<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-26090
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. /X/ Yes / / 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 AUGUST 10, 1996
- --------------------------------------------- ---------------------------------------------
<S> <C>
Common Stock, $.01 par value 10,064,393
</TABLE>
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<PAGE> 2
COMPDENT CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements................................................. 2
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 9
Part II. Other Information
Item 1. Legal Proceedings.................................................... 14
Item 6. Exhibits and Reports Filed on Form 8-K............................... 14
Signatures............................................................................... 15
Exhibit Index............................................................................ 16
</TABLE>
<PAGE> 3
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.
1
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ITEM 1. FINANCIAL STATEMENTS
COMPDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
JUNE 30, --------
1996
--------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 26,082 $ 40,388
Premiums receivable from subscribers.............................. 4,022 3,374
Dental indemnity premiums due and unpaid.......................... 326 263
Income taxes receivable........................................... 239 0
Assets held for sale.............................................. 0 532
Deferred income taxes............................................. 4,838 1,416
Other current assets.............................................. 494 281
-------- --------
Total current assets...................................... 36,001 46,254
-------- --------
Restricted funds.................................................... 2,063 1,463
Property and equipment, net of accumulated depreciation............. 2,056 1,937
Excess of purchase price over net assets acquired................... 135,330 71,063
Noncompetition agreement............................................ 1,259 1,521
Unamortized loan fees............................................... 245 172
Reinsurance receivable.............................................. 5,423 6,332
Cash surrender value of officers' life insurance.................... 120 155
Deferred income taxes............................................... 597 243
Other assets........................................................ 978 256
-------- --------
$ 184,072 $129,396
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Unearned revenue.................................................. $ 11,842 $ 10,300
Accounts payable and accrued expenses............................. 12,904 7,372
Accrued interest payable.......................................... 354 0
Income taxes payable.............................................. 0 883
Life policy and contract claims reserves.......................... 68 37
Dental claims reserves............................................ 1,172 2,437
Other current liabilities......................................... 698 12
-------- --------
Total current liabilities................................. 27,038 21,041
-------- --------
Aggregate reserves for life policies and contracts.................. 5,339 5,323
Aggregate reserves for dental contracts............................. 0 172
Notes payable....................................................... 44,115 0
Deferred compensation expense....................................... 360 384
Other liabilities................................................... 344 299
-------- --------
Total liabilities......................................... 77,196 27,219
-------- --------
Commitments and contingencies (Note 3)
Stockholders' equity:
Common stock...................................................... 101 100
Additional paid-in capital........................................ 95,761 95,707
Retained earnings................................................. 11,014 6,370
-------- --------
Total stockholders' equity................................ 106,876 102,177
-------- --------
$ 184,072 $129,396
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
COMPDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------
1996 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues:
Subscriber premiums................................................. $33,384 $23,238
Other revenue....................................................... 1,377 238
------- -------
Total revenue............................................... 34,761 23,476
------- -------
Expenses:
Dental care providers' fees and claim costs......................... 17,967 13,832
Commissions......................................................... 3,091 2,674
Premium taxes....................................................... 264 353
General and administrative.......................................... 7,831 3,896
Depreciation and amortization....................................... 1,287 533
------- -------
Total expenses.............................................. 30,440 21,288
------- -------
Operating income............................................ 4,321 2,188
------- -------
Other (income) expense:
Interest income..................................................... (145) (96)
Interest expense.................................................... 434 630
Other, net.......................................................... (299) (7)
------- -------
(10) 527
------- -------
Income before provision for income taxes and extraordinary
item...................................................... 4,331 1,661
Income tax provision.................................................. 1,924 709
------- -------
Net income before extraordinary item........................ 2,407 952
Extraordinary loss, net of applicable tax benefit of $305............. 0 (498)
------- -------
Net income.................................................. $ 2,407 $ 454
======= =======
Income per common share:
Income before extraordinary item.................................... $ 0.24 $ 0.15
Extraordinary loss.................................................. $ 0.00 $ (0.09)
------- -------
Net income per common share................................. $ 0.24 $ 0.06
======= =======
Weighted average common shares outstanding............................ 10,185 5,903
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
COMPDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1996 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues:
Subscriber premiums............................................... $64,215 $46,028
Other revenue..................................................... 1,932 479
------- -------
Total revenue............................................. 66,147 46,507
------- -------
Expenses:
Dental care providers' fees and claim costs....................... 34,448 27,532
Commissions....................................................... 6,104 5,266
Premium taxes..................................................... 523 677
General and administrative........................................ 14,603 7,636
Depreciation and amortization..................................... 2,334 1,099
------- -------
Total expenses............................................ 58,012 42,210
------- -------
Operating income.......................................... 8,135 4,297
------- -------
Other (income) expense:
Interest income................................................... (298) (127)
Interest expense.................................................. 480 1,579
Other, net........................................................ (309) 4
------- -------
(127) 1,456
------- -------
Income before provision for income taxes and extraordinary
item.................................................... 8,262 2,841
Income tax provision................................................ 3,618 1,232
------- -------
Net income before extraordinary item...................... 4,644 1,609
Extraordinary loss, net of applicable tax benefit of $305........... 0 (498)
------- -------
Net income................................................ $ 4,644 $ 1,111
======= =======
Income per common share:
Income before extraordinary item.................................. $ 0.46 $ 0.27
Extraordinary loss................................................ $ 0.00 $ (0.10)
------- -------
Net income per common share............................... $ 0.46 $ 0.17
======= =======
Weighted average common shares outstanding.......................... 10,191 5,084
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
COMPDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1996 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net Income....................................................... $ 4,644 $ 1,111
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 2,374 1,196
(Gain) loss on sale of assets held for sale................ (309) 14
Extraordinary loss......................................... 0 803
Deferred income tax expense (benefit)...................... 327 (288)
Changes in assets and liabilities:
Premiums receivable from subscribers..................... 586 (391)
Income taxes receivable/payable.......................... (1,126) 133
Other assets............................................. 382 (245)
Unearned revenue......................................... 814 981
Accounts payable and accrued expenses.................... (538) (542)
Other liabilities........................................ (2,584) (343)
-------- -------
Net cash provided by operating activities............ 4,570 2,429
-------- -------
Cash flows from investing activities:
Additions to property and equipment.............................. (609) (585)
Increase in restricted cash...................................... (600)
Proceeds from sales of assets held for sale...................... 911 656
Payments made in connection with proposed business acquisition... 0 (820)
Acquisition of businesses, net of cash acquired.................. (62,468) 0
Cash surrender value of life insurance........................... 35 (27)
-------- -------
Net cash used in investing activities................ (62,731) (776)
-------- -------
Cash flows from financing activities:
Proceeds from (repayment of) notes payable....................... 44,000 (26,600)
Repayment of subordinated notes.................................. 0 (7,947)
Retirement of preferred stock.................................... 0 (5,377)
Loan fees paid................................................... (113) 0
Proceeds from issuance of common stock........................... 0 51,442
Proceeds from exercise of stock options.......................... 55 0
Payments made in connection with proposed public offering........ (87) 0
Other............................................................ 0 (34)
-------- -------
Net cash provided by financing activities............ 43,855 11,484
-------- -------
(Decrease) increase in cash and cash equivalents................... (14,306) 13,137
Cash and cash equivalents, beginning of period..................... 40,388 9,680
-------- -------
Cash and cash equivalents, end of period........................... $ 26,082 $ 22,817
======== =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................... $ 126 $ 1,708
======== =======
Income taxes............................................... $ 4,412 $ 793
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 8
COMPDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 1996
1. BASIS OF PRESENTATION
The unaudited consolidated balance sheet as of June 30, 1996 and the
unaudited consolidated statements of operations and cash flows for the three and
six months ended June 30, 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 six months or the three months ended June 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,
was $38 million, of which the Company paid approximately $27 million in cash and
assumed approximately $11 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.
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........................................... $44,412,858
Cash paid for assets acquired, net of cash acquired..................... (26,836,356)
Acquisition costs paid.................................................. (842,535)
-----------
Liabilities assumed..................................................... $16,733,967
===========
</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.
6
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COMPDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 six months
ended June 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>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995
---------------- ----------------
<S> <C> <C>
Revenues (in thousands)....................................... $ 72,322 $ 55,102
======= =======
Income before extraordinary item (in thousands)............... $ 3,491 $ 1,284
======= =======
Net income (in thousands)..................................... $ 3,491 $ 786
======= =======
Net income per common share before extraordinary item......... $ 0.34 $ 0.13
======= =======
Net income per common share................................... $ 0.34 $ 0.08
======= =======
</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
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
7
<PAGE> 10
COMPDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
employee owners of CompDent, the elimination of interest expense assuming the
repayment of debt with offering 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. The
plaintiffs have filed a motion for reconsideration, which is set for hearing on
August 19, 1996. The Company believes that they are likely to appeal the order
denying class certification if they are unsuccessful on their motion for
reconsideration. During the pendency of an appeal, it is up to the trial judge
to decide whether to allow the case to proceed as to the two plaintiffs.
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.
8
<PAGE> 11
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 June 30, 1996 and 1995
Revenues increased by $11.3 million, or 48.1%, to $34.8 million in the
second quarter of 1996 from $23.5 million in the second quarter of 1995. This
increase was primarily attributable to a net increase of $10.2 million, or
43.7%, in subscriber premiums to $33.4 million in the second quarter of 1996
from $23.2 million in the second quarter of 1995. The addition of CompDent
subscriber premiums following the acquisition of this company in July 1995
accounted for $8.9 million of the overall increase in subscriber premiums. Texas
Dental Plans, acquired in January 1996, and Dental Care, acquired in May 1996,
subscriber premiums provided an additional $2.1 million and $2.4 million,
respectively. 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 $4.8 million, or
100.0%, in UniLife Insurance Company ("UniLife") premiums which were recorded in
the second 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 $1.1 million, or 479.0%, to $1.4 million in the
second quarter of 1996 from $238,000 in the second quarter of 1995. The increase
is primarily attributable to $823,000 of Dental Care third party administrator
fees and management fees recorded in the second quarter of 1996 following the
May 1996 Dental Care acquisition. Also contributing to the overall increase were
UniLife reinsurance fees and CompDent Administrative Services Only revenue.
Administrative Services Only revenue represents fees collected from self-funded
groups in exchange for claims processing.
Dental care providers' fees and claims costs increased $4.2 million, or
29.9%, to $18.0 million in the second quarter of 1996 from $13.8 million in the
second 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 53.2% from 54.8% of managed dental care subscriber premiums in
the second 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 and Dental Care dental care
providers' fees at 60.4% and 62.4%, respectively, of subscriber premiums in the
second 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 $2.8 million, or 75.9%, to $877,000 in the second
quarter of 1996 from $3.7 million in the second 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 $4.6 million in annual revenues
whereby dentists are reimbursed for services rendered through claim payments.
Commissions increased $417,000, or 15.6%, to $3.1 million in the second
quarter of 1996 from $2.7 million in the second quarter of 1995. The addition of
CompDent, Texas Dental, and Dental Care commissions in 1996 accounted for
$489,000, $493,000, and $25,000, respectively, of this increase while the
elimination of UniLife
9
<PAGE> 12
commissions in the second quarter of 1996 resulted in a $608,000 decrease. As a
percentage of revenues, commissions decreased to 8.9% of revenues in the second
quarter of 1996 from 11.4% in the second quarter of 1995. This decrease related
primarily to the addition of CompDent and Dental Care commissions at 5.4% and
.8%, respectively, of revenues and the elimination of UniLife commissions at
12.6% of revenues, partially offset by the addition of Texas Dental commissions
at 23.2% of revenues during the second quarter of 1996.
Commissions on the Company's existing revenues were 10.2% in the second
quarter of 1996 compared to 11.4% in the second 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 and
Dental Care have relied more heavily on their direct sales forces than on
independent agents, resulting in lower commissions as a percentage of revenues
for CompDent and Dental Care 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.
Premium taxes decreased as a percentage of revenues to .8% in the second
quarter of 1996 compared to 1.5% in the second 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 second quarter of 1996. Texas
Dental is a referral fee-for-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 $3.9 million, or 101.1%, to
$7.8 million in the second quarter of 1996 from $3.9 million in the second
quarter of 1995. As a percentage of revenues, this expense increased to 22.5% in
the second quarter of 1996 from 16.6% in the second quarter of 1995. This
increase as a percentage of revenues is due to a higher general and
administrative level added following the July 1995 acquisition of CompDent, the
January 1996 acquisition of Texas Dental, and the May 1996 acquisition of Dental
Care.
Depreciation and amortization expense increased $754,000, or 141.5%, to
$1.3 million in the second quarter of 1996 from $533,000 in the second quarter
of 1995. This increase is primarily attributable to the additional goodwill
amortization recorded following the CompDent, Texas Dental, and Dental Care
acquisitions.
Interest income increased $49,000, or 51.0%, to $145,000 in the second
quarter of 1996 from $96,000 in the second 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 $196,000 or 31.1%, to $434,000 in the second
quarter of 1996 from $630,000 in the second quarter of 1995. During the second
quarter of 1995, the Company had approximately $34.5 million in outstanding
borrowings from the beginning of the quarter until June 1, 1995 when all
indebtedness was repaid with proceeds from the initial public offering. During
the second quarter of 1996, the Company had no outstanding indebtedness until
May 7, 1996 when the Company borrowed $38.0 million on its revolving line of
credit to finance its acquisition of Dental Care Plus. Interest expense
decreased, however, from the second quarter of 1995 to the second quarter of
1996 as the Company's borrowing rate decreased from 10% to 6.7%, respectively.
Amortization of loan fees also decreased from the second quarter of 1995 to the
second quarter of 1996 due to lower loan fees paid for the existing credit
facility than were paid for the credit facility outstanding in the second
quarter of 1995. Any future acquisitions may cause the Company to incur
additional indebtedness under its revolving credit facility or otherwise.
In the second quarter of 1996, the Company's effective income tax rate
increased to 44.4% compared to 42.7% in the second quarter of 1995. The increase
is primarily attributable to additional nondeductible goodwill
10
<PAGE> 13
amortization recorded in the second quarter of 1996 following the recent
acquisitions.
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 three months ended June 30, 1995.
Six months ended June 30, 1996 and 1995
Revenues increased by $19.6 million, or 42.2%, to $66.1 million in the six
months ended June 30, 1996 from $46.5 million in the six months ended June 30,
1995. This increase was primarily attributable to a net increase of $18.2
million, or 39.5%, in subscriber premiums to $64.2 million in the six months
ended June 30, 1996 from $46.0 million in the six months ended June 30, 1995.
Subscriber premiums from CompDent, Texas Dental, and Dental Care accounted for
$17.7 million, $4.5 million, and $2.4 million, respectively, of the overall
increase in subscriber premiums. An additional $3.2 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 $9.6 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 $1.5 million, or 303.5%, to $1.9 million in the
six months ended June 30, 1996 from $479,000 in the six months ended June 30,
1995. Dental Care third party administrator fees and management fees recorded in
the six months ended June 30, 1996 accounted for $823,000 of this increase,
while UniLife reinsurance fees and CompDent administrative services only revenue
accounted for most of the remaining increase.
Dental care providers' fees and claims costs increased $6.9 million, or
25.1%, to $34.4 million in the six months ended June 30, 1996 from $27.5 million
in the six months ended June 30, 1995. Dental care providers' fees decreased to
52.7% from 55.3% of managed dental care subscriber premiums in the six months
ended June 30, 1996 and 1995, respectively, due to the addition of Texas Dental
premiums with no corresponding capitation. Partially offsetting this decrease
was the addition of CompDent and Dental Care dental care providers' fees at
59.6% and 62.4%, respectively, of subscriber premiums in the six months ended
June 30, 1996. Dental claims decreased $5.5 million, or 75.1%, to $1.8 million
in the six months ended June 30, 1996 from $7.3 million in the six months ended
June 30, 1995 due to the reinsurance of the UniLife book of business effective
October 1995.
Commissions had a net increase of $838,000, or 15.9%, to $6.1 million in
the six months ended June 30, 1996 from $5.3 million in the six months ended
June 30, 1995. The additional CompDent, Texas Dental, and Dental Care
commissions accounted for $959,000, $990,000, and $25,000, respectively, of the
overall increase in commissions, while the elimination of UniLife commissions in
the six months ended June 30, 1996 resulted in a $1.3 million decrease. As a
percentage of revenues, commissions decreased to 9.3% of revenues in the six
months ended June 30, 1996 from 11.3% in the six months ended June 30, 1995.
This decrease related primarily to the addition of CompDent and Dental Care
commissions at 5.3% and .8%, respectively, of revenues and the elimination of
UniLife commissions at 12.9% of revenues, partially offset by the addition of
Texas Dental commissions at 22.1% of revenues during the six months ended June
30, 1996. Commissions on the Company's existing revenues were 10.3% in the six
months ended June 30, 1996 compared to 11.3% in the six months ended June 30,
1995. The elimination of UniLife commissions and an increase in the number of
large employer groups sold both contributed to this decrease.
Premium taxes decreased as a percentage of revenues to .8% in the six
months ended June 30, 1996 compared to 1.5% in the six months ended June 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.
General and administrative expenses increased $7.0 million, or 91.3%, to
$14.6 million in the six months ended June 30, 1996 from $7.6 million in the six
months ended June 30, 1995. As a percentage of revenues, this expense increased
to 22.1% in the six months ended June 30, 1996 from 16.4% in the six months
ended June 30, 1995. This increase as a percentage of revenues is due to a
higher general and administrative level added following the
11
<PAGE> 14
CompDent, Texas Dental, and Dental Care acquisitions.
Depreciation and amortization expense increased $1.2 million, or 112.4%, to
$2.3 million in the six months ended June 30, 1996 from $1.1 in the six months
ended June 30, 1995. This increase was primarily attributable to the additional
goodwill amortization recorded following the CompDent, Texas Dental, and Dental
Care acquisitions.
Interest income increased $171,000, or 134.6%, to $298,000 in the six
months ended June 30, 1996 from $127,000 in the six months ended June 30, 1995
as a result of the Company investing excess cash balances remaining from the
second stock offering in August 1995.
Interest expense decreased $1.1 million, or 69.6%, to $480,000 in the six
months ended June 30, 1996 from $1.6 million in the six months ended June 30,
1995. The Company had outstanding borrowings during most of the first six months
of 1995 until proceeds from the initial public offering were used to repay the
existing indebtedness on June 1, 1995. The Company had no outstanding borrowings
during the six months ended June 30, 1996 until May 7, 1996 when the Company
borrowed $38.0 million on its revolving line of credit to finance its
acquisition of Dental Care. Therefore, interest expense decreased significantly
from the six months ended June 30, 1995 to the same period in 1996. Any future
acquisitions may cause the Company to again incur indebtedness under its
revolving credit facility or otherwise.
In the six months ended June 30, 1996, the Company's effective income tax
rate increased slightly to 43.8% compared to 43.4% in the six months ended June
30, 1995. Additional nondeductible goodwill amortization recorded in the six
months ended June 30, 1996 contributed to an increase in the Company's effective
tax rate, while tax free interest income recorded during this period partially
offset this increase.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash in the six months ended June 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 $4.6 million and $2.4 million for
the six months ended June 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 $62.7 million and $776,000 for the
six months ended June 30, 1996 and 1995, respectively. The increase in cash used
during the six months ended June 30, 1996 relates primarily to $62.5 million
used to acquire Texas Dental and Dental Care in January and May 1996,
respectively. The Company expects to make additional capital expenditures in
excess of $2.5 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 six months ended June 30, 1996
were $44.0 million, representing borrowings under the Company's revolving line
of credit to finance the acquisition of Dental Care and to payoff intercompany
borrowings to its regulated subsidiary companies at quarter-end. Cash provided
by financing activities was $11.5 in the six months ended June 30, 1995, which
primarily represents the net of initial public offering proceeds of $51.4
million and the use of $39.9 million of these proceeds to payoff 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 and on July 5, 1995, to
partially finance the acquisition of CompDent, the Company borrowed $25
12
<PAGE> 15
million under the Credit Facility. During the six months ended June 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 $44 million of borrowings outstanding as of June
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 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 did not have any material
effect on the Company's financial position, results of operations, or cash
flows.
13
<PAGE> 16
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.
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K
(a) Exhibits.
10.1 First Amendment to Credit Facility
(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.
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<PAGE> 17
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: August 14, 1996 By: /s/ SHARON S. GRAHAM
-------------------------------------------
Sharon S. Graham
Treasurer and Chief Financial Officer
(Signing as duly authorized officer and
chief financial officer)
15
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<S> <C> <C>
10.1 -- First Amendment to Credit Agreement
27.1 -- Financial Data Schedule (for SEC use only)
</TABLE>
16
<PAGE> 1
EXHIBIT 10.1
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT, dated as of the 3rd day of May,
1996 (this "Amendment"), is made among AMERICAN PREPAID PROFESSIONAL SERVICES,
INC., a Florida corporation (the "Borrower"), COMPDENT CORPORATION, a Delaware
corporation formerly known as APPS Dental, Inc. (the "Parent"), FIRST UNION
NATIONAL BANK OF NORTH CAROLINA ("First Union") and NATIONSBANK, N.A. (SOUTH),
formerly known as NationsBank of Georgia, N.A. ("NationsBank," and, together
with First Union, the "Lenders"), and FIRST UNION, as agent for the Lenders (in
such capacity, the "Agent").
RECITALS
A. The Borrower, the Parent, the Lenders and the Agent are parties to a
Credit Agreement, dated as of June 30, 1995 (the "Credit Agreement"), providing
for the availability of certain credit facilities to the Borrower upon the terms
and conditions set forth therein. Capitalized terms used herein without
definition shall have the meanings given to them in the Credit Agreement.
B. The Borrower has requested that the Lenders agree to increase the
aggregate principal amount of the Total Revolving Credit Commitment and make
certain other amendments to the Credit Agreement, and the Lenders have agreed to
effect such amendments upon the terms and conditions set forth herein.
STATEMENT OF AGREEMENT
NOW, THEREFORE in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
AMENDMENTS
1.1 Definitions. Section 1.1 of the Credit Agreement is hereby amended as
follows:
(a) The definition of "Acquisition Amount" is hereby amended by
deleting clause (iv) therefrom and renumbering clause (v) as clause (iv).
1
<PAGE> 2
(b) The definition of "Expiry Date" is hereby amended by deleting the
words "June 30, 2000" therefrom and substituting the words "December 31,
2000" therefor.
(c) The definition of "Reportable Event" is hereby amended and
restated in its entirety as follows:
" 'Reportable Event' shall mean (i) any "reportable event" within
the meaning of Section 4043(c) of ERISA for which the 30-day notice
under Section 4043(a) of ERISA has not been waived by the PBGC
(including any failure to meet the minimum funding standard of or timely
make any required installment under Section 412 of the Internal Revenue
Code or Section 302 of ERISA, regardless of the issuance of any waivers
in accordance with Section 412(d) of the Internal Revenue Code), (ii)
any such "reportable event" subject to advance notice to the PBGC under
Section 4043(b)(3) of ERISA, (iii) any application for a funding waiver
or an extension of any amortization period pursuant to Section 412 of
the Internal Revenue Code, and (iv) a cessation of operations described
in Section 4062(e) of ERISA."
(d) The following definition is hereby added to the Credit Agreement
in proper alphabetical order:
" 'Consolidated EBITDA' shall mean, for any period, the aggregate
of (i) Consolidated Net Income for such period, plus (ii) the sum of
Consolidated Interest Expense, federal and state income taxes,
depreciation, amortization of intangible assets and other noncash
expenses or charges reducing income, all to the extent taken into
account in the calculation of Consolidated Net Income for such period,
minus (iii) to the extent taken into account in the calculation of
Consolidated Net Income for such period, noncash credits increasing
income for such period."
1.2 Scheduled Reductions in Aggregate Commitment. The table set forth in
Section 2.6(b) of the Credit Agreement is hereby amended and restated in its
entirety as follows:
<TABLE>
<CAPTION>
AGGREGATE
"DATE COMMITMENT
------------------------------------------------------------------------ -----------
<S> <C>
December 31, 1998....................................................... $43,333,333
December 31, 1999....................................................... $21,666,667
December 31, 2000....................................................... 0"
</TABLE>
1.3 Permitted Acquisitions. Section 5.8(a) of the Credit Agreement is
hereby amended and restated in its entirety as follows:
2
<PAGE> 3
"(a) Subject to the provisions of subsection (c) below and the
requirements contained in the definition of Allowed Acquisition, and
subject to the other terms and conditions of this Agreement, the Borrower
may from time to time after the Closing Date effect Allowed Acquisitions,
provided that (i) the aggregate of the Acquisition Amounts for all Allowed
Acquisitions consummated during any single fiscal year shall not exceed (y)
for the fiscal year ending December 31, 1996, $20,000,000 (such limitation
being calculated without regard to the Acquisition Amounts in connection
with the Acquisitions by the Borrower of Texas Dental Plans, Inc., Dental
Plans International, Inc., Dental Provider Resources, Inc., National Dental
Plans, Inc., Dental Care Plus Management, Corp. and I.H.C.S., Inc. and (z)
for any fiscal year ending after December 31, 1996, Consolidated EBITDA for
the immediately preceding fiscal year, and (ii) with respect to each
Allowed Acquisition, no Default or Event of Default shall have occurred and
be continuing at the time of the consummation of such Allowed Acquisition
or would exist immediately after giving effect thereto."
1.4. Financial Covenants. (a) Section 6.1 of the Credit Agreement is
hereby amended and restated in its entirety as follows:
"6.1. Ratio of Consolidated Funded Debt to Consolidated Total
Capital. The Parent will not permit the ratio of Consolidated Funded Debt
to Consolidated Total Capital to be greater than: (i) 0.5 to 1.0 as of the
last day of the fiscal quarter ending September 30, 1995, and as of the
last day of any fiscal quarter ending thereafter up to and including the
fiscal quarter ending December 31, 1998; (ii) 0.4 to 1.0 as of the last day
of the fiscal quarter ending March 31, 1999, and as of the last day of any
fiscal quarter ending thereafter up to and including the fiscal quarter
ending December 31, 1999; and (iii) 0.3 to 1.0 as of the last day of any
fiscal quarter ending thereafter."
(b) Section 6.2 of the Credit Agreement is hereby amended and restated in
its entirety as follows:
"6.2. Ratio of Consolidated EBITA to Consolidated Interest
Expense. The Parent will not permit the ratio of Consolidated EBITA to
Consolidated Interest Expense to be less than: (i) 3.0 to 1.0 for the
fiscal quarter ending September 30, 1995, and for any fiscal quarter ending
thereafter up to and including the fiscal quarter ending December 31, 1996;
(ii) 3.5 to 1.0 for
3
<PAGE> 4
the fiscal quarter ending March 31, 1997, and for any fiscal quarter ending
thereafter up to and including the fiscal quarter ending December 31, 1997;
and (iii) 4.0 to 1.0 for any fiscal quarter ending thereafter."
(c) Section 6.3 of the Credit Agreement is hereby amended and restated in
its entirety as follows:
"6.3. Ratio of Consolidated Funded Debt to Consolidated Pro Forma
EBITDA. The Parent will not permit the ratio of Consolidated Funded Debt
as of the last day of any fiscal quarter to Consolidated Pro Forma EBITDA
for the period of four consecutive fiscal quarters then ending to be
greater than: (i) 3.0 to 1.0 as of the last day of the fiscal quarter
ending September 30, 1995, and as of the last day of any fiscal quarter
ending thereafter up to and including the fiscal quarter ending December
31, 1998; (ii) 2.5 to 1.0 as of the last day of the fiscal quarter ending
March 31, 1999, and as of the last day of any fiscal quarter ending
thereafter up to and including the fiscal quarter ending December 31, 1999;
and (iii) 2.0 to 1.0 as of the last day of any fiscal quarter ending
thereafter."
(d) Section 6.4 of the Credit Agreement is hereby amended and restated in
its entirety as follows:
"6.4. Consolidated Net Worth. The Parent will not permit Consolidated
Net Worth as of the last day of any fiscal quarter, beginning with the
fiscal quarter ending March 31, 1996, to be less than the sum of (i)
$100,000,000, plus (ii) 90% of the aggregate of Consolidated Net Income for
each fiscal quarter ending after March 31, 1996 (provided that Consolidated
Net Income for any such fiscal quarter shall be taken into account for
purposes of this calculation only if positive), plus (iii) 100% of the
aggregate amount of all increases in the stated capital and additional
paid-in capital accounts of the Parent and its Subsidiaries, as determined
on a consolidated basis in accordance with Generally Accepted Accounting
Principles, resulting from the issuance of equity securities or other
capital investments after March 31, 1996."
1.5. Revolving Credit Commitments. The Revolving Credit Commitment of each
Lender set forth opposite such Lender's name on its signature page to the Credit
Agreement under the caption "Revolving Credit Commitment" is hereby deleted and
is replaced with the amount set forth opposite such Lender's name on the
signature pages to this Amendment under the caption "Revolving Credit
Commitment."
4
<PAGE> 5
1.6. Name Changes. (a) All references in the Credit Agreement to
"NationsBank" shall be deemed to be references to NationsBank, N.A. (South).
(b) All references in the Credit Agreement to the "Parent" or "APPS Dental,
Inc." shall be deemed to be references to CompDent Corporation, a Delaware
corporation formerly known as APPS Dental, Inc.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Each of the Parent and the Borrower hereby represents and warrants to the
Agent and each Lender as follows:
2.1 Corporate Organization and Power. Each of the Parent and the
Borrower is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has
the full corporate power and authority to execute, deliver and perform this
Amendment and each of the other Credit Documents required in connection
herewith to which it is a party.
2.3 Authorization; Enforceability. Each of the Parent and the
Borrower has taken all necessary corporate action to execute, deliver and
perform, and has validly executed and delivered, this Amendment and each of
the other Credit Documents required in connection herewith to which it is a
party. This Amendment and each of such other Credit Documents constitutes
the legal, valid and binding obligation of each of the Parent and the
Borrower, as applicable, enforceable against it in accordance with its
terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors'
rights generally or by general equitable principles.
2.3. No Violation. The execution, delivery and performance by each of
the Parent and the Borrower of this Amendment and each of the other Credit
Documents required in connection herewith to which it is a party, and
compliance by it therewith, do not and will not (i) violate any provision
of its articles or certificate of incorporation or bylaws, (ii) contravene
in any material respect any other applicable Requirement of Law, (iii)
conflict with, result in a breach of or constitute (with notice, lapse of
time or both) a default under any indenture, loan agreement, mortgage or
other instrument relating to Debt or any other material lease, agreement or
instrument to which it is a party, by which it or any of its properties is
bound or to which it may be subject, (iv) result in or require the creation
or imposition of any Lien upon any of its properties, other than Liens
created
5
<PAGE> 6
pursuant to the Credit Documents, or (v) require the approval or consent of
any Person not a Governmental Authority, other than such approvals and
consents as have been obtained as required and such approvals and consents
the failure to obtain which, individually or in the aggregate, would not be
reasonably likely to have a Material Adverse Effect.
2.4 Governmental Authorization. No consent, approval, authorization,
exemption or other action by, notice to, or filing with, any Governmental
Authority is required as a condition to or otherwise in connection with the
due execution, delivery and performance by each of the Parent and the
Borrower of this Amendment and the other Credit Documents required in
connection herewith to which it is a party or the legality, validity or
enforceability hereof or thereof.
2.5 Representations and Warranties. Each of the representations and
warranties of the Parent and the Borrower contained in the Credit Agreement
and in the other Credit Documents is true and correct on and as of the date
hereof with the same effect as if made on and as of the date hereof (except
to the extent any such representation or warranty is expressly stated to
have been made as of a specific date, in which case such representation or
warranty is true and correct as of such date).
2.6 No Default. No Default or Event of Default has occurred and is
continuing.
ARTICLE III
CONDITIONS TO EFFECTIVENESS
The effectiveness of the amendments to the Credit Agreement set forth in
this Amendment is subject to the satisfaction of the following conditions:
3.1 Revolving Credit Notes. The Agent shall have received, in
replacement of the outstanding Revolving Credit Notes, a new Revolving
Credit Note for each Lender in the amount of such Lender's Revolving Credit
Commitment (as set forth opposite its signature hereto), each duly
completed and executed by the Borrower in substantially the form of EXHIBIT
A.
3.2 Representations and Warranties; Officer's Certificate. The
following shall be true and the Agent shall have received a certificate,
signed by the chief executive officer or chief financial officer of each of
the Parent and the Borrower, in form and substance satisfactory to the
Lenders, certifying that (i) each of the representations and warranties of
the Parent and the Borrower contained in this Amendment, the Credit
Agreement
6
<PAGE> 7
and the other Credit Documents is true and correct as of the date of such
certificate, both immediately before and after giving effect to the
amendments effected hereby (except to the extent any such representation or
warranty is expressly stated to have been made as of a specific date, in
which case such representation or warranty is true and correct as of such
date), (ii) no Default or Event of Default has occurred and is continuing,
both immediately before and after giving effect to the amendments effected
hereby, and (iii) each of the conditions set forth in this Article III has
been satisfied.
3.3 Parent Secretary's Certificate. The Agent shall have received a
certificate, signed by the secretary or an assistant secretary of the
Parent, in form and substance satisfactory to the Lenders, certifying (i)
that attached thereto is a true and complete copy of the certificate of
incorporation and all amendments thereto of the Parent, certified as of a
recent date by the Secretary of State of Delaware, and that such
certificate has not been amended since the date of such certification, (ii)
that attached thereto is a true and complete copy of the bylaws of the
Parent as in effect at all times from the date on which the resolutions
referred to in clause (iii) below were adopted to and including the date of
such certificate, and (iii) that attached thereto is a true and complete
copy of resolutions adopted by the board of directors of the Parent
authorizing the execution, delivery and performance of this Amendment and
the other Credit Documents to which it is a party, and as to the incumbency
and genuineness of the signature of each officer of the Parent executing
this Amendment or any of such other Credit Documents, and attaching all
such copies of the documents described above.
3.4 Borrower Secretary's Certificate. The Agent shall have received a
certificate, signed by the secretary or an assistant secretary of the
Borrower, in form and substance satisfactory to the Lenders, certifying (i)
that attached thereto is a true and complete copy of the articles of
incorporation and all amendments thereto of the Borrower, certified as of a
recent date by the Secretary of State of Florida, and that such articles
have not been amended since the date of such certification, (ii) that
attached thereto is a true and complete copy of the bylaws of the Borrower
as in effect at all times from the date on which the resolutions referred
to in clause (iii) below were adopted to and including the date of such
certificate, and (iii) that attached thereto is a true and complete copy of
resolutions adopted by the board of directors of the Borrower authorizing
the execution, delivery and performance of this Amendment and the other
Credit Documents to which it is a party, and as to the incumbency and
genuineness of the signature of each officer of the Borrower executing this
Amendment or any of such other Credit Documents, and attaching all such
copies of the documents described above.
7
<PAGE> 8
3.5 Good Standing Certificates. The Agent shall have received (i) a
certificate as of a recent date of the good standing of each of the Parent
and Borrower under the laws of its jurisdiction of incorporation, from the
appropriate Governmental Authority of such jurisdiction and (ii) a
certificate as of a recent date as to the qualification of each of the
Parent and the Borrower to conduct business as a foreign corporation in the
State of Georgia, from the Secretary of State of Georgia.
3.6 Opinions of Counsel. The Agent shall have received the favorable
opinions, addressed to the Agent and the Lenders, of (i) Goodwin, Proctor &
Hoar, special counsel to the Parent and the Borrower, in substantially the
form of Exhibit B-1, and (ii) Bruce A. Mitchell, general counsel to the
Parent and the Borrower, in substantially the form of Exhibit B-2, and in
each case addressing such other matters as the Agent or any Lender may
reasonably request.
3.7 No Material Adverse Change. Since December 31, 1994, both
immediately before and after giving effect to the consummation of the
transactions contemplated by this Amendment, there shall not have occurred
any Material Adverse Change or any event, condition or state of facts that
could reasonably be expected to have a Material Adverse Effect (it being
understood that neither the CompDent Acquisition nor the acquisition of
Texas Dental Plans, Inc., Dental Plans International, Inc., Dental Provider
Resources, Inc. or National Dental Plans, Inc. constitutes, as such, a
Material Adverse Change).
3.8 Payment of Fees. The Borrower shall have paid (i) to First Union,
for its own account, the facility fee set forth in the Commitment letter
from the Agent to the Borrower dated March 1, 1996, and (ii) to
NationsBank, for its own account, any commitment, facility or other fees
agreed upon by the Borrower and NationsBank and required to be paid as a
condition to the effectiveness of the amendments to the Credit Agreement
set forth herein.
3.9 Other Documents. The Agent and each Lender shall have received
such other documents, certificates, opinions and instruments as it shall
have reasonably requested.
ARTICLE IV
EFFECT OF AMENDMENT
4.1 Credit Agreement From and after the effective date of the amendments
to the Credit Agreement set forth herein, all references to the Credit Agreement
set forth in any other Credit Document or other agreement or instrument shall,
unless otherwise
8
<PAGE> 9
specifically provided, be references to the Credit Agreement as amended by this
Amendment and as may be further amended, modified, restated or supplemented from
time to time. This Amendment is limited as specified and shall not constitute or
be deemed to constitute an amendment, modification or waiver of any provision of
the Credit Agreement except as expressly set forth herein. Except as expressly
amended hereby, the Credit Agreement shall remain in full force and effect in
accordance with its terms.
4.2 Parent Guaranty and Pledge. The Parent recognizes and acknowledges (i)
that it has obtained and will continue to obtain benefits as a result of the
extension of credit to the Borrower under the Credit Agreement, (ii) that it is
a condition to the effectiveness of the amendments to the Credit Agreement set
forth in this Amendment and to the continued extension of credit to the Borrower
under the Credit Agreement that the Parent shall have confirmed and ratified its
agreements under the Parent Guaranty and the Parent Pledge Agreement, and shall
have evidenced its agreement to the other terms and provisions hereof, by
executing and delivering this Amendment, and (iii) that the Agent and the
Lenders have relied and will continue to rely on the Parent Guaranty and the
Parent Pledge Agreement in their decision to extend credit to the Borrower under
the Credit Agreement, and would not enter into this Amendment or continue to
extend credit to the Borrower under the Credit Agreement without the agreements
of the Parent set forth herein. Accordingly, the Parent hereby irrevocably,
absolutely and unconditionally (a) approves and consents to the amendments to
the Credit Agreement set forth in this Amendment and to the execution and
delivery by the Borrower of this Amendment and all other Credit Documents
required or provided in connection herewith, (b) confirms and ratifies all of
its covenants and agreements set forth in the Parent Guaranty (including,
without limitation, the guaranties set forth in Section 1 thereof) and the
Parent Pledge Agreement (including, without limitation, the pledge and grant of
security interests set forth in Section 1 thereof), and (c) agrees that its
liabilities and obligations under the Parent Guaranty and the Parent Pledge
Agreement shall not be discharged, limited or otherwise affected by reason of
the amendments to the Credit Agreement set forth in this Amendment and that each
of the Parent Guaranty and the Parent Pledge Agreement shall remain in full
force and effect in accordance with its terms.
ARTICLE V
MISCELLANEOUS
5.1 Governing Law. This Amendment shall be governed by and construed and
enforced in accordance with the laws of the State
9
<PAGE> 10
of North Carolina (without regard to the conflicts of law provisions thereof).
5.2 Expenses. The Borrower agrees to pay upon demand all reasonable
out-of-pocket costs and expenses of the Agent and each Lender (including,
without limitation, the reasonable fees and expenses of counsel to the Agent and
each Lender) in connection with the preparation, negotiation, execution and
delivery of this Amendment and the other Credit Documents delivered in
connection herewith.
5.3 Severability. To the extent any provision of this Amendment is
prohibited by or invalid under the applicable law of any jurisdiction, such
provision shall be ineffective only to the extent of such prohibition or
invalidity and only in any such jurisdiction, without prohibiting or
invalidating such provision in any other jurisdiction or the remaining
provisions of this Amendment in any jurisdiction.
5.4. Counterparts; Effectiveness. This Amendment may be executed in any
number of counterparts and by different parties hereto on separate counterparts,
each of which when so executed and delivered shall be an original, but all of
which shall together constitute one and the same instrument. This Amendment
shall become effective upon the execution and delivery of a counterpart hereof
by each of the parties hereto (provided that the amendments to the Credit
Agreement set forth herein shall become effective as provided in Article III
hereof).
10
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized officers as of the date first above written.
AMERICAN PREPAID PROFESSIONAL
SERVICES, INC.
By: /s/ SHARON S. GRAHAM
--------------------------------------
Title: Chief Financial Officer
COMPDENT CORPORATION (f/k/a APPS
Dental, Inc.)
By: /s/ SHARON S. GRAHAM
--------------------------------------
Title: Chief Financial Officer
<TABLE>
<S> <C>
Revolving Credit FIRST UNION NATIONAL BANK OF
Commitment: NORTH CAROLINA, as Agent and as Lender
$35,000,000
By: /s/ ANN M. DODD
-----------------------------------------------
Title: Senior Vice President
Revolving Credit NATIONSBANK, N.A. (SOUTH)
Commitment:
$20,000,000
By: /s/ LAURA GRAY
-----------------------------------------------
Title: Vice President
</TABLE>
11
<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 SIX
MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 28,145
<SECURITIES> 0
<RECEIVABLES> 4,348
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 36,001
<PP&E> 2,056
<DEPRECIATION> 0
<TOTAL-ASSETS> 184,072
<CURRENT-LIABILITIES> 27,038
<BONDS> 0
0
0
<COMMON> 101
<OTHER-SE> 106,775
<TOTAL-LIABILITY-AND-EQUITY> 184,072
<SALES> 0
<TOTAL-REVENUES> 66,147
<CGS> 0
<TOTAL-COSTS> 58,012
<OTHER-EXPENSES> (309)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 480
<INCOME-PRETAX> 8,262
<INCOME-TAX> 3,618
<INCOME-CONTINUING> 4,644
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,644
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
</TABLE>
