<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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
100 Mansell Court East, Suite 400
Roswell, Georgia 30076
(Address of principal executive offices)
(770) 998-8936
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 10, 1997
----- --------------------------------
Common Stock, $.01 par value 10,109,539
<PAGE> 2
COMPDENT CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page #
<S> <C> <C>
Part I. Financial Information 3
Item 1. Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 6. Exhibits and Reports Filed on Form 8-K 18
Signatures 19
Exhibit Index 20
</TABLE>
2
<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 described in CompDent Corporation's Annual Report on Form 10-K
for the year ended December 31, 1996, and 1st and 2nd Quarter Reports for 1997,
both on Form 10-Q, all filed with the Securities and Exchange Commission.
3
<PAGE> 4
ITEM 1. FINANCIAL STATEMENTS
COMPDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
---- ----
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24,393 $ 26,959
Premiums receivable from subscribers 5,716 3,121
Income taxes receivable 2,557 247
Deferred income taxes 1,866 3,106
Other current assets 1,740 650
-------- --------
Total current assets 36,272 34,083
-------- --------
Restricted funds 2,231 2,070
Property and equipment, net of accumulated depreciation 6,416 2,977
Excess of purchase price over net assets acquired 152,956 135,040
Noncompetition agreement 483 945
Unamortized loan fees 106 189
Reinsurance receivable 5,352 5,388
Cash surrender value of officers' life insurance 149 140
Deferred income taxes 607 2,026
Other assets 5,083 1,309
-------- --------
$209,655 $184,167
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Unearned revenue $ 8,841 $ 9,582
Accounts payable and accrued expenses 11,683 10,956
Accrued interest payable 116 390
Dental claims reserves 1,547 1,421
Other current liabilities 79 1,924
-------- --------
Total current liabilities 22,266 24,273
-------- --------
Aggregate reserves for life policies and contracts 5,322 5,338
Notes payable 55,970 41,663
Deferred compensation expense 308 338
Deferred income taxes 2,776 --
Other liabilities 430 372
-------- --------
Total liabilities 87,072 71,984
-------- --------
Commitments and contingencies (Note 3)
Stockholders' equity:
Common stock 101 101
Additional paid-in capital 97,565 95,820
Retained earnings 24,917 16,262
-------- --------
Total stockholders' equity 122,583 112,183
-------- --------
$209,655 $184,167
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
COMPDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------
1997 1996
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues:
Subscriber premiums $ 35,982 $ 35,443
Affiliated practice revenue 3,343 --
Other revenue 1,809 1,704
-------- --------
Total revenue 41,134 37,147
-------- --------
Expenses:
Dental care providers' fees and claim costs 19,849 19,196
Commissions 3,552 2,949
Premium taxes 263 264
General and administrative 10,231 7,964
Depreciation and amortization 1,553 1,389
-------- --------
Total expenses 35,448 31,762
-------- --------
Operating income 5,686 5,385
-------- --------
Other (income) expense:
Interest income (79) (117)
Interest expense 783 697
Other, net (5) 96
-------- --------
699 676
-------- --------
Income before provision for income taxes 4,987 4,709
Income tax provision 2,055 2,103
-------- --------
Net income $ 2,932 $ 2,606
======== ========
Net income per common share $ 0.29 $ 0.26
======== ========
Weighted average common shares outstanding 10,238 10,163
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
COMPDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
1997 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues:
Subscriber premiums $107,470 $ 99,658
Affiliated practice revenue 4,161 --
Other revenue 5,538 3,635
-------- --------
Total revenue 117,169 103,293
-------- --------
Expenses:
Dental care providers' fees and claim costs 59,299 53,644
Commissions 9,916 9,053
Premium taxes 784 787
General and administrative 26,058 22,566
Depreciation and amortization 4,229 3,723
-------- --------
Total expenses 100,286 89,773
-------- --------
Operating income 16,883 13,520
-------- --------
Other (income) expense:
Interest income (494) (415)
Interest expense 2,229 1,177
Other, net (66) (213)
-------- --------
1,669 549
-------- --------
Income before provision for income taxes 15,214 12,971
Income tax provision 6,559 5,721
-------- --------
Net income $ 8,655 $ 7,250
======== ========
Net income per common share $ 0.85 $ 0.71
======== ========
Weighted average common shares outstanding 10,200 10,167
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
COMPDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
1997 1996
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,655 $ 7,250
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,312 3,790
Gain on sale of property and equipment (14) (309)
Deferred income tax expense 6,438 1,086
Changes in assets and liabilities:
Premiums receivable from subscribers (1,548) (380)
Income taxes receivable/payable (2,310) (1,427)
Other assets (4,581) (438)
Unearned revenue (756) 365
Accounts payable and accrued expenses (4,465) (1,833)
Other liabilities (1,707) (2,563)
-------- --------
Net cash provided by operating activities 4,024 5,541
-------- --------
Cash flows from investing activities:
Additions to property and equipment (2,686) (1,779)
Increase in restricted cash (86) (600)
Proceeds from sale of property and equipment 24 911
Cash surrender value of life insurance (9) 34
Payments made in connection with proposed business acquisitions 19 --
Purchase of businesses, net of cash acquired (18,763) (62,471)
-------- --------
Net cash used in investing activities (21,501) (63,905)
-------- --------
Cash flows from financing activities:
Borrowings under credit agreement 14,307 43,804
Tax benefit realized from exercise of nonqualified stock options 583 --
Loan fees paid -- (112)
Payments made in connection with proposed public offering -- (94)
Proceeds from exercise of stock options 21 66
-------- --------
Net cash provided by financing activities 14,911 43,664
-------- --------
Decrease in cash and cash equivalents (2,566) (14,700)
Cash and cash equivalents, beginning of period 26,959 40,388
-------- --------
Cash and cash equivalents, end of period $ 24,393 $ 25,688
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,420 $ 835
======== ========
Income taxes $ 1,850 $ 6,061
======== ========
Non-cash investing and financing activities:
Stock issued in exchange for business acquired $ 1,141 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
COMPDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. BASIS OF PRESENTATION
The unaudited consolidated balance sheet as of September 30, 1997, the
unaudited consolidated statements of operations for the three months and nine
months ended September 30, 1997 and 1996, and the unaudited consolidated
statements of cash flows for the nine months ended September 30, 1997 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 as of
December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995, and
1994, included in the 1996 Annual Report of CompDent Corporation and
Subsidiaries (the "Company", except as the context otherwise requires) and on
Form 10-K. Operating results of the Company for the three months or nine months
ended September 30, 1997, are not necessarily indicative of the results that may
be expected for the entire year ending December 31, 1997.
2. BUSINESS COMBINATIONS
Effective January 8, 1996, the Company completed the acquisition of Texas
Dental Plans, Inc., a Texas-based referral fee-for-service dental company, and
affiliated entities ("Texas Dental"), for an aggregate cash purchase price of
approximately $23.0 million. The acquisition was funded with net proceeds
remaining from the Company's second stock offering. The Texas Dental acquisition
was accounted for using the purchase method of accounting, with the results of
operations of the businesses acquired included from the effective date of the
acquisition. The acquisition resulted in excess of cost over fair value of net
assets acquired of $26.0 million which is being amortized over 40 years.
The following is a summary of assets acquired, liabilities assumed, and
consideration paid in connection with the acquisition:
<TABLE>
<S> <C>
Fair value of assets acquired $ 27,239,000
Cash paid for assets acquired, net of cash acquired (23,132,000)
Acquisition costs paid (540,000)
------------
Liabilities assumed $ 3,567,000
============
</TABLE>
Effective May 8, 1996, the Company acquired all of the outstanding capital
stock and options of Dental Care Plus Management, Corp. ("Dental Care Plus").
The aggregate purchase price for Dental Care Plus 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 Plus and its subsidiary, IHCS, are based in
Chicago, Illinois, and provide managed dental care services through a network of
dental care providers. Dental Care Plus also acts as a third party administrator
and provides management services to Health Care Systems, Inc., a non-profit
dental company. The Company financed the purchase of Dental Care Plus, as well
as satisfaction of the assumed liabilities, by drawing down the Company's
revolving credit facility. The acquisition of Dental Care Plus 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
$39.7 million which is being amortized over 40 years. In 1996, the Company
finalized its allocation of the purchase price of Dental Care Plus which
resulted in an increase to excess of purchase price over net assets acquired of
$1.5 million to $41.2 million.
8
<PAGE> 9
The following is a summary of assets acquired, liabilities assumed, and
consideration paid in connection with the acquisition:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired $ 46,770,000
Cash paid for assets acquired, net of cash acquired (26,836,000)
Acquisition costs paid (843,000)
------------
Liabilities assumed $ 19,091,000
============
</TABLE>
Effective March 21, 1997, the Company completed the acquisition of American
Dental Providers, Inc. ("AMDP"), and Diamond Dental & Vision, Inc. ("DDV"). The
aggregate purchase price of $1.7 million consisted of $0.5 million in cash and
$1.2 million of Company common stock issued at fair market value. AMDP provides
managed dental care services through a network of dental care providers, and DDV
provides a vision plan and referral fee-for-service dental plan to the Arkansas
market. The Company funded the cash portion of the purchase with cash available
from operations. The acquisition of AMDP and DDV 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 $2.9
million which will be amortized over 40 years. During the second quarter of
1997, the Company revised its allocation of the purchase price of AMDP and DDV
which resulted in a decrease to the excess of purchase price over net assets
acquired of $0.5 million to $2.4 million.
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 $ 2,652,000
Cash paid and fair value of stock issued
for assets acquired, net of cash acquired (1,614,000)
Acquisition costs paid (416,000)
------------
Liabilities assumed $ 622,000
============
</TABLE>
Effective July 2, 1997, the Company completed the acquisition of 21 dental
facilities from The Workman Management Group, Ltd. ("Workman"). The dental
facilities are located in central and southern Illinois. The purchase price
consisted of $15.5 million in cash less aggregate outstanding indebtedness of
approximately $1.2 million. In addition, the Company granted an aggregate of
70,000 non-qualified options to the selling shareholders. Funding for the
acquisition was obtained from cash available from operations and from the
Company's revolving line of credit. Concurrent with the acquisition, the Company
entered into a 40-year agreement to manage the dental practices which are
operating in the dental facilities. The acquisition of Workman 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
$15.2 million which will be 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 $ 18,462,000
Cash paid, net of cash acquired (15,340,000)
Acquisition costs paid (990,000)
------------
Liabilities assumed $ 2,132,000
============
</TABLE>
Effective July 2, 1997, the Company completed the acquisition of one dental
facility from Old Cutler Dental Associates, P.A. ("Old Cutler"). The dental
facility is located in southern Florida. The purchase
9
<PAGE> 10
price consisted of $1.4 million in cash less discharge of liabilities related
to the purchased assets. Funding for the acquisition was obtained from cash
available from operations and from the Company's revolving line of credit.
Concurrent with the acquisition, the Company entered into a 40-year agreement
to manage the dental practice which is operating in the dental facility. The
acquisition of Old Cutler was accounted for using the purchase method of
accounting with the results of operations of the business acquired included from
the effective date of the acquisition. The acquisition resulted in excess of
cost over fair value of net assets acquired of $1.5 million which will be
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 $ 1,901,000
Cash paid, net of cash acquired (1,400,000)
Acquisition costs paid (111,000)
------------
Liabilities assumed $ 390,000
============
</TABLE>
Effective September 26, 1997, the Company completed the acquisition of one
dental facility from Robert T. Winfree, D.D.S., P.C. ("Winfree"). The dental
facility is located in central Tennessee. The purchase price consisted of $1.5
million in cash less discharge of liabilities related to the purchased assets.
Funding for the acquisition was obtained from cash available from operations and
from the Company's revolving line of credit. Concurrent with the acquisition,
the Company entered into a 40-year agreement to manage the dental practice which
is operating in the dental facility. The acquisition of Winfree was accounted
for using the purchase method of accounting with the results of operations of
the business acquired included from the effective date of the acquisition. The
acquisition resulted in excess of cost over fair value of net assets acquired of
$1.6 million which will be 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 $ 1,821,000
Cash paid, net of cash acquired (1,550,000)
Acquisition costs paid (116,000)
------------
Liabilities assumed $ 155,000
============
</TABLE>
Unaudited pro forma results of operations of the Company for the nine
months ended September 30, 1997 and 1996, are included below. Such pro forma
presentation has been prepared assuming that the AMDP, DDV, Workman, Old Cutler,
and Winfree acquisitions had occurred as of January 1, 1997, and that the AMDP,
DDV, Workman, Old Cutler, Winfree, Texas Dental, and Dental Care Plus
acquisitions had occurred as of January 1, 1996, respectively.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(in thousands, except per share data) 1997 1996
---- ----
<S> <C> <C>
Revenues $122,243 $117,417
======== ========
Net income $ 7,984 $ 5,120
======== ========
Net income per common share $ 0.78 $ 0.50
======== ========
</TABLE>
10
<PAGE> 11
The pro forma results include the historical accounts of the Company,
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, the
reduction of revenues for an intercompany management fee charged by Dental Care
Plus to its subsidiary, IHCS, the elimination of consulting costs incurred by
Dental Care Plus under various contractual arrangements with related entities of
Dental Care Plus which were terminated upon the Company's purchase of Dental
Care Plus, 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
The Company's wholly-owned subsidiary, 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. For over three
years, the parties have litigated the procedural issue of whether the suit may
be maintained 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
appealed this order denying class certification. In an opinion dated July 11,
1997, the appellate court ruled that the cause is suitable for a class action.
The Company has applied to the Florida Supreme Court to exercise its
discretionary jurisdiction to review the appellate court's decision. If the
Florida Supreme Court declines to review the case, or if the supreme court
affirms the appellate court's decision, litigation on the merits of the
Plaintiffs' claim will proceed in the trial court as a class action.
The Company believes its interpretation and administration of the
Participating Dentist Agreements are correct and, therefore, is vigorously
defending the suit. While the ultimate outcome of this lawsuit cannot at this
time be predicted with certainty, management does not expect that this matter
will have a material adverse effect on the consolidated financial position, cash
flow or results of operations of the Company.
The Company is not a party to any other material legal proceeding.
11
<PAGE> 12
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 year ended December 31,
1996.
Three months ended September 30, 1997 and 1996
Total revenue increased to $41.1 million in the third quarter of 1997
as compared to $37.1 million for the same period in 1996. This 10.8% increase
was largely attributable to $3.3 million of affiliated practice revenue from the
Company's dental practice management company, Dental Health Management, Inc.
("DHM"), which began operations in 1997. The acquisitions of AMPD and DDV in
March 1997 accounted for $0.2 million of the increase in subscriber premiums.
Internal growth of the Company's existing subscriber base accounted for a $0.5
million increase in subscriber premiums. Other revenue, which consists of third
party administrator fees and indemnity fees, increased $0.1 million during the
third quarter of 1997 versus the same period in 1996.
Dental care providers' fees and claim costs increased 3.1% in the third
quarter of 1997 to $19.8 million from $19.2 million for the third quarter of
1996. Dental care providers' fees represent capitation payments paid to 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 dental indemnity
insurance plans. Dental care providers' fees and claim costs increased to 55.2%
of subscriber premiums in the third quarter of 1997 compared to 54.2% in the
third quarter of 1996. This small increase as a percentage of subscriber
premiums was due to a change in product mix toward more inclusive dental plans
which incur higher claims costs, and toward plans which pay a capitation fee
based on the number of family members who have selected a dentist, rather than a
per-subscriber capitation fee. The product mix has also experienced a decline in
referral-fee-for-service plans which incur no capitation fees.
Commission expense increased $0.7 million, or 24.1%, to $3.6 million in the
third quarter of 1997 from $2.9 million in the third quarter of 1996. As a
percentage of subscriber premiums, commissions increased to 9.9% in the third
quarter of 1997 from 8.3% in the third quarter of 1996. This increase reflects a
shift in emphasis toward reliance on independent agents and away from a larger
direct sales force.
General and administrative expenses increased $2.2 million, or 27.5%,
to $10.2 million in the third quarter of 1997 from $8.0 million in the third
quarter of 1996. As a percentage of revenues, this expense increased to 24.8% in
the third quarter of 1997 from 21.6% in the third quarter of 1996. Of the
increase, $2.9 million was the result of expenses related to the generation of
affiliated practice revenue from DHM, the Company's dental practice management
company, which started in 1997. General and administrative expenses for the
other operations declined $0.7 million in the third quarter of 1997 versus the
third quarter of 1996. These savings resulted from general cost reductions and
continued cost savings realized from the consolidation of acquired operations.
Depreciation and amortization expense increased $0.2 million, or 14.3%, to
$1.6 million in the third quarter of 1997 from $1.4 million in the third quarter
of 1996. This increase was principally due to the additional goodwill obtained
as a result of the AMDP and DDV acquisitions in March 1997 and as a result of
the acquisitions made by DHM in July and September, 1997.
Net interest expense increased $0.1 million to $0.7 million in the third
quarter of 1997 from $0.6 million in the third quarter of 1996. This increase
related principally to additional debt incurred to
12
<PAGE> 13
finance DHM acquisitions in the third quarter of 1997 offset by the
implementation of a cash management system which reduced outstanding cash
balances. Any future acquisitions may cause the Company to incur additional
indebtedness under its revolving credit facility or otherwise.
In the third quarter of 1997, the Company's effective income tax rate
decreased to 41.2% compared to 44.7% in the third quarter of 1996. This decrease
was achieved through improved tax planning and because the amortization of the
goodwill acquired in connection with the asset purchases made by DHM in the
third quarter of 1997 was deductible for income tax purposes.
Nine months ended September 30, 1997 and 1996
Total revenue increased by $13.9 million, or 13.5%, to $117.2 million for
the nine months ended September 30, 1997, from $103.3 million for the nine
months ended September 30, 1996. Of the total increase, $4.2 million was from
affiliated practice revenue from our dental practice management company, DHM,
which began operations in 1997. In addition, subscriber premiums increased $7.8
million, or 7.8%, to $107.5 million for the nine months ended September 30,
1997, from $99.7 million in the nine months ended September 30, 1996. The
acquisition of Dental Care Plus in May 1996 provided $5.1 million of the
increase in subscriber premiums as a full nine months of its revenues were
included for the nine months ended September 30, 1997, compared to only five
months of its revenues after the acquisition for the nine months ended September
30, 1996. The acquisitions of AMPD and DDV in March 1997 accounted for $0.7
million of the increase in subscriber premiums. Internal growth of the Company's
existing subscriber base accounted for the remaining $2.0 million increase.
Other revenue increased by $1.9 million, or 52.8%, to $5.5 million for the
nine months ended September 30, 1997, from $3.6 million for the nine months
ended September 30, 1996. Inclusion of Dental Care Plus' third party
administrator fees and management fees for a full nine months ended September
30, 1997, compared to five months after the acquisition for the nine months
ended September 30, 1996, accounted for most of the increase.
Dental care providers' fees and claim costs increased $5.7 million, or
10.6%, to $59.3 million for the nine months ended September 30, 1997, from $53.6
million for the nine months ended September 30, 1996. 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. Dental care
providers' fees and claims costs increased to 55.2% of subscriber premiums for
the nine months ended September 30, 1997, compared to 53.8% for the nine months
ended September 30, 1996. This increase was due to a change in product mix
toward more inclusive dental plans which incur higher claims costs, and toward
plans which pay a capitation fee based on the number of family members who have
selected a dentist, rather than simply a per-subscriber capitation fee. The
product mix has also experienced a decline in referral-fee-for-service plans
which incur no capitation fees. The increase in dental care providers' fees and
claims costs as a percentage of subscriber premiums was also due, in part, to
the acquisition in May 1996 of Dental Care Plus, which historically incurred
capitation expense at 62.4% of subscriber premiums, a higher percentage than the
Company's other subsidiaries.
Commission expense increased $0.8 million, or 8.8%, to $9.9 million for
the nine months ended September 30, 1997, from $9.1 million for the nine months
ended September 30, 1996. As a percentage of subscriber premiums, commissions
increased slightly to 9.2% for the nine months ended September 30, 1997, from
9.1% for the nine months ended September 30, 1996. This increase reflected a
shift emphasis toward reliance on independent agents and away from a larger
direct sales force.
General and administrative expenses increased $3.5 million, or 15.5%,
to $26.1 million for the nine months ended September 30, 1997, from $22.6
million for the nine months ended September 30,
13
<PAGE> 14
1996. As a percentage of revenues, this expense increased to 22.3% for the nine
months ended September 30, 1997, from 21.9% for the nine months ended September
30, 1996. All of the increase was the result of expenses related to the
generation of affiliated practice revenue from the Company's dental practice
management company, DHM, which started in 1997. Other general and administrative
expenditures remained constant despite rising revenues as a result of general
cost reductions and cost savings realized from the consolidation of acquired
operations. Redundant personnel and overhead costs have been reduced relating to
Texas Dental and Dental Care Plus following the acquisitions of these companies
in January 1996 and May 1996, respectively.
Depreciation and amortization expense increased $0.5 million, or 13.5%,
to $4.2 million for the nine months ended September 30, 1997, from $3.7 million
for the nine months ended September 30, 1996. Amortization of goodwill, which
accounted for most of the change, increased principally due to acquisitions made
by DHM in July and September 1997 and the acquisitions in March 1997 of AMDP and
DDV.
Net interest expense increased $0.9 million to $1.7 million for the
nine months ended September 30, 1997, versus $0.8 million for the nine months
ended September 30, 1996. This increase related mostly to additional debt
incurred to finance the acquisitions of AMDP and DDV in March 1997 and the
Workman, Old Cutler, and Winfree acquisitions in the third quarter of 1997,
which were offset by the implementation of a cash management system which
reduced outstanding cash balances. Any future acquisitions may cause the Company
to incur additional indebtedness under its revolving credit facility or
otherwise.
For the nine months ended September 30, 1997, the Company's effective
income tax rate was 43.1% compared to 44.1% for the nine months ended September
30, 1996. This decrease was achieved through improved tax planning resulting in
the utilization of net operating loss carry forwards in certain subsidiaries and
because the amortization of the goodwill acquired in connection with the asset
purchases made by DHM in the third quarter of 1997 was deductible for income tax
purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash in the nine months ended
September 30, 1997, were $14.3 million of proceeds under the Company's revolving
credit agreement and $4.0 million of cash provided by operating activities. The
primary uses of cash for the period were the acquisitions of AMDP, DDV, Workman,
Old Cutler, and Winfree, and the purchases of property and equipment.
Cash flows from operating activities were $4.0 million for the nine
months ended September 30, 1997, and $5.5 million for the nine months ended
September 30, 1996. Cash flows from operations consist primarily of subscriber
premiums and investment income net of capitation payments to panel dentists,
claims paid, broker and agent 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 $21.5 million and $63.9 million
for the nine months ended September 30, 1997 and 1996, respectively. The
decrease in cash used during the nine months ended September 30, 1997, relates
primarily to decreased use of cash for acquisitions. In the nine months ended
September 30, 1997, $18.8 million was used for the acquisitions of AMDP and DDV,
and the dental facilities of Workman, Old Cutler, and Winfree, compared to $62.5
million used to acquire Texas Dental and Dental Care Plus in the nine months
ended September 30, 1996. Capital expenditures increased $0.9 million during the
nine months ended September 30, 1997, compared to the nine months ended
September 30, 1996, due primarily to purchases of leasehold improvements and
dental equipment for the Company's dental office management business, and
telephone and computer purchases. The Company has entered into a joint
initiative with Golder, Thoma, Cressey, Rauner Fund V, a leading private equity
firm ("GTCR"),
14
<PAGE> 15
relating to the development of 35 to 50 de novo dental offices within the next
two years. Under this arrangement, the Company has agreed to fund certain
development costs (including the purchase of dental equipment, supplies, and
leasehold improvements) in an amount equal to amounts funded by GTCR in
connection with the joint initiative, not to exceed $15 million. The Company
anticipates capital expenditures will continue to increase as the Company meets
its funding obligations under this arrangement.
Cash flows provided by financing activities in the nine months ended
September 30, 1997, were $14.9 million, representing $14.3 million of net
proceeds under the Company's revolving line of credit and a $0.6 million income
tax benefit realized from the exercise of nonqualified stock options. For the
nine months ended September 30, 1996, financing activities provided $43.7
million of cash flow, consisting almost entirely of borrowings under the
Company's revolving line of credit.
On June 30, 1995, the Company obtained a reducing revolving $35.0
million line of credit (the "Credit Facility") from banks. The Credit Facility
subsequently was amended to increase the available line of credit to $65.0
million. The Credit Facility, as amended, requires beginning at the end of three
and one-half years from the date of closing, a 33% reduction per year in
available and outstanding borrowings. Outstanding indebtedness under the Credit
Facility bears interest, at the Company's option, at a rate equal to the prime
rate plus up to .25% of LIBOR plus up to 1.75%, 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 $56.0 million of
borrowings outstanding as of September 30, 1997, 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 24 months because cash receipts are principally premium
revenue received prior to expected capitation payments and claims for dental
services. Historically, the Company's operations have not been capital
intensive; however, the Company's recent initiative in the establishment of
dental offices through its subsidiary operation, DHM, will present capital
needs, the extent of which is indeterminate. Any acquisitions the Company may
consummate in the future may require additional financing under the Credit
Facility or otherwise.
Under applicable insurance laws of most states in which the Company
conducts business, the Company's subsidiaries operating in the particular states
are required to maintain a minimum level of net worth and reserves. 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
The Financial Accounting Standards Board ("the Board") has issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. This Statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, "Earnings Per Share," and makes
them comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation.
15
<PAGE> 16
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that shared in the
earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS
pursuant to APB Opinion No. 15.
This Statement is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted. This Statement requires restatement of all prior-period EPS
data presented. Implementing the requirements of SFAS No. 128 is not anticipated
to have a material impact on the financial position, results of operations,
earnings per share, or cash flows of the Company.
The Board has issued SFAS No. 130, "Reporting Comprehensive Income", which
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, and losses) in the financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. This Statement
does not require a specific format for the presentation of comprehensive income
but requires an amount representing total comprehensive income for the period.
This Statement is effective for fiscal years beginning after December 15, 1997,
with reclassification of earlier periods required. Other than the additional
presentation requirements of this Statement, the Company does not anticipate a
material impact on the financial position, results of operations, earnings per
share, or cash flows.
The Board has issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports.
This Statement requires that a public business enterprise report financial
and descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
The financial information required includes a measure of segment profit or
loss, certain specific revenue and expense items, segment assets and a
reconciliation of each category to the general financial statements. The
descriptive information required includes the way that the operating segments
were determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the general purpose financial statements, and changes in the
measurement of segment amounts from period to period.
This Statement is effective for financial statements for periods beginning
after December 15, 1997, with restatement of earlier periods required in the
initial year of application. This Statement need not be applied to interim
financial statements in the initial year of its application, but comparative
information for interim periods in the initial year of application is to be
reported in financial statements for interim periods in the second year of
application. The Company is currently determining if these disclosure
requirements will be applicable and, therefore, required in future periods.
16
<PAGE> 17
RECENT DEVELOPMENTS
By the end of 1998, the Company expects that its various administrative
systems will have the capability to process transactions dated beyond 1999. The
costs to complete its efforts to modify or replace such systems are not expected
to be material.
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported in the Company's Form 10-K for the period ended
December 31, 1996, the Company's wholly-owned subsidiary, 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 dentist for the period of time between when affected
subscribers enroll and the time at which the subscribers select a dentist. For
over three years, the parties have litigated the procedural issue of whether the
suit may be maintained 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 appealed this order denying class certification. In an opinion dated
July 11, 1997, the appellate court ruled that the cause is suitable for a class
action. The Company has applied to the Florida Supreme Court to exercise its
discretionary jurisdiction to review the appellate court's decision. If the
Florida Supreme Court declines to review the case, or if the supreme court
affirms the appellate court's decision, litigation on the merits of the
Plaintiffs' claim will proceed in the trial court as a class action.
The Company believes its interpretation and administration of the
Participating Dentist Agreements are correct and, therefore, is vigorously
defending the suit. While the ultimate outcome of this lawsuit cannot at this
time be predicted with certainty, management does not expect that this matter
will have a material adverse effect on the consolidated financial position, cash
flow, or results of operations of the Company.
The Company is not a party to any other material legal proceeding.
ITEM 2. CHANGES IN SECURITIES
The Option Committee granted an aggregate of 70,000 non-qualified stock
options as part of the purchase price consideration paid in connection with the
acquisition of Workman Management Company on July 2, 1997. These options were
issued at an exercise price of $18.753, which represented the per share price
equal to the average closing price of a share of CompDent Corporation over the
20 trading days immediately preceding the date of grant. The options were
granted in reliance upon the exemption from registration under Section 4(2)
of the Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K
(a) Exhibits.
10.1 Form of Non-Qualified Stock Option Agreement issued in
connection with acquisition.
10.2 Form of Non-Qualified Stock Option Agreement issued in
connection with acquisition.
10.3 Form of Non-Qualified Stock Option Agreement issued in
connection with acquisition.
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K.
None.
18
<PAGE> 19
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 11, 1997 By: /s/ Bruce A. Mitchell
----------------------------
Bruce A. Mitchell
Treasurer and interim Chief
Financial Officer
(Signing as duly authorized
officer and chief financial
officer)
19
<PAGE> 20
EXHIBIT INDEX
10.1 Form of Non-Qualified Stock Option Agreement issued in connection with
acquisition.
10.2 Form of Non-Qualified Stock Option Agreement issued in connection with
acquisition.
10.3 Form of Non-Qualified Stock Option Agreement issued in connection with
acquisition.
27 Financial Data Schedule (for SEC use only).
20
<PAGE> 1
EXHIBIT 10.1
FORM OF
NON-QUALIFIED STOCK OPTION AGREEMENT
NAME OF OPTIONEE:
NO. OF OPTION SHARES:
GRANT DATE:
OPTION EXERCISE PRICE:
EXPIRATION DATE:
CompDent Corporation, a Delaware corporation (the "Company"), hereby
grants to the person named above (the "Optionee") an option (the "Stock Option")
to purchase on or prior to the expiration date specified above (the "Expiration
Date") all or any part of the number of shares of Common Stock, par value $0.01
per share ("Common Stock"), of the Company indicated above (the "Option
Shares"), at the per share option exercise price specified above, subject to the
terms and conditions set forth herein.
1. VESTING AND EXERCISABILITY.
No portion of this Stock Option may be exercised until such
portion shall have vested. This Stock Option shall be vested and exercisable
with respect to the following number of Option Shares on the dates indicated:
<TABLE>
<CAPTION>
Incremental (Aggregate) Number
of Option Shares Exercisable* Vesting Date
----------------------------- ------------
<S> <C>
1st anniversary of Grant Date
2nd anniversary of Grant Date
3rd anniversary of Grant Date
4th anniversary of Grant Date
</TABLE>
- --------
* Subject to Section 4
<PAGE> 2
Once any portion of this Stock Option becomes vested and exercisable,
it shall continue to be exercisable at any time or times prior to the Expiration
Date, subject to the provisions hereof, including, without limitation, Section 5
hereof which provides for the termination of unexercised options upon completion
of certain transactions described therein. In the event a Terminating Event (as
defined below) has occurred, this Stock Option shall no longer vest or become
exercisable with respect to any additional Option Shares after the date of a
Terminating Event, and this Stock Option may thereafter be exercised, to the
extent it was vested and exercisable on the date of such Terminating Event, by
the Optionee until the earlier of (i) three months from the date of such
Terminating Event or (ii) the Expiration Date. For purposes of this Agreement,
the term "Terminating Event" shall mean (A) a termination of the Optionee's
employment with the Company, Dental Health Management, Inc. ("DHMI") or any
professional corporation or association or other entity with which DHMI or any
other subsidiary of the Company has a management services or similar agreement
or (B) a material breach of any covenant, agreement or representation or
warranty of the Optionee under (i) that certain Asset Purchase Agreement dated
as of June 13, 1997 (the "Purchase Agreement") by and among the Company, Dental
Health Management, Inc. ("DHMI"), DentLease, Inc. ("DentLease"), Workman
Management Group, Ltd. ("WMG"), Associated Dental Professionals, Ltd., Premier
Management Group, Ltd., Supreme Dental Management, Ltd., Elite Management Group,
Ltd., Paramount Dental Management, Ltd. and the Stockholders thereof (including
the Optionee) or the certificate delivered pursuant to Section 7.01(a), if such
breach constitutes the wilful breach of a covenant on the part of the Optionee
or is the result of the Optionee's fraud or intentional misrepresentation, (ii)
the Option Agreement dated as of
2
<PAGE> 3
even date herewith (the "Option Agreement") by and among the Company, DHMI,
DentLease, WMG, Optionee and certain other related parties, and (iii) the
Non-Competition Agreement executed and delivered by the Optionee to the Company,
DHMI and DentLease pursuant to the Purchase Agreement and the Option Agreement.
2. EXERCISE OF STOCK OPTION.
(a) The Optionee may exercise only vested portions of this
Stock Option and only in the following manner: Prior to the Expiration Date
(subject to Sections 1 and 5), the Optionee may give written notice on any
business day to the Option and Compensation Committee of the Board of Directors
of the Company, or other committee performing similar functions as in effect
from time-to-time or, if no such committee exists, the Board of Directors of the
Company (the "Committee") of his or her election to purchase some or all of the
Option Shares with respect to which this Stock Option has vested at the time of
such notice. Such notice shall specify the number of shares to be purchased
pursuant to the exercise of this Stock Option and shall be accompanied (i) by
payment therefor in cash and (ii) by such agreement, statement or other evidence
as the Committee may reasonably require in order to satisfy itself that the
issuance and conveyance of the Option Shares being purchased pursuant to such
exercise and any subsequent resale thereof will be in compliance with applicable
laws and regulations, including, without limitation, all federal and state
securities laws.
(b) Certificates for the Option Shares so purchased will be
issued and delivered to the Optionee upon compliance to the satisfaction of the
Committee with all requirements under applicable laws or regulations in
connection with such issuance. Until the Optionee shall have complied with the
requirements hereof, the Company shall be under no
3
<PAGE> 4
obligation to issue the Option Shares subject to this Stock Option, and the
determination of the Committee as to such compliance shall be final and binding
on the Optionee. The Optionee shall not be deemed to be the holder of, or to
have any of the rights of a holder with respect to, any shares of stock subject
to this Stock Option unless and until this Stock Option shall have been
exercised pursuant to the terms hereof, the Company shall have issued and
delivered the Option Shares to the Optionee, and the Optionee's name shall have
been entered as a stockholder of record on the books of the Company. Thereupon,
the Optionee shall have full dividend and other ownership rights with respect to
such Option Shares, subject to the terms of this Agreement.
(c) Notwithstanding any other provision hereof, no portion of
this Stock Option shall be exercisable after the Expiration Date hereof or such
expiration date as is specified in Section 1 or 5 hereof.
3. TRANSFERABILITY. This Agreement is personal to the Optionee and is
not transferable by the Optionee in any manner other than by will or by the laws
of descent and distribution. This Stock Option may be exercised during the
Optionee's lifetime only by the Optionee. The Optionee may elect to designate a
beneficiary by providing written notice of the name of such beneficiary to the
Company, and may revoke or change such designation at any time by filing written
notice of revocation or change with the Company; such beneficiary may exercise
the Optionee's Stock Option in the event of the Optionee's death to the extent
provided herein. If the Optionee does not designate a beneficiary, or if the
designated beneficiary predeceases the Optionee, the Optionee's personal
representative, heirs or legatees to whom ownership has passed may exercise this
Stock Option to the extent provided herein in
4
<PAGE> 5
the event of the Optionee's death.
4. ADJUSTMENT UPON CHANGES IN CAPITALIZATION. Subject to Section 5
hereof, if the shares of Common Stock as a whole are increased, decreased,
changed or converted into or exchanged for a different number or kind of shares
or securities of the Company, whether through merger, consolidation,
reorganization, recapitalization, reclassification, stock dividend, stock split,
combination of shares, exchange of shares, change in corporate structure or the
like, an appropriate and proportionate adjustment shall be made in the number
and kind of shares and in the per share exercise price of shares subject to any
unexercised portion of this Stock Option. Subject to Section 5 hereof, in the
event of any such adjustment in this Stock Option, the Optionee thereafter shall
have the right to purchase the number of shares under this Stock Option at the
per share price, as so adjusted, which the Optionee could purchase at the total
purchase price applicable to this Stock Option immediately prior to such
adjustment. Adjustments under this Section 4 shall be determined by the
Committee and such determination shall be final, binding and conclusive.
5. EFFECT OF CERTAIN TRANSACTIONS. In the case of (a) the dissolution
or liquidation of the Company, (b) the sale of all or substantially all of the
assets of the Company to another person or entity, or (c) the sale of all of the
stock of the Company to an unrelated person or entity, this Stock Option shall
terminate on the effective date of such transaction or event, unless provision
is made in such transaction in the sole discretion of the parties thereto for
the assumption of this Stock Option or the substitution for this Stock Option of
a new stock option of the successor person or entity or a parent or subsidiary
thereof, with such adjustment as to the number and kind of shares and the per
share exercise price as such parties shall agree to.
5
<PAGE> 6
In the event of any transaction which will result in such termination, the
Company shall give to the Optionee written notice thereof at least fifteen (15)
days prior to the effective date of such transaction or the record date on which
stockholders of the Company entitled to participate in such transaction shall be
determined, whichever comes first. Until the earlier to occur of such effective
date or record date, the Optionee may exercise any vested portion of this Stock
Option, but after such effective date or record date, as the case may be, the
Optionee may not exercise this Stock Option. In the case of a merger,
reorganization or consolidation in which the Company is acquired by another
person or entity (other than a holding company formed by the Company) or in
which the Company is not the surviving corporation, the Company shall cause its
obligations under this Agreement to be assumed by the surviving corporation in
connection with such transaction and this Agreement shall otherwise remain in
full force and effect in accordance with its terms.
6. WITHHOLDING TAXES. The Optionee shall, not later than the date as of
which the exercise of this Stock Option becomes a taxable event for Federal
income tax purposes, pay to the Company or make arrangements reasonably
satisfactory to the Committee for payment of any Federal, state, and local taxes
required by law to be withheld on account of such taxable event. The Optionee
may elect to have such tax withholding obligation satisfied, in whole or in
part, by authorizing the Company to withhold from shares of Common Stock to be
issued or transferring to the Company, a number of shares of Common Stock with
an aggregate Fair Market Value that would satisfy the withholding amount due.
For purposes of this Section 6 "Fair Market Value" on any given date means the
last reported sale price at which Common Stock is traded on such date or, if no
Common Stock is traded on such date,
6
<PAGE> 7
the next preceding date on which Common Stock was traded, as reflected on the
principal stock exchange or, if applicable, any other national stock exchange on
which the Common Stock is traded or admitted to trading.
7. PURCHASE AGREEMENT.
This Agreement has been entered into as a condition precedent to and in
consideration of the closing of the transactions contemplated by the Purchase
Agreement.
8. MISCELLANEOUS.
(a) That the Optionee understands and acknowledges:
(i) That he shall not be deemed for any purpose to be
a shareholder of the Company with respect to any of the Option Shares,
except to the extent that the Option herein granted shall have been
exercised with respect thereto and a stock certificate issued therefor.
(ii) That the existence of the Option herein granted
shall not effect in any way the right or power of the Company or its
shareholders to make or authorize any or all adjustments,
recapitalizations, reorganizations, or other changes in the Company's
capital structure or its business, or any merger or consolidation of
the Company, or any issue of bonds, debentures, preferred or prior
preference stock ahead of or affecting the Common Stock of the Company
or the rights thereof, or dissolution or liquidation of the Company, or
any sale or transfer of all or any part of its assets or business or
any other corporate act or proceeding, whether of a similar character
or otherwise.
(iii) That as a condition of the granting of the
Option herein granted, the Optionee agrees, for himself and his
personal representative, that any dispute or
7
<PAGE> 8
disagreements which may arise under or as a result of or pursuant to
this Agreement shall be determined by the Board of Directors in its
sole discretion, and that any interpretation by the Board of Directors
of the terms of this Agreement shall be final, binding and conclusive.
(b) This Option shall not confer upon the Optionee any right
with respect to the continuance of the relationship between Optionee and the
Company or its related corporations, nor shall it interfere in any way with the
right of the Company to terminate the Optionee's relationship with the Company
or any of its subsidiaries.
(c) This Agreement shall be governed and interpreted by the
laws of the State of Delaware.
(d) As used in this Agreement, the masculine, feminine or
neuter gender and the singular or plural number shall be deemed to include the
others whenever the context so indicates or requires.
(e) This Agreement and the exhibits thereto constitute the
entire agreement between the parties with respect to the subject matter hereof,
and no change or modification shall be valid unless made in writing and signed
by the party against whom such change or modification is sought to be enforced.
(f) Notices hereunder shall be mailed or delivered to the
Company at its principal place of business, Attention: President, and shall be
mailed or delivered to the Optionee at the address set forth below, or in either
case at such other address as one party may subsequently furnish to the other
party in writing.
8
<PAGE> 9
COMPDENT CORPORATION
By:
---------------------------------------
Title:
------------------------------------
The foregoing Agreement is hereby accepted and the terms and conditions
thereof hereby agreed to by the undersigned.
Dated as of __________ __, 1997 OPTIONEE:
-----------------------------------
Optionee's Address:
-----------------------------------
-----------------------------------
<PAGE> 1
EXHIBIT 10.2
FORM OF
NON-QUALIFIED STOCK OPTION AGREEMENT
NAME OF OPTIONEE:
NO. OF OPTION SHARES:
GRANT DATE:
OPTION EXERCISE PRICE:
EXPIRATION DATE:
CompDent Corporation, a Delaware corporation (the "Company"), hereby
grants to the person named above (the "Optionee") an option (the "Stock Option")
to purchase on or prior to the expiration date specified above (the "Expiration
Date") all or any part of the number of shares of Common Stock, par value $0.01
per share ("Common Stock"), of the Company indicated above (the "Option
Shares"), at the per share option exercise price specified above, subject to the
terms and conditions set forth herein.
1. VESTING AND EXERCISABILITY.
No portion of this Stock Option may be exercised until such
portion shall have vested. This Stock Option shall be vested and exercisable
with respect to the following number of Option Shares on the dates indicated:
<TABLE>
<CAPTION>
Incremental (Aggregate) Number
of Option Shares Exercisable* Vesting Date
----------------------------- ------------
<S> <C>
1st anniversary of Grant Date
2nd anniversary of Grant Date
3rd anniversary of Grant Date
4th anniversary of Grant Date
</TABLE>
- --------
* Subject to Section 4
<PAGE> 2
Once any portion of this Stock Option becomes vested and exercisable,
it shall continue to be exercisable at any time or times prior to the Expiration
Date, subject to the provisions hereof, including, without limitation, Section 5
hereof which provides for the termination of unexercised options upon completion
of certain transactions described therein. In the event a Terminating Event (as
defined below) has occurred, this Stock Option shall no longer vest or become
exercisable with respect to any additional Option Shares after the date of a
Terminating Event, and this Stock Option may thereafter be exercised, to the
extent it was vested and exercisable on the date of such Terminating Event, by
the Optionee until the earlier of (i) three months from the date of such
Terminating Event or (ii) the Expiration Date. For purposes of this Agreement,
the term "Terminating Event" shall mean a material breach of any covenant,
agreement or representation or warranty of the Optionee under the Option
Agreement dated as of even date herewith (the "Option Agreement") by and among
the Company, DHMI, DentLease, WMG, Optionee and certain other related parties,
(iii) the Non-Competition Agreement executed and delivered by the Optionee to
the Company, DHMI and DentLease pursuant to the Purchase Agreement and the
Option Agreement and (iv) any provider agreement for the provision of dental
services to members of the Company's dental plans between the Company and any of
WMG, Heartland Dental Management, Ltd. Dental Specialists of Illinois, Ltd., any
Affiliate of the foregoing or any Affiliate of the Optionee. For purposes of
this Agreement, "Affiliate" means, with respect to any Person, (i) any Person
directly or indirectly controlling, controlled by or under common control with
such Person; (ii) any Person owning or controlling ten percent (10%) or more of
the outstanding voting or equity interests of such Person; (iii) any Person of
which such Person owns or controls ten
2
<PAGE> 3
percent (10%) or more of the voting or equity interests; or (iv) any officer,
director, general partner or trustee of such Person or of any Person referred to
in clauses (i), (ii), and (iii) above. In addition, for all purposes of this
Agreement, any professional corporation or professional association with whom
any Person has a management services or similar agreement shall be deemed to be
an Affiliate of such Person. For purposes of this Agreement, "Person" means an
individual or a corporation, limited liability company, partnership, trust,
unincorporated organization, association or other entity.
2. EXERCISE OF STOCK OPTION.
(a) The Optionee may exercise only vested portions of this
Stock Option and only in the following manner: Prior to the Expiration Date
(subject to Sections 1 and 5), the Optionee may give written notice on any
business day to the Option and Compensation Committee of the Board of Directors
of the Company, or other committee performing similar functions as in effect
from time-to-time or, if no such committee exists, the Board of Directors of the
Company (the "Committee") of his or her election to purchase some or all of the
Option Shares with respect to which this Stock Option has vested at the time of
such notice. Such notice shall specify the number of shares to be purchased
pursuant to the exercise of this Stock Option and shall be accompanied (i) by
payment therefor in cash and (ii) by such agreement, statement or other evidence
as the Committee may reasonably require in order to satisfy itself that the
issuance and conveyance of the Option Shares being purchased pursuant to such
exercise and any subsequent resale thereof will be in compliance with applicable
laws and regulations, including, without limitation, all federal and state
securities laws.
(b) Certificates for the Option Shares so purchased will be
issued and
3
<PAGE> 4
delivered to the Optionee upon compliance to the satisfaction of the Committee
with all requirements under applicable laws or regulations in connection with
such issuance. Until the Optionee shall have complied with the requirements
hereof, the Company shall be under no obligation to issue the Option Shares
subject to this Stock Option, and the determination of the Committee as to such
compliance shall be final and binding on the Optionee. The Optionee shall not be
deemed to be the holder of, or to have any of the rights of a holder with
respect to, any shares of stock subject to this Stock Option unless and until
this Stock Option shall have been exercised pursuant to the terms hereof, the
Company shall have issued and delivered the Option Shares to the Optionee, and
the Optionee's name shall have been entered as a stockholder of record on the
books of the Company. Thereupon, the Optionee shall have full dividend and other
ownership rights with respect to such Option Shares, subject to the terms of
this Agreement.
(c) Notwithstanding any other provision hereof, no portion of
this Stock Option shall be exercisable after the Expiration Date hereof or such
expiration date as is specified in Section 1 or 5 hereof.
3. TRANSFERABILITY. This Agreement is personal to the Optionee and is
not transferable by the Optionee in any manner other than by will or by the laws
of descent and distribution. This Stock Option may be exercised during the
Optionee's lifetime only by the Optionee. The Optionee may elect to designate a
beneficiary by providing written notice of the name of such beneficiary to the
Company, and may revoke or change such designation at any time by filing written
notice of revocation or change with the Company; such beneficiary may exercise
the Optionee's Stock Option in the event of the Optionee's death to the extent
4
<PAGE> 5
provided herein. If the Optionee does not designate a beneficiary, or if the
designated beneficiary predeceases the Optionee, the Optionee's personal
representative, heirs or legatees to whom ownership has passed may exercise this
Stock Option to the extent provided herein in the event of the Optionee's death.
4. ADJUSTMENT UPON CHANGES IN CAPITALIZATION. Subject to Section 5
hereof, if the shares of Common Stock as a whole are increased, decreased,
changed or converted into or exchanged for a different number or kind of shares
or securities of the Company, whether through merger, consolidation,
reorganization, recapitalization, reclassification, stock dividend, stock split,
combination of shares, exchange of shares, change in corporate structure or the
like, an appropriate and proportionate adjustment shall be made in the number
and kind of shares and in the per share exercise price of shares subject to any
unexercised portion of this Stock Option. Subject to Section 5 hereof, in the
event of any such adjustment in this Stock Option, the Optionee thereafter shall
have the right to purchase the number of shares under this Stock Option at the
per share price, as so adjusted, which the Optionee could purchase at the total
purchase price applicable to this Stock Option immediately prior to such
adjustment. Adjustments under this Section 4 shall be determined by the
Committee and such determination shall be final, binding and conclusive.
5. EFFECT OF CERTAIN TRANSACTIONS. In the case of (a) the dissolution
or liquidation of the Company, (b) the sale of all or substantially all of the
assets of the Company to another person or entity, or (c) the sale of all of the
stock of the Company to an unrelated person or entity, this Stock Option shall
terminate on the effective date of such transaction or event, unless provision
is made in such transaction in the sole discretion of the parties thereto for
the
5
<PAGE> 6
assumption of this Stock Option or the substitution for this Stock Option of a
new stock option of the successor person or entity or a parent or subsidiary
thereof, with such adjustment as to the number and kind of shares and the per
share exercise price as such parties shall agree to. In the event of any
transaction which will result in such termination, the Company shall give to the
Optionee written notice thereof at least fifteen (15) days prior to the
effective date of such transaction or the record date on which stockholders of
the Company entitled to participate in such transaction shall be determined,
whichever comes first. Until the earlier to occur of such effective date or
record date, the Optionee may exercise any vested portion of this Stock Option,
but after such effective date or record date, as the case may be, the Optionee
may not exercise this Stock Option. In the case of a merger, reorganization or
consolidation in which the Company is acquired by another person or entity
(other than a holding company formed by the Company) or in which the Company is
not the surviving corporation, the Company shall cause its obligations under
this Agreement to be assumed by the surviving corporation in connection with
such transaction and this Agreement shall otherwise remain in full force and
effect in accordance with its terms.
6. WITHHOLDING TAXES. The Optionee shall, not later than the date as of
which the exercise of this Stock Option becomes a taxable event for Federal
income tax purposes, pay to the Company or make arrangements reasonably
satisfactory to the Committee for payment of any Federal, state, and local taxes
required by law to be withheld on account of such taxable event. The Optionee
may elect to have such tax withholding obligation satisfied, in whole or in
part, by authorizing the Company to withhold from shares of Common Stock to be
issued or transferring to the Company, a number of shares of Common Stock with
an
6
<PAGE> 7
aggregate Fair Market Value that would satisfy the withholding amount due. For
purposes of this Section 6 "Fair Market Value" on any given date means the last
reported sale price at which Common Stock is traded on such date or, if no
Common Stock is traded on such date, the next preceding date on which Common
Stock was traded, as reflected on the principal stock exchange or, if
applicable, any other national stock exchange on which the Common Stock is
traded or admitted to trading.
7. NON-COMPETITION.
In consideration of the grant of the Stock Option to the Optionee
pursuant to this Agreement, the Optionee has entered into that certain
Non-Competition Agreement with the Company dated of even date herewith and
attached hereto as Exhibit A.
8. MISCELLANEOUS.
(a) That the Optionee understands and acknowledges:
(i) That he shall not be deemed for any purpose to be
a shareholder of the Company with respect to any of the Option Shares,
except to the extent that the Option herein granted shall have been
exercised with respect thereto and a stock certificate issued therefor.
(ii) That the existence of the Option herein granted
shall not effect in any way the right or power of the Company or its
shareholders to make or authorize any or all adjustments,
recapitalizations, reorganizations, or other changes in the Company's
capital structure or its business, or any merger or consolidation of
the Company, or any issue of bonds, debentures, preferred or prior
preference stock ahead of or affecting the Common Stock of the Company
or the rights thereof, or dissolution or liquidation of the
7
<PAGE> 8
Company, or any sale or transfer of all or any part of its assets or
business or any other corporate act or proceeding, whether of a similar
character or otherwise.
(iii) That as a condition of the granting of the
Option herein granted, the Optionee agrees, for himself and his
personal representative, that any dispute or disagreements which may
arise under or as a result of or pursuant to this Agreement shall be
determined by the Board of Directors in its sole discretion, and that
any interpretation by the Board of Directors of the terms of this
Agreement shall be final, binding and conclusive.
(b) This Option shall not confer upon the Optionee any right
with respect to the continuance of the relationship between Optionee and the
Company or its related corporations, nor shall it interfere in any way with the
right of the Company to terminate the Optionee's relationship with the Company
or any of its subsidiaries.
(c) This Agreement shall be governed and interpreted by the
laws of the State of Delaware.
(d) As used in this Agreement, the masculine, feminine or
neuter gender and the singular or plural number shall be deemed to include the
others whenever the context so indicates or requires.
(e) This Agreement and the exhibits thereto constitute the
entire agreement between the parties with respect to the subject matter hereof,
and no change or modification shall be valid unless made in writing and signed
by the party against whom such change or modification is sought to be enforced.
(f) Notices hereunder shall be mailed or delivered to the
Company at its principal place of business, Attention: President, and shall be
mailed or delivered to the Optionee at the address set forth below, or in
either case at such other address as one party may subsequently furnish to the
other party in writing.
8
<PAGE> 9
principal place of business, Attention: President, and shall be mailed or
delivered to the Optionee at the address set forth below, or in either case at
such other address as one party may subsequently furnish to the other party in
writing.
9
<PAGE> 10
COMPDENT CORPORATION
By:
---------------------------------------
Title:
------------------------------------
The foregoing Agreement is hereby accepted and the terms and conditions
thereof hereby agreed to by the undersigned.
Dated as of __________ __, 1997 OPTIONEE:
-----------------------------------
Optionee's Address:
-----------------------------------
-----------------------------------
<PAGE> 1
EXHIBIT 10.3
FORM OF
NON-QUALIFIED STOCK OPTION AGREEMENT
NAME OF OPTIONEE:
NO. OF OPTION SHARES:
GRANT DATE:
OPTION EXERCISE PRICE:
EXPIRATION DATE:
CompDent Corporation, a Delaware corporation (the "Company"), hereby
grants to the person named above (the "Optionee") an option (the "Stock Option")
to purchase on or prior to the expiration date specified above (the "Expiration
Date") all or any part of the number of shares of Common Stock, par value $0.01
per share ("Common Stock"), of the Company indicated above (the "Option
Shares"), at the per share option exercise price specified above, subject to the
terms and conditions set forth herein.
1. VESTING AND EXERCISABILITY.
No portion of this Stock Option may be exercised until such
portion shall have vested. This Stock Option shall be vested and exercisable
with respect to the following number of Option Shares on the dates indicated:
<TABLE>
<CAPTION>
Incremental (Aggregate) Number
of Option Shares Exercisable* Vesting Date
------------------------------ ------------
<S> <C>
1st anniversary of Grant Date
2nd anniversary of Grant Date
3rd anniversary of Grant Date
4th anniversary of Grant Date
</TABLE>
- --------
* Subject to Section 4
<PAGE> 2
Once any portion of this Stock Option becomes vested and exercisable,
it shall continue to be exercisable at any time or times prior to the Expiration
Date, subject to the provisions hereof, including, without limitation, Section 5
hereof which provides for the termination of unexercised options upon completion
of certain transactions described therein. In the event a Terminating Event (as
defined below) has occurred, this Stock Option shall no longer vest or become
exercisable with respect to any additional Option Shares after the date of a
Terminating Event, and this Stock Option may thereafter be exercised, to the
extent it was vested and exercisable on the date of such Terminating Event, by
the Optionee until the earlier of (i) three months from the date of such
Terminating Event or (ii) the Expiration Date. For purposes of this Agreement,
the term "Terminating Event" shall mean a material breach of any covenant,
agreement or representation or warranty of the Optionee under (i) that certain
Asset Purchase Agreement dated as of June 13, 1997 (the "Purchase Agreement") by
and among the Company, Dental Health Management, Inc. ("DHMI"), DentLease, Inc.
("DentLease"), Workman Management Group, Ltd. ("WMG"), Associated Dental
Professionals, Ltd., Premier Management Group, Ltd., Supreme Dental Management,
Ltd., Elite Management Group, Ltd., Paramount Dental Management, Ltd. and the
Stockholders thereof (including the Optionee) or the certificate delivered
pursuant to Section 7.01(a), if such breach constitutes the wilful breach of a
covenant on the part of the Optionee or is the result of the Optionee's fraud or
intentional misrepresentation, (ii) the Option Agreement dated as of even date
herewith (the "Option Agreement") by and among the Company, DHMI, DentLease,
WMG, Optionee and certain other related parties, (iii) the Non-Competition
Agreement executed and delivered by the Optionee to the Company, DHMI and
DentLease
2
<PAGE> 3
pursuant to the Purchase Agreement and the Option Agreement and (iv) any
provider agreement for the provision of dental services to members of the
Company's dental plans between the Company and any of WMG, Heartland Dental
Management, Ltd. Dental Specialists of Illinois, Ltd., any Affiliate of the
foregoing or any Affiliate of the Optionee. For purposes of this Agreement,
"Affiliate" means, with respect to any Person, (i) any Person directly or
indirectly controlling, controlled by or under common control with such Person;
(ii) any Person owning or controlling ten percent (10%) or more of the
outstanding voting or equity interests of such Person; (iii) any Person of which
such Person owns or controls ten percent (10%) or more of the voting or equity
interests; or (iv) any officer, director, general partner or trustee of such
Person or of any Person referred to in clauses (i), (ii), and (iii) above. In
addition, for all purposes of this Agreement, any professional corporation or
professional association with whom any Person has a management services or
similar agreement shall be deemed to be an Affiliate of such Person. For
purposes of this Agreement, "Person" means an individual or a corporation,
limited liability company, partnership, trust, unincorporated organization,
association or other entity.
2. EXERCISE OF STOCK OPTION.
(a) The Optionee may exercise only vested portions of this
Stock Option and only in the following manner: Prior to the Expiration Date
(subject to Sections 1 and 5), the Optionee may give written notice on any
business day to the Option and Compensation Committee of the Board of Directors
of the Company, or other committee performing similar functions as in effect
from time-to-time or, if no such committee exists, the Board of Directors of the
Company (the "Committee") of his or her election to purchase some or all of the
Option
3
<PAGE> 4
Shares with respect to which this Stock Option has vested at the time of such
notice. Such notice shall specify the number of shares to be purchased pursuant
to the exercise of this Stock Option and shall be accompanied (i) by payment
therefor in cash and (ii) by such agreement, statement or other evidence as the
Committee may reasonably require in order to satisfy itself that the issuance
and conveyance of the Option Shares being purchased pursuant to such exercise
and any subsequent resale thereof will be in compliance with applicable laws and
regulations, including, without limitation, all federal and state securities
laws.
(b) Certificates for the Option Shares so purchased will be
issued and delivered to the Optionee upon compliance to the satisfaction of the
Committee with all requirements under applicable laws or regulations in
connection with such issuance. Until the Optionee shall have complied with the
requirements hereof, the Company shall be under no obligation to issue the
Option Shares subject to this Stock Option, and the determination of the
Committee as to such compliance shall be final and binding on the Optionee. The
Optionee shall not be deemed to be the holder of, or to have any of the rights
of a holder with respect to, any shares of stock subject to this Stock Option
unless and until this Stock Option shall have been exercised pursuant to the
terms hereof, the Company shall have issued and delivered the Option Shares to
the Optionee, and the Optionee's name shall have been entered as a stockholder
of record on the books of the Company. Thereupon, the Optionee shall have full
dividend and other ownership rights with respect to such Option Shares, subject
to the terms of this Agreement.
(c) Notwithstanding any other provision hereof, no portion of
this Stock Option shall be exercisable after the Expiration Date hereof or such
expiration date as is
4
<PAGE> 5
specified in Section 1 or 5 hereof.
3. TRANSFERABILITY. This Agreement is personal to the Optionee and is
not transferable by the Optionee in any manner other than by will or by the laws
of descent and distribution. This Stock Option may be exercised during the
Optionee's lifetime only by the Optionee. The Optionee may elect to designate a
beneficiary by providing written notice of the name of such beneficiary to the
Company, and may revoke or change such designation at any time by filing written
notice of revocation or change with the Company; such beneficiary may exercise
the Optionee's Stock Option in the event of the Optionee's death to the extent
provided herein. If the Optionee does not designate a beneficiary, or if the
designated beneficiary predeceases the Optionee, the Optionee's personal
representative, heirs or legatees to whom ownership has passed may exercise this
Stock Option to the extent provided herein in the event of the Optionee's death.
4. ADJUSTMENT UPON CHANGES IN CAPITALIZATION. Subject to Section 5
hereof, if the shares of Common Stock as a whole are increased, decreased,
changed or converted into or exchanged for a different number or kind of shares
or securities of the Company, whether through merger, consolidation,
reorganization, recapitalization, reclassification, stock dividend, stock split,
combination of shares, exchange of shares, change in corporate structure or the
like, an appropriate and proportionate adjustment shall be made in the number
and kind of shares and in the per share exercise price of shares subject to any
unexercised portion of this Stock Option. Subject to Section 5 hereof, in the
event of any such adjustment in this Stock Option, the Optionee thereafter shall
have the right to purchase the number of shares under this Stock Option at the
per share price, as so adjusted, which the Optionee could
5
<PAGE> 6
purchase at the total purchase price applicable to this Stock Option immediately
prior to such adjustment. Adjustments under this Section 4 shall be determined
by the Committee and such determination shall be final, binding and conclusive.
5. EFFECT OF CERTAIN TRANSACTIONS. In the case of (a) the dissolution
or liquidation of the Company, (b) the sale of all or substantially all of the
assets of the Company to another person or entity, or (c) the sale of all of the
stock of the Company to an unrelated person or entity, this Stock Option shall
terminate on the effective date of such transaction or event, unless provision
is made in such transaction in the sole discretion of the parties thereto for
the assumption of this Stock Option or the substitution for this Stock Option of
a new stock option of the successor person or entity or a parent or subsidiary
thereof, with such adjustment as to the number and kind of shares and the per
share exercise price as such parties shall agree to. In the event of any
transaction which will result in such termination, the Company shall give to the
Optionee written notice thereof at least fifteen (15) days prior to the
effective date of such transaction or the record date on which stockholders of
the Company entitled to participate in such transaction shall be determined,
whichever comes first. Until the earlier to occur of such effective date or
record date, the Optionee may exercise any vested portion of this Stock Option,
but after such effective date or record date, as the case may be, the Optionee
may not exercise this Stock Option. In the case of a merger, reorganization or
consolidation in which the Company is acquired by another person or entity
(other than a holding company formed by the Company) or in which the Company is
not the surviving corporation, the Company shall cause its obligations under
this Agreement to be assumed by the surviving corporation in connection with
such transaction and this Agreement shall
6
<PAGE> 7
otherwise remain in full force and effect in accordance with its terms.
6. WITHHOLDING TAXES. The Optionee shall, not later than the date
as of which the exercise of this Stock Option becomes a taxable event for
Federal income tax purposes, pay to the Company or make arrangements reasonably
satisfactory to the Committee for payment of any Federal, state, and local taxes
required by law to be withheld on account of such taxable event. The Optionee
may elect to have such tax withholding obligation satisfied, in whole or in
part, by authorizing the Company to withhold from shares of Common Stock to be
issued or transferring to the Company, a number of shares of Common Stock with
an aggregate Fair Market Value that would satisfy the withholding amount due.
For purposes of this Section 6 "Fair Market Value" on any given date means the
last reported sale price at which Common Stock is traded on such date or, if no
Common Stock is traded on such date, the next preceding date on which Common
Stock was traded, as reflected on the principal stock exchange or, if
applicable, any other national stock exchange on which the Common Stock is
traded or admitted to trading.
7. PURCHASE AGREEMENT.
This Agreement has been entered into as a condition precedent to and in
consideration of the closing of the transactions contemplated by the Purchase
Agreement.
8. MISCELLANEOUS.
(a) That the Optionee understands and acknowledges:
(i) That he shall not be deemed for any purpose to be
a shareholder of the Company with respect to any of the Option Shares,
except to the extent that the Option herein granted shall have been
exercised with respect thereto and a stock
7
<PAGE> 8
certificate issued therefor.
(ii) That the existence of the Option herein granted
shall not effect in any way the right or power of the Company or its
shareholders to make or authorize any or all adjustments,
recapitalizations, reorganizations, or other changes in the Company's
capital structure or its business, or any merger or consolidation of
the Company, or any issue of bonds, debentures, preferred or prior
preference stock ahead of or affecting the Common Stock of the Company
or the rights thereof, or dissolution or liquidation of the Company, or
any sale or transfer of all or any part of its assets or business or
any other corporate act or proceeding, whether of a similar character
or otherwise.
(iii) That as a condition of the granting of the
Option herein granted, the Optionee agrees, for himself and his
personal representative, that any dispute or disagreements which may
arise under or as a result of or pursuant to this Agreement shall be
determined by the Board of Directors in its sole discretion, and that
any interpretation by the Board of Directors of the terms of this
Agreement shall be final, binding and conclusive.
(b) This Option shall not confer upon the Optionee any right
with respect to the continuance of the relationship between Optionee and the
Company or its related corporations, nor shall it interfere in any way with the
right of the Company to terminate the Optionee's relationship with the Company
or any of its subsidiaries.
(c) This Agreement shall be governed and interpreted by the
laws of the State of Delaware.
(d) As used in this Agreement, the masculine, feminine or
neuter gender and
8
<PAGE> 9
the singular or plural number shall be deemed to include the others whenever the
context so indicates or requires.
(e) This Agreement and the exhibits thereto constitute the
entire agreement between the parties with respect to the subject matter hereof,
and no change or modification shall be valid unless made in writing and signed
by the party against whom such change or modification is sought to be enforced.
(f) Notices hereunder shall be mailed or delivered to the
Company at its principal place of business, Attention: President, and shall be
mailed or delivered to the Optionee at the address set forth below, or in either
case at such other address as one party may subsequently furnish to the other
party in writing.
9
<PAGE> 10
COMPDENT CORPORATION
By:
---------------------------------------
Title:
------------------------------------
The foregoing Agreement is hereby accepted and the terms and conditions
thereof hereby agreed to by the undersigned.
Dated as of __________ __, 1997 OPTIONEE:
-----------------------------------
Optionee's Address:
-----------------------------------
-----------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF COMPDENT
CORPORATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 26,624
<SECURITIES> 0
<RECEIVABLES> 5,716
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 36,272
<PP&E> 6,416
<DEPRECIATION> 0
<TOTAL-ASSETS> 209,655
<CURRENT-LIABILITIES> 22,266
<BONDS> 0
0
0
<COMMON> 101
<OTHER-SE> 122,583
<TOTAL-LIABILITY-AND-EQUITY> 209,655
<SALES> 0
<TOTAL-REVENUES> 117,169
<CGS> 0
<TOTAL-COSTS> 100,286
<OTHER-EXPENSES> (66)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,229
<INCOME-PRETAX> 15,214
<INCOME-TAX> 6,559
<INCOME-CONTINUING> 8,655
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,655
<EPS-PRIMARY> .85
<EPS-DILUTED> .85
</TABLE>
