of 1996 from $31.5
million in the third quarter of 1995. Texas Dental Plans, acquired in January
1996, and Dental Care, acquired in May 1996, provided an additional $2.2
million and $3.7 million, respectively. Internal growth of the Company's
existing subscriber base accounted for an additional $2.6 million increase in
subscriber premiums. These increases in subscriber premiums were partially
offset by a decrease of $4.6 million, or 100.0%, in UniLife Insurance Company
("UniLife") premiums which were recorded in the third 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 $1.3 million, or 316.6%, to $1.7 million in the
third quarter of 1996 from $409,000 in the third quarter of 1995. The increase
is primarily attributable to $1.2 million of Dental Care third party
administrator fees and management fees recorded in the third quarter of 1996
following the May 1996 Dental Care acquisition. Also contributing to the
overall increase were UniLife reinsurance fees.
Dental care providers' fees and claims costs increased $394,000, or 2.1%,
to $19.2 million in the third quarter of 1996 from $18.8 million in the third
quarter of 1995. Dental care providers' fees represent capitation payments
paid to panel dentists under the Company's managed dental care plans. Under
managed dental care plans, capitation payments to panel dentists are fixed
under the participating dental agreement regardless of the extent of services
provided. Dental claim costs represent amounts payable to dental care providers
under the dental indemnity insurance plans offered by CompDent. Dental care
providers' fees and claims costs decreased to 54.2% from 59.8% of subscriber
premiums in the third quarter of 1996 and 1995, respectively, due to the
acquisition of Texas Dental which has subscriber premiums with no corresponding
capitation expense. As a referral fee-for-service dental company, Texas Dental
has no capitation payments associated with its subscriber revenues. Providers'
fees and claim costs as a percent of subscriber premiums was also lowered by
the elimination of UniLife claims costs. As discussed above, effective October
1, 1995, UniLife entered into a reinsurance agreement and thus incurred no
claims cost after this date. The addition of Dental Care dental care
providers' fees and claims at 59.3% of subscriber premiums in the third quarter
of 1996 partially offset these decreases.
Commission expense decreased $166,000, or 5.3%, to $2.9 million in the
third quarter of 1996 from $3.1 million in the third quarter of 1995. The
addition of Texas Dental and Dental Care commissions in 1996 resulted in a
$227,000 increase while the elimination of UniLife commissions in the third
quarter of 1996 resulted in a $641,000 decrease. The remaining $248,000
increase in commission expense is the result of internal growth in revenues.
As a percentage of revenues, commissions decreased to 7.9% of revenues in the
third quarter of 1996 from 9.8% in the third quarter of 1995. This decrease
related primarily to the addition of Dental Care commissions at .7% of revenues
and the elimination of UniLife commissions at 13.5% of revenues. Without the
effects of Texas Dental, Dental Care and UniLife on revenues and commissions,
commissions as a percent of revenue held constant at 9.1% for both the third
quarter of 1995 and the third quarter of 1996.
Premium taxes decreased as a percentage of revenues to .7% in the third
quarter of 1996 compared to 1.2% in the third quarter of 1995. This decrease
was a result of the addition of Texas Dental and Dental Care revenues and the
elimination of UniLife premium revenue in the third quarter of 1996. Texas
Dental is a referral fee-for-
<PAGE> 10
service dental company, and, accordingly, its revenues are not subject to
premium tax in the state of Texas. Dental Care revenues are not subject to a
premium tax in the state of Illinois. UniLife premiums in 1995 were subject to
the Texas premium tax rate of approximately 2.5%.
General and administrative expenses increased $2.2 million, or 39.2%, to
$8.0 million in the third quarter of 1996 from $5.7 million in the third
quarter of 1995. As a percentage of revenues, this expense increased to 21.4%
in the third quarter of 1996 from 17.9% in the third quarter of 1995. This
increase as a percentage of revenues is due to a higher general and
administrative level added following the January 1996 acquisition of Texas
Dental and the May 1996 acquisition of Dental Care.
Depreciation and amortization expense increased $571,000, or 69.8%, to $1.4
million in the third quarter of 1996 from $818,000 in the third quarter of
1995. Amortization of goodwill increased $421,000 as a result of additional
goodwill amortization recorded following the Texas Dental and Dental Care
acquisitions. Depreciation expense increased $150,000 due to additional office
furniture, equipment, and leasehold improvements obtained in conjunction with
the acquisitions in January 1996 and May 1996 and for new office space occupied
by the Company in September 1996.
Interest expense increased $345,000 or 98.0%, to $697,000 in the third
quarter of 1996 from $352,000 in the third quarter of 1995. During the third
quarter of 1995, the Company had approximately $25.0 million in outstanding
borrowings from July 5, 1995 when debt was incurred to partially finance the
CompDent acquisition, until August 28, 1995 when the debt was retired with
proceeds of a second stock offering. In the third quarter of 1996, the
average outstanding debt balance was approximately $38.0 million. The impact
on interest expense of the additional average outstanding debt balance in the
third quarter of 1996 was partially offset by a lower Company borrowing rate
and lower loan fee amortization. Any future acquisitions may cause the Company
to incur additional indebtedness under its revolving credit facility or
otherwise.
In the third quarter of 1996, the Company's effective income tax rate
increased to 44.7% compared to 43.1% in the third quarter of 1995. The
increase is primarily attributable to additional nondeductible goodwill
amortization recorded in the third quarter of 1996 following the recent
acquisitions.
Nine months ended September 30, 1996 and 1995
Revenues increased by $24.9 million, or 31.8%, to $103.3 million in the
nine months ended September 30, 1996 from $78.4 million in the nine months
ended September 30, 1995. This increase was primarily attributable to a net
increase of $22.2 million, or 28.6%, in subscriber premiums to $99.7 million in
the nine months ended September 30, 1996 from $77.5 million in the nine months
ended September 30, 1995. Subscriber premiums from CompDent, Texas Dental, and
Dental Care accounted for $17.7 million, $6.6 million, and $6.1 million,
respectively, of the overall increase in subscriber premiums. An additional
$6.0 million of the increase was a result of increases in the Company's
existing subscriber base over the same period in 1995. These increases in
subscriber premiums were partially offset by a decrease of $14.2 million, or
100.0%, in UniLife premiums as a result of the Company entering into a
reinsurance agreement for these premiums which was effective October 1995.
Other revenue increased by $2.7 million, or 309.3%, to $3.6 million in the
nine months ended September 30, 1996 from $888,000 in the nine months ended
September 30, 1995. Dental Care third party administrator fees and management
fees recorded in the nine months ended September 30, 1996 accounted for $2.0
million of this increase. UniLife reinsurance fees and an increase in dual
option indemnity enrollment contributed to most of the remaining increase in
other revenue. The Company retains a portion of dual option indemnity premium
to cover commissions and administrative costs in accordance with its agreement
with Shenandoah Life Insurance Company.
Dental care providers' fees and claims costs increased $7.3 million, or
15.8%, to $53.6 million in the nine months ended September 30, 1996 from $46.3
million in the nine months ended September 30, 1995. As a percent of
subscriber premiums, dental care providers' fees and claims costs decreased to
53.8% from 59.8% for the nine months ended September 30, 1996 and 1995,
respectively. This decrease was due to the addition of Texas Dental premiums
with no corresponding capitation. Partially offsetting this decrease was the
<PAGE> 11
addition of Dental Care dental care providers' fees at 60.5% of subscriber
premiums in the nine months ended September 30, 1996.
Commissions had a net increase of $672,000, or 8.0%, to $9.1 million in the
nine months ended September 30, 1996 from $8.4 million in the nine months ended
September 30, 1995. The addition of CompDent, Texas Dental, and Dental Care
commissions accounted for $959,000, $1.2 million, and $60,000, respectively, of
the overall increase in commissions, while the elimination of UniLife
commissions in the nine months ended September 30, 1996 resulted in a $1.9
million decrease. As a percentage of revenues, commissions decreased to 8.8%
of revenues in the nine months ended September 30, 1996 from 10.7% in the nine
months ended September 30, 1995. This decrease related primarily to the
addition of Dental Care commissions at .7%, respectively, of revenues and the
elimination of UniLife commissions at 13.1% of revenues, partially offset by
the addition of Texas Dental commissions at 17.8% of revenues during the nine
months ended September 30, 1996. Commissions on the Company's existing
revenues were 9.7% in the nine months ended September 30, 1996 compared to
10.1% in the nine months ended September 30, 1995. An increase in the number of
large employer groups sold contributed to this slight decrease.
Premium taxes decreased as a percentage of revenues to .8% in the nine
months ended September 30, 1996 compared to 1.3% in the nine months ended
September 30, 1995. This decrease was a result of the addition of Texas Dental
and Dental Care revenues which are not subject to premium tax and the
elimination of UniLife premium revenues which were subject to a higher premium
tax rate than the revenues of most of the Company's other subsidiaries.
General and administrative expenses increased $9.2 million, or 68.9%, to
$22.6 million in the nine months ended September 30, 1996 from $13.4 million in
the nine months ended September 30, 1995. As a percentage of revenues, this
expense increased to 21.8% in the nine months ended September 30, 1996 from
17.0% in the nine months ended September 30, 1995. This increase as a
percentage of revenues is due to a higher general and administrative level
added following the CompDent, Texas Dental and Dental Care acquisitions.
Depreciation and amortization expense increased $1.8 million, or 94.3%, to
$3.7 million in the nine months ended September 30, 1996 from $1.9 million in
the nine months ended September 30, 1995. This increase was primarily
attributable to the additional goodwill amortization recorded following the
CompDent, Texas Dental, and Dental Care acquisitions.
Interest expense decreased $754,000, or 39.0%, to $1.2 million in the nine
months ended September 30, 1996 from $1.9 million in the nine months ended
September 30, 1995. The Company had outstanding borrowings of approximately
$34.5 million during five of the first nine months of 1995 until proceeds from
the initial public offering were used to repay the existing indebtedness on
June 1, 1995. The Company also had outstanding borrowings from May 7, 1996
through the end of the first nine months of 1996 as a result of borrowing $38.0
million on its revolving line of credit to finance the acquisition of Dental
Care and borrowing $5.9 million to finance intercompany regulatory capital
requirements. Although outstanding borrowings increased slightly from the nine
months ended September 30, 1995 to the nine months ended September 30, 1996,
interest expense decreased due to a decrease in the Company's borrowing rate
and a decrease in the amortization of loan fees paid in connection with these
borrowings. Any future acquisitions may cause the Company to incur additional
indebtedness under its revolving credit facility or otherwise.
In the nine months ended September 30, 1996, the Company's effective income
tax rate increased slightly to 44.1% compared to 43.3% in the nine months ended
September 30, 1995 due to additional nondeductible goodwill amortization
recorded in the nine months ended September 30, 1996.
In June 1, 1995, in conjunction with the repayment of existing
indebtedness, the Company wrote off unamortized loan fees of $498,000, net of a
tax benefit of $305,000. This write-off is presented as an extraordinary item
for the nine months ended September 30, 1995.
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash in the nine months ended September
30, 1996 have been operating activities and borrowings under its revolving line
of credit. The primary uses of cash for the period were the acquisitions of
Texas Dental and Dental Care.
Cash flows from operating activities were $5.5 million and $4.9 million for
the nine months ended September 30, 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, general and administrative expenses, and income tax payments. 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 $63.9 million and $30.8 million for
the nine months ended September 30, 1996 and 1995, respectively. The increase
in cash used during the nine months ended September 30, 1996 relates primarily
to $62.5 million used to acquire Texas Dental and Dental Care in January and
May 1996, respectively, compared to $31.2 million used for only one acquisition
(the acquisition of CompDent in July 95) during the nine months ended September
30, 1995. The $1.2 million of capital expenditures during the third quarter of
1996 relate primarily to purchases of new office furniture, equipment and
leasehold improvements for new office space occupied by the Company in
September 1996.. The Company expects to make additional capital expenditures
of approximately $500,000 during the remainder of 1996 for further enhancements
to its computer and telephone equipment.
Cash flows from financing activities in the nine months ended September 30,
1996 were $43.7 million, representing borrowings under the Company's revolving
line of credit to finance the acquisition of Dental Care and to repay
intercompany borrowings to its regulated subsidiary companies at quarter-end.
Cash provided by financing activities was $53.3 in the nine months ended
September 30, 1995, which primarily represents the net of initial public
offering proceeds of $51.4 million, secondary offering proceeds of $42.0
million, and the use of $39.9 million of these proceeds to repay outstanding
indebtedness and retire preferred stock.
On June 30, 1995, the Company obtained a reducing revolving $35 million
line of credit (the "Credit Facility") from banks. On July 5, 1995, to
partially finance the acquisition of CompDent, the Company borrowed $25 million
under the Credit Facility. During the nine months ended September 30, 1996 the
Credit Facility was amended to increase the available line of credit to $65
million. On May 7, 1996, the Company borrowed $38 million under the Credit
Facility to finance the acquisition of Dental Care. 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 LIBOR-based 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 $43.9 million of borrowings
outstanding as of September 30, 1996 under the Credit Facility.
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
<PAGE> 13
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 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 will not have any
material effect on the Company's financial position, results of operations, or
cash flows.
<PAGE> 14
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. See "Notes to
Consolidated Unaudited Financial Statements -- Contingent Liabilities" for a
discussion of material developments with regard to that action which have taken
place since the previous report.
The Company is not a party to any other material legal proceeding.
<TABLE>
<CAPTION>
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K
<S> <C>
(a) Exhibits.
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 May 23, 1996, July 22, 1996, and July 26,
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 Forms 8-K/A:
(i) Financial Statements of Dental Care Plus Management, Corp. as
of and for the years ended December 31, 1995 and 1994;
(ii) Financial Statements of I.H.C.S., Inc. as of and for the years
ended December 31, 1995 and 1994;
(iii) Financial Statements of Dental Care Plus Management, Corp. as
of March 31, 1996 and for the three months ended March 31,
1996 and 1995; and
(iv) Financial Statements of I.H.C.S., Inc. as of March 31, 1996
and for the three months ended March 31, 1996 and 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 Financial Statements of CompDent Corporation as of and for
the three months ended March 31, 1996 and for the year ended December 31, 1995.
</TABLE>
<PAGE> 15
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: November 13, 1996 By: /s/ Sharon S. Graham
------------------------------
Sharon S. Graham
Treasurer and Chief Financial
Officer (Signing as duly
authorized officer and chief
financial officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 27,751
<SECURITIES> 0
<RECEIVABLES> 5,315
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,861
<PP&E> 2,861
<DEPRECIATION> 0
<TOTAL-ASSETS> 187,129
<CURRENT-LIABILITIES> 27,703
<BONDS> 0
0
0
<COMMON> 101
<OTHER-SE> 109,392
<TOTAL-LIABILITY-AND-EQUITY> 187,129
<SALES> 0
<TOTAL-REVENUES> 103,293
<CGS> 0
<TOTAL-COSTS> 89,773
<OTHER-EXPENSES> (213)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,177
<INCOME-PRETAX> 12,971
<INCOME-TAX> 5,721
<INCOME-CONTINUING> 7,250
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 7,250
<EPS-PRIMARY> .71
<EPS-DILUTED> .71
</TABLE>
