SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_____________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number: 0-26090
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.)
100 Mansell Court East, Suite 400, Roswell, Georgia 30076
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (770) 998-8936
__________________________
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Preferred Stock Purchase Rights
(Title of Class)
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 [BOX WITH X] No [BOX]
Indicate by Check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
As of March 10, 1998, there were 10,112,629 shares of the registrant's
Common Stock outstanding. The aggregate market value of the voting
stock held by nonaffiliates of the registrant on March 10, 1998 was
$119,437,566.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement dated March 30,
1998 for the Annual Meeting of Stockholders to be held on April 30,
1998 are incorporated by reference in Part III of the Report on Form
10-K.
<PAGE>
PART I
STATEMENTS MADE OR INCORPORATED INTO THIS ANNUAL REPORT INCLUDE A
NUMBER OF FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. FORWARD-LOOKING STATEMENTS INCLUDE,
WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS "ANTICIPATES,"
"BELIEVES," EXPECTS," "INTENDS," "FUTURE" AND WORDS OF SIMILAR IMPORT
WHICH EXPRESS MANAGEMENT'S BELIEF, EXPECTATIONS OR INTENT REGARDING
THE COMPANY'S FUTURE PERFORMANCE. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES ARE DESCRIBED IN
THE SECTION ENTITLED "CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS"
FOUND ON PAGE 21 OF THIS ANNUAL REPORT.
Item 1. BUSINESS.
The information contained in this report is provided as of
December 31, 1997, unless otherwise indicated.
Overview
The Company is a full-service dental benefits provider,
offering network-based dental care, reduced fee-for-service and
third-party administration and providing dental coverage for
approximately 2.2 million plan members at December 31, 1997. The
Company currently has operations in more than 23 states and markets
its products through a network of more than 8,000 independent agents
and a direct marketing sales force that assists the independent
agents. The Company markets its products to employers and other
business entities ("Groups"), to Group employees or other members and
their families as a unit ("Subscribers") and to individuals. The
Company has contracted with more than 9,000 dental facilities ("Panel
dentists") to provide dental services to covered individuals
("Members"). CompDent's benefit plans also include
CompSave[COPYRIGHT] (a reduced fee-for-service product),
CompNet[COPYRIGHT] a PPO and network rental product), and
administrative services for self-insured dental plans. In the first
quarter of 1997, CompDent established Dental Health Management, Inc.
("DHMI"), a wholly-owned subsidiary providing management and
administrative services to dental practices. DHMI manages or operates
38 dental practices in 7 states.
Markets and Operations; Acquisitions
The Company commenced operations in Florida in 1978 and until
1987 conducted business only in Florida. The Company established
operations in Georgia and Ohio in 1987 and 1990, respectively. The
Company established operations on a de novo basis in Alabama (1992),
North Carolina (1993), Mississippi (1993), Tennessee (1994) and South
Carolina (1995). In 1994 and 1995, the Company entered markets in
eight new states, including Texas, Kentucky, Indiana and Missouri
through acquisitions. In January 1996, the Company acquired Texas
Dental Plans, Inc. and certain of its affiliated entities
(collectively, "TDP") for $23 million in cash. TDP is a San
Antonio-based provider of low cost dental referral plans with
operations in fourteen states, including principally Texas, Louisiana,
Oklahoma and Pennsylvania (the "TDP Acquisition"). As a result of the
TDP Acquisition, the Company expanded its presence in seven states,
entered markets in seven new states and expedited the Company's
development of the CompSave[COPYRIGHT] product line. In addition,
in May 1996, the Company acquired all of the outstanding capital stock
of Dental Care Plus Management, Corp. and its wholly owned subsidiary
(collectively, "Dental Care Plus"), a Chicago-based third-party
administrator and managed dental care plan, for an aggregate purchase
price of approximately $38 million (the "Dental Care Plus
Acquisition"). The Dental Care Plus Acquisition significantly expanded
the Company's presence in Illinois. In March 1997, the Company
acquired American Dental Providers, Inc. and Diamond Dental & Vision,
Inc. (the "AMDP & DDV Acquisitions") for $1.7 million in cash and
stock. As a result of the AMDP & DDV Acquisition, the Company entered
the Arkansas market. In July 1997, the Company entered the dental
practice management business with the acquisition of 21 dental
facilities in Illinois and one clinic in Florida for approximately
$16.9 million in cash. In addition, in September 1997, the Company
acquired one dental facility in Tennessee for $1.6 million in cash.
In November 1997, the Company acquired the Stratman Management Group
and its six dental facilities in Indiana for $2.0 million in cash.
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Products and Services
Managed Dental Plans. The Company offers a variety of managed
dental care plans under the principal trade names American Dental
Plan, American Prepaid Dental Plan, DentiCare and CompDent( Dental
Plan. The Company's managed dental care plans operate similarly in
each state in which business is conducted.
Under the Company's managed dental care plans a premium is paid
to the Company by the Subscriber through payroll deduction or directly
(in the case of individual Subscribers), or by the Subscriber's
employer, from the date the Subscriber enrolls in the plan. The
Subscriber selects a dentist from the Company's panel to provide
dental services. Each Panel Dentist provides dental services to the
Subscribers who selected that dentist in return for a portion of the
premium paid by the Subscriber ("Capitation payments"). Thus, the
Panel Dentist receives steady monthly capitation payments from the
Company according to the number of Subscribers who have selected the
dentist, regardless of the frequency or value of dental services
performed. Under a managed dental care plan, capitation payments are
fixed. Therefore, incentive to control costs and the risk of
over-utilization of dental services is shifted to the dentists.
Members covered under the Company's managed dental care plans
obtain certain basic dental procedures (such as exams, x-rays,
cleanings, and certain fillings) at no additional charge beyond
premium payments (other than, in some cases, a small per visit
copayment). The plans establish copayments for more complicated
services provided by the Panel Dentist, such as root canals and
crowns, which vary according to the complexity of the service and the
level of benefits purchased by subscribers. The Company's managed
dental care plans also cover services provided by specialists
participating in the dental panel rather than by the Panel Dentist
selected by the Subscriber, including oral surgery, endodontics,
periodontics, orthodontics and pediatric dentistry. Members typically
receive a reduction from the specialist's usual and customary fees for
the services performed. The Company does not assume traditional
insurance risk under its managed dental care plan arrangements, except
with respect to certain specialty benefit plans described in more
detail below under "Specialty Benefit Plan".
The Company's managed dental care plans are tailored to meet the
needs of different customers, and range from products having
relatively higher levels of benefits and premiums to products having
relatively lower levels. A majority of the Company's revenues from
managed dental care plans for the year ended December 31, 1997, were
paid by Subscribers either directly or through employee payroll
deductions, with the remainder paid by employers on behalf of their
employees. The contracts between the Company and its Subscribers
require the payment of a monthly premium that is generally fixed for
one year.
Dual Choice Plans. The Company's products also include dual
choice plans ("Dual Choice Plans"), which allow Subscribers to choose
between a managed dental care plan offered by the Company and an
indemnity dental insurance plan underwritten by a licensed insurance
company but marketed and administered by the Company under an
agreement with the underwriting insurer. The Company believes that
the ability to offer Dual Choice Plans enables it to offer prospective
customers flexibility, particularly when there are potential
Subscribers outside the area served by the Company's dental panel.
Certain states require that managed dental care plans be offered only
as part of a Dual Choice Plan and other states may do so in the
future. Dual Choice Plans are particularly effective as part of the
Company's growth strategy in areas in which the Company's dental panel
is less well developed and Subscribers may value the ability to choose
non-panel dentists.
The indemnity insurance portion of the Company's Dual Choice
Plans is marketed and administered by the Company under contractual
arrangements primarily with independent insurance companies. Under the
dental indemnity insurance portion of the Dual Choice Plans,
Subscribers are required to pay small deductibles and copayments which
are generally higher than those which are required under the Company's
managed dental care plans. Subscribers who select the indemnity plan
are not limited to the Company's Panel dentists and may receive dental
services from the dentist of their choice. Under the contract with the
third-party insurers, the Company retains as a marketing and servicing
fee a specified percentage (typically 10-25%) of Premiums paid by
Subscribers under indemnity dental insurance plans underwritten by the
insurer and remits the remainder of such premiums to the insurer.
<PAGE>
Reduced Fee-For-Service Plans. In January 1996, the Company
acquired TDP, a Texas-based reduced fee-for-service dental company.
The Company's reduced fee-for-service products are offered principally
under the trade names CompSave[COPYRIGHT], Texas Dental Plans and National
Dental Plan. Members receive dental care from a list of participating
dentists who offer discounts from their usual and customary fees.
There are no claim forms or deductibles and no pre-authorization
approval is required. No capitation payments are made to the dentists.
The plan covers certain basic dental procedures as well as
orthodontics and cosmetic dentistry.
Network Rental. The Company has contracted to provide discount
dental benefits to members of several HMOs. Under this plan Members of
the HMO receive certain limited dental services from Panel dentists at
reduced rates as an additional benefit under the health care plan
provided by the HMO. The Company receives a fixed monthly fee per
Member to administer this plan and does not make capitation payments
to the Panel dentists, who receive payments at rates established under
the plan directly from the Members who receive services. The TDP
Acquisition expanded the number of network rental members. The Company
may in the future seek to provide similar plans to other
organizations.
ASO Services. In connection with the Dental Care Plus
Acquisition, the Company began providing services as an Administrative
Services Organization ("ASO") in certain markets to self-insured
groups. The Company provides comprehensive services to employers and
other groups offering self-insured dental plans, including billing and
collections, claims processing and payment, Member eligibility
processing and customer service. The Company receives a monthly fee in
exchange for such services equal to a specified amount per each member
of the plan.
Specialty Benefit Plan. The Company also offers a managed dental
care plan (the "Specialty Benefit Plan") whereby Members who require
covered dental services from participating specialists rather than
their selected Panel dentists may receive them for specific copayments
rather than at a discount from the specialists' usual and customary
fees (as under the Company's more standard plans). The Company
typically collects a higher premium from the Subscriber for this
benefit and reimburses the specialist, resulting in the Company
assuming some risk of utilization of covered specialty dental
services. The Company uses actuaries to determine the cost of expected
benefits under the plan based on the anticipated level of utilization
of specialty services by Members.
Dental Practice Management. The Company has established a
subsidiary, DHMI, through which the Company manages and operates a
network of dental practices. The Company earned fees paid by dental
facilities for providing management and administrative services and
support to such dental facilities. The Company owns the operating
assets of the dental practices but does not employ or contract with
dentists or control the provision of dental care or equipment related
thereto.
Existing dental practices create the foundation for DHMI
networks. DHMI acquires the assets of and signs a Management Services
Agreement ("MSA") with this practice. Through the MSA, DHMI provides
the resources and expertise necessary to operate and improve the
business and management elements of a dental practice. These services
include billing and collections, accounting, marketing, materials
management, human resources, facility management and payor relations.
The practice, in turn, is obligated through the MSA to oversee the
provision of all patient care. Thus all clinical personnel are
employees of the practice.
DHMI derives all of its revenue from MSAs with its affiliated
dental practices. Under certain of the MSAs, DHMI receives a
management fee equal to DHMI's costs plus the lower of (i) the
practice's net pre-tax income or (ii) 30% of the practice's net
revenue. DHMI's costs include all direct and indirect costs, overhead
and expenses relating to the provision of management services to the
practice under the MSA, such that substantially all of the costs
associated with the provision of dental services by the practice are
borne by DHMI, other than the compensation and benefits of the
clinical personnel who are employed by the practice. In some cases,
DHMI receives a stated fee for the services provided rather than a
percentage of the practice's revenues.
Once an acquired practice has been integrated into DHMI's
management systems, DHMI and the practice seek to develop a network of
offices throughout the market. DHMI and the practice will be able to
develop a geographically comprehensive network of offices that offer
patients and payors a full continuum of dental services.
<PAGE>
Panel Dentists
The design and operating features of the Company's dental
benefits are intended to assist it in attracting and retaining quality
Panel dentists. These plan features include copayments, capitation
rates, timely remittance of capitation payments, maintenance of
accurate Member eligibility information, reduction of paperwork and
other administrative functions, and the Company's ability to deliver a
reliable supply of new patients. As of December 31, 1997, more than
9,000 primary-care and specialty-care dentists were participants on
the Company's panel.
In its efforts to establish a large panel of quality dentists in
convenient locations, the Company engages in an active marketing and
recruitment program emphasizing personal visits to potential Panel
dentists followed by a quality management program involving screening
of applications for panel membership, reference checks with state
licensing authorities, validation of malpractice coverage, initial
certification and periodic recertification. Once a dentist has been
admitted to the Company's panel, the Company seeks to recredential the
dentist on an annual basis by updating verification of professional
credentials, licenses, malpractice insurance coverage and legal
compliance, conducting an on-site visit and evaluation, and reviewing
any complaints and/or questions received from Members. The Company
administers its quality management program through a full-time staff
of three dentists who serve as Regional Dental Directors under the
supervision of its National Dental Director, who is also a dentist.
Panel dentists are independent from the Company and provide
services to Members pursuant to contractual arrangements with the
Company. The Company's relationships with its Panel dentists are
terminable by either party, upon advance written notice (typically
thirty or sixty days). The contracts do not require Panel dentists to
provide services exclusively to Members of the Company's plans. The
Company may, following any required regulatory approval, change the
terms, capitation rates, benefits and conditions of the various plans
serviced by its Panel dentists upon advance written notice. The
Company's contracts with Panel dentists require the Dentists to
maintain their own malpractice insurance. The Company also carries
insurance protecting it against liability relating to acts or
omissions of Panel dentists.
Marketing
The Company markets its dental benefits through a large network
of independent agents and a direct sales force consisting of Company
employees. This dual distribution system is designed to reach large
groups as well as smaller groups and individual subscribers in an
efficient and cost effective manner. The Company seeks to avoid
competition between its direct sales force and its independent agents
for the same or similar accounts and seeks to conduct its direct sales
efforts in a manner that avoids undermining the loyalty of independent
agents or their incentive to market the Company's plans on a regular
basis. The Company's direct sales force (often working with
independent agents) generally focuses on soliciting larger accounts,
including employers with over 250 employees. Independent agents
typically target mid-size and smaller employers and individuals. The
Company pays the independent agents commissions based on revenue
generated while its direct sales force receives a combination of
salary and a bonus program based on new Subscribers enrolled. The
independent agents typically do not market the Company's dental
benefits on an exclusive basis.
The Company also has several departments and employees who
facilitate Group and Member retention. These departments and employees
assist Members on such matters as schedules of benefits, available
Panel dentists, transfers from one Panel Dentist to another, emergency
dental services, billing issues and other administrative and customer
service matters.
Management Information Systems
The management information systems used by the Company are
designed to facilitate subscriber, provider and agent service. The
Company depends on these systems for comprehensive customer service,
premium collection and reconciliation, administration of capitation
and commission payments, Member eligibility processing, corporate
accounting, and management reporting. The Company's management
information systems are sufficiently flexible to allow it to offer
multiple dental benefits tailored to the needs of its customers and
have the capability to interface directly with the systems of its
customers, which can facilitate expeditious processing of changes in
membership information. In case of emergency, the Company has
established a disaster avoidance and recovery plan and has
<PAGE>
entered into agreements for the transfer of its system and backed-up
data to a compatible computer in Atlanta. The Company utilizes a
separate management information system in connection with ASO services
provided in Illinois.
DHMI has licensed for use at its dental offices a management
information system for dental practice management. Substantially all
of the dental offices are currently utilizing this information system.
DHMI uses the information system to track data related to each dental
office's operations. The information system can provide each of the
dental offices with data such as patient and practitioner scheduling
information, insurance coverage information, clinical record-keeping
and revenue and collection data (including credit history). Within
each market, DHMI uses the information system to manage billing and
collections, including electronic insurance claims processing.
Competition
The Company operates in a highly competitive environment. Its
competitors principally include large insurance companies, which offer
managed dental care and indemnity dental products in most of the
Company's markets, and independent companies including for-profit and
not-for-profit HMOs, DHMOs, self-funded plans, PPOs and reduced
fee-for-service dental plans offering dental benefits similar to those
offered by the Company.
The principal competitive factors in the dental benefits industry
are the cost of services (based on the level and type of benefits,
premiums and copayments), the reputation of the plan for providing
quality dental care and the size of the plan's provider network
(including the number of available Panel dentists and the convenience
of their locations). Price competition may be especially relevant in
seeking the accounts of governmental employers which award contracts
on a periodic basis through competitive bidding. The dental benefits
industry in general has been subjected to periods of intense price
competition in the past, and similar intense competition in the
managed dental care industry may occur in the future. The Company has
experienced increased competition from indemnity insurance companies
through direct entry into the managed dental care market. It is
likely that these efforts will intensify in the future. Frequently,
such plans are offered in tandem with indemnity dental insurance
coverage and/or PPO alternatives. In addition, an increasing number
of medically-oriented HMOs and PPOs include dental care benefits as
part of their benefit programs.
The Company's dental benefits business does not require
substantial amounts of capital and, other than government regulation,
systems operating costs and the cost of obtaining and monitoring a
dental panel, there are no significant barriers to new competitors
entering the market. There can be no assurance that the Company will
be able to compete successfully with existing competitors or new
market entrants. Any such additional competition could adversely
affect the Company's results of operations.
Indemnity dental insurance coverage offered by insurance carriers
may have a competitive advantage over other dental benefit plans
because many such carriers are better known, are significantly larger
and have substantially greater financial and other resources than the
Company. Indemnity dental insurance coverage also has the benefit of
allowing a beneficiary to select almost any licensed dentist, while
participants in the benefits offered by the Company typically must
select a dentist from the plan's panel.
The dental services industry is highly fragmented, consisting
primarily of solo and smaller group practices. The dental practice
management segment of this industry, currently in its formative stage,
is highly competitive and is expected to become more competitive. In
this regard, the Company expects that the provision of multi-specialty
dental services at convenient locations will become increasingly more
common. The Company is aware of several dental practice management
companies that are currently operating in its existing markets.
Companies with dental practice management businesses similar to that
of DHMI, which currently operate in other parts of the country, may
begin targeting DHMI's existing markets for expansion. Such
competitors may be better capitalized or otherwise enjoy competitive
advantages which may make it difficult for the Company to compete
against them or to acquire additional dental offices on terms
acceptable to the Company. As the Company seeks to expand its
operations into new markets, it is likely to face competition from
dental practice management companies which already have established a
strong business presence in such locations.
The business of providing general dental, orthodontic and other
specialty dental services is highly competitive in the markets in
which DHMI operates. DHMI believes it competes with other providers
of dental and
<PAGE>
specialty services on the basis of factors such as brand
name recognition, convenience, cost and the quality and range of
services provided. Competition may include practitioners who have
more established practices and reputations. DHMI's affiliated dental
practices also compete in the retention and recruitment of general
dentists, specialists and clinical staff. If the availability of
dentists begins to decline in DHMI's markets, it may become more
difficult to attract qualified dentists to staff the dental offices
sufficiently or to expand them. The dental offices may not be able to
compete effectively against other existing practices or against new
single or multi-specialty dental practices that enter its markets, or
to compete against such other practices in the recruitment of
qualified dentists.
Government Regulation
The Company's business is and will continue to be subject to
substantial governmental regulation, principally under the insurance
laws of the states in which the Company conducts business and may in
the future conduct business. Although specific requirements vary from
state to state, these laws generally require that the Company's
subsidiary operating in that state be licensed by the relevant state
insurance department to offer its dental care products and otherwise
conduct its operations, prescribe minimum levels of net worth and
reserves, limit the ability of the Company's subsidiaries to pay
dividends to the extent required regulatory capital would be impaired,
establish the manner in which premiums are determined or structured,
require filing for approval of products, certain product literature,
premium levels and contract forms with subscribers, dentists and
others (which may entail substantial delay in implementing changes or
introducing new products), in some cases establish minimum benefit
levels for the Company's dental products, provide for periodic
examinations, including quality assurance review, establish standards
for the Company's management and other personnel, specify measures for
resolving grievances and generally prohibit the acquisition of more
than specified levels (as low as 5% in current states of operation) of
the Company's outstanding voting power without prior approval. These
regulatory provisions generally grant plenary power to the relevant
agencies in interpreting and administering the applicable laws and
regulations. Various state regulatory agencies and legislatures have
in the past considered, are presently considering, and may in the
future propose regulatory and legislative changes, such as the
establishment of prescribed minimum capitation payments to Panel
dentists, minimum loss ratios or mandated schedules of benefits and
the adoption of legislation requiring the Company to admit "any
willing provider" to its dental panels, that could adversely affect
the Company's business and profitability. In addition, health care
and insurance reform initiatives have been proposed and may be
proposed in the future at the state and federal levels which may
adversely affect the Company's business and profitability. The
Company is unable to determine the likelihood or effect of any such
regulatory or legislative changes.
State regulatory requirements may also limit the Company's
ability to operate in certain existing markets or adversely affect its
ability to enter new markets on a de novo basis or through
acquisitions. In some states the Company can only conduct business
through a contractual arrangement with a licensed indemnity carrier or
a full service HMO, which is generally a less advantageous and more
cumbersome arrangement than offering managed dental care plans
directly. The Company conducts business in such states through such
arrangements with Shenandoah Life Insurance Company ("Shenandoah") and
Centennial Life Insurance Company. The Company cannot generally enter
new states on a de novo basis without obtaining required licenses and
approvals, a process which can take as long as two years or more in
certain states. The acquisition of managed dental care companies
generally requires the prior approval of the state regulatory
authorities in the states in which these companies do business, which
can take up to six months or more, and relevant state laws concerning
regulatory capital and surplus in many cases prohibit these entities
from guaranteeing parent company debt, thus possibly limiting the
Company's ability to obtain acquisition financing. While the
regulated nature of the Company's industry may interfere with
management's plans for further geographic expansion, this regulatory
environment also governs, to a greater or lesser extent, the conduct
and expansion prospects of existing and new competitors.
Failure to maintain regulatory compliance and constructive
relationships with relevant regulatory authorities could adversely
affect the Company's ability to conduct its business, for example, by
limiting the Company's ability to obtain required approvals for new
products or premium increases. In an extreme case, failure to comply
with relevant laws and regulations may result in revocation of one or
more of the Company's licenses. The Company's policy is to pay close
attention to regulatory compliance matters.
In connection with the marketing and administration by the
Company of the indemnity insurance benefits that are offered as a part
of its Dual Choice Plans, the Company may be subject to license and
regulation as a "third-
<PAGE>
party administrator" in certain states. Such regulation typically is
less extensive than regulation applicable to the managed dental care
plans offered directly by the Company. In addition, if the Company is
licensed to offer managed dental care plans in such states, it may be
exempt from regulation as a third-party administrator.
DHMI is also subject to a variety of governmental and regulatory
requirements relating to the conduct of its business. DHMI seeks to
structure its business practices and arrangements with dental
practices to comply with relevant federal and state law and believes
that such arrangements and practices comply in all material respects
with all applicable statutes and regulations. The health care
industry and dental practices are highly regulated, and there can be
no assurance that the regulatory environment in which DHMI operates
will not change significantly and adversely in the future.
The laws of many states prohibit corporations that are not owned
entirely by dentists from employing dentists (and in some states,
dental hygienists and dental assistants), having control over clinical
decision-making or engaging in other activities that are deemed to
constitute the practice of dentistry. DHMI does not employ dentists
or dental hygienists and does not exercise control over any prohibited
areas. Also, the laws and regulations of certain states into which
DHMI seeks to expand may require DHMI to change the form of
relationships entered into with dentists in a manner that restricts
DHMI's operations in those states.
The operations of DHMI are also subject to compliance with
regulations promulgated by the Occupational Safety and Health
Administration ("OSHA"), relating to such matters as heat
sterilization of dental instruments and the usage of barrier
techniques; such as, masks, goggles and gloves. DHMI incurs expenses
on an ongoing basis relating to OSHA monitoring and compliance.
DHMI believes that health care regulations will continue to
change, and as a result, regularly monitors developments in health
care law. DHMI expects to modify its agreements and operations from
time to time, if necessary, as the business and regulatory environment
change.
Employees
The Company had approximately 600 employees at December 31, 1997.
None of the Company's employees are covered by a collective bargaining
agreement. The Company believes its relations with its employees are
good.
UniLife
The Company's wholly-owned subsidiary, UniLife Insurance Company,
an Arizona-domiciled company ("UniLife"), is licensed to transact
business in Arizona, Colorado, Louisiana, Mississippi, Missouri, New
Mexico, Oklahoma, Texas and Utah. UniLife is a traditional indemnity
insurance carrier and therefore assumes underwriting risk. Effective
January 1, 1996, UniLife and Shenandoah entered into an assumption
reinsurance agreement transferring all of UniLife's existing business
that was not already reinsured to Shenandoah.
Item 2. PROPERTIES.
All offices and facilities of the Company are leased. The
Company's leased properties are in generally good condition and are
adequate for their intended use.
Item 3. LEGAL.
The Company's wholly-owned subsidiary, American Prepaid and its
Florida subsidiary, American Dental Plan, Inc. ("ADP"), 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 ADP to make capitation payments
to its participating dentists for the period of time between when a
subscriber enrolls and the time at which the subscriber selects a
participating dentist. The plaintiffs sought to bring the suit as a
class action. On December 4, 1997, a class was certified consisting
of all participating dentists in the states of
<PAGE>
Florida, Mississippi, South Carolina, and Tennessee who, since
September 1, 1989, have had Participating Dentist Agreements with
American Dental Plan, Inc.
While the Company believes its interpretation and administration
of the Participating Dentist Agreements are correct, the Company
recently entered into a proposed settlement, which awaits final
approval by the Court. The general terms of the settlement provide
for a total payment of $1.3 million to be divided among (1) the class
members who are no longer with ADP, (2) the class representatives, and
(3) the attorneys for the plaintiff class. Additional costs associated
with this settlement will be approximately $0.3 million.
The settlement also requires that ADP amend its Participating
Dental Agreement to provide that it will pay capitation to the dentist
when there has been a delay between the time a subscriber initially
enrolls in the dental plan and the date they select a dentist, for all
subscribers who enroll after January 1, 1999. In addition, ADP has
agreed to provide additional notices to subscribers who have not
selected a dentist.
The proposed settlement is subject to the notification of the
class members, a fairness hearing, and approval by the court.
Management does not believe that there are currently any asserted
or unasserted claims that will have a material adverse effect on the
financial position of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted during the fourth quarter of the
fiscal year covered by this report to a vote of security holders
through solicitation of proxies or otherwise.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Market Information
The Common Stock of the Company has been traded on the Nasdaq
National Market ("Nasdaq") since the Company's initial public offering
on May 24, 1995 and currently trades under the symbol "CPDN". The
following table sets forth the high and low closing sales prices for
the Company's Common Stock as reported by Nasdaq for the periods
indicated:
Market Prices (1)
Fiscal Quarters High ($) Low ($)
1997
First 39 1/4 27 1/2
Second 27 3/8 14 1/4
Third 26 1/8 19 3/8
Fourth 27 5/8 18 5/8
1996
First 45 1/8 34 1/4
Second 51 35 1/8
Third 51 11/16 33
Fourth 40 3/8 27 1/2
_______________
(1) The prices listed reflect inter-dealer prices without retail
mark-up, markdown or commission and may not necessarily represent
actual transactions.
<PAGE>
Holders
The number of record holders of the Company's Common Stock as of
March 10, 1998 was approximately forty-three (43). The Company
believes that the number of beneficial owners of the Company's Common
Stock at that date was substantially greater.
Dividends
The Company did not pay cash dividends on its Common Stock during
the years ended December 31, 1997 and December 31, 1996. The Company
does not currently intend to pay cash dividends on its Common Stock in
the foreseeable future. Under the Company's senior credit facility,
the distribution of dividends would require the lender's consent.
Applicable laws generally limit the ability of the Company's
subsidiaries to pay dividends to the extent that required regulatory
capital would be impaired, which in turn further limits the Company's
ability to pay dividends.
<PAGE>
Item 6. SELECTED FINANCIAL DATA.
The selected consolidated statement of income data and balance
sheet data set forth below for, and at the end of, the years ended
December 31, 1995, 1996 and 1997, are derived from, and are qualified
by reference to the financial statements of the Company audited by
Coopers & Lybrand L.L.P., independent auditors, included elsewhere in
this annual report. The selected consolidated statement of income
data and balance sheet data for, and at the end of, the periods ended
December 31, 1993 and prior, are derived from audited financial
statements of the Company not included herein. The selected
consolidated financial information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated
financial statements and related notes.
<TABLE>
Predecessor Company(1) The Company
Six Months Six Months
Ended Ended
June 30, Dec. 31, YearEnded Dec. 31,
1993 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Consolidated Statement of Income Data:
Revenues $22,004 $24,033 $55,192 $106,661 $141,069 $158,726
Dental providers' fees and claim costs 11,932 13,055 30,262 62,218 73,431 81,690
Commissions 3,028 3,143 6,800 10,763 12,184 13,272
Gross profit 7,044 7,835 18,130 33,680 55,454 1,047
General and administrative 6,418 4,537 10,827 20,827 31,412 44,318
Depreciation and amortization 205 884 2,195 2,717 5,153 64,688
Operating income (loss) 42l 2,414 5,108 10,136 18,889 (46,289)
Interest expense -- 1,208 2,464 1,970 1,935 3,239
Other (income) expense, net 1,139 -- (77) (803) (804) (723)
Income (loss) before provisions for
income taxes and extraordinary item (718) 1,206 2,721 8,969 17,758 (48,805)
Income tax provision 55 553 1,316 3,765 7,866 4,900
Income (loss) before extraordinary item (773) 653 1,405 5,204 9,892 (53,705)
Extraordinary loss, net of applicable
benefit of $305 -- -- -- 498 -- --
Net income (loss) (773) 653 1,405 4,706 9,892 (53,705)
Income (loss) per common share - basic:
Income (loss) before extraordinary item 0.31 0.69 0.98 (5.32)
Extraordinary loss (0.07)
Income (loss) income per common share 0.31 0.62 0.98 (5.32)
Income (loss) per common share - diluted:
Income (loss) before extraordinary loss 0.30 0.68 0.97 (5.32)
Extraordinary loss -- (0.07) -- --
Net income (loss) per common share (1) 0.30 0.61 0.97 (5.32)
Weighted average common shares outstanding (1) 4,149 7,241 10,049 10,098
Weighted average common shares outstanding
with dilutive securities 4,252 7,352 10,177 10,098
</TABLE>
<PAGE>
<TABLE> The Company
December 31,
1993 1994(2) 1995(2)(3) 1996(4)(5) 1997(6)(7)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Total current assets $ 8,776 $14,488 $ 46,254 $ 34,083 $37,283
Total assets 37,202 63,342 129,396 184,167 150,871
Total current liabilities 8,640 16,597 21,041 24,273 26,067
Total liabilities 34,252 53,983 27,219 71,984 90,595
Redeemable preferred 1,050 5,159 -- -- --
Stockholders' equity 1,900 4,200 102,177 112,183 60,276
</TABLE>
(1) Presents consolidated financial data of the Company's
predecessor, American Prepaid, for the periods prior to the
Company's Acquisition of all of the outstanding stock thereof
effective in June 1993. Because of such transaction, certain
aspects of the consolidated results of operations for periods
prior to the period July 1, 1993 are not comparable with those
for subsequent periods. Consequently, net income per share data
are presented only for the years December 31, 1994 and
thereafter. For purposes of the Consolidated Statements of Income
Data, references to common shares include common share
equivalents. Net income per common share for the years ended
December 31, 1994 and 1995, has been computed after deducting
$109,000 and $218,000, respectively, from net income attributable
to preferred stock dividend accumulation.
(2) The DentiCare and UniLife acquisitions were completed on December
28, 1994, and DentiCare and UniLife are therefor included in the
consolidated balance sheet of the Company at December 31, 1994
and thereafter, and the consolidated statement of income of the
Company for the years ended December 31, 1995 and thereafter.
(3) The CompDent acquisition was completed on July 5, 1995, and
CompDent is therefor included in the consolidated balance sheet
of the Company at December 31, 1995 and thereafter, and the
consolidated statement of income of the Company for the years
ended December 31, 1995 and thereafter.
(4) The Texas Dental acquisition was completed on January 8, 1996 and
Texas Dental is therefor included in the consolidated balance
sheet of the Company at December 31, 1996, and the consolidated
statement of income of the Company for the year ended December
31, 1996.
(5) The Dental Care Plus acquisition was completed on May 8, 1996,
and Dental Care Plus is therefore included in the consolidated
balance sheet of the Company at December 31, 1996, and the
consolidated statement of income of the Company for the year
ended December 31, 1996.
(6) The American Dental Providers and Diamond Dental & Vision
acquisition was completed on March 21, 1997 and is therefore
included in the consolidated balance sheet of the Company at
December 31, 1997, and the consolidated statement of income of
the Company for the year ended December 31, 1997.
(7) The Workman Management Group, Old Cutler Dental Associates,
Robert T. Winfree, D.D.S. and the Stratman Management Group
acquisitions were completed on July 2, 1997, July 2, 1997,
September 26, 1997 and November 7, 1997 respectively and these
five are included in the consolidated balance sheet of the
Company at December 31, 1997, and the consolidated statement of
income of the Company for the year ended December 31, 1997.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
Type of Services
The Company is a full-service dental benefits provider.
Approximately 75% of revenues are generated from managed dental care
plan subscriber premiums. In addition, DHMI generates approximately
10% of the Company's revenues from providing management services and
support to dental practices. The balance of revenues are generated by
reduced fee-for-service plans and third-party administrator services.
Under managed dental care plans, Subscribers pay a premium to
receive dental services from a dentist which the subscriber selects
from a panel of dentists. The Panel dentists are paid by the Company
a monthly capitation fee which is fixed under the participating dental
agreement regardless of the extent of services provided. Historically,
the cost structure within managed dental care plans results in
capitations of approximately 60% of revenues, commission expense of
approximately 10% of revenues, and general and administrative expenses
of
<PAGE>
approximately 20% of revenues, leaving an operating margin of
approximately 10% of revenues. Dual Choice plans allow members to
choose between a managed dental care plan offered by the Company or a
traditional dental indemnity insurance plan underwritten by an
unaffiliated insurance company, but marketed and administered by the
Company under agreements with the underwriting insurers. A small
portion of the Company's revenues is generated from commissions earned
from the insurance companies underwriting such dental indemnity
insurance.
In reduced fee-for-service plans, the subscriber pays a fee for
access to a panel of dentists. The dentists on the panel have agreed
to provide services at reduced rates. The subscriber pays the dentist
at the reduced rate for services provided at the time of service
delivery. Therefore, this type of plan involves no payment by the
Company to the dentists. Historically, the cost structure within
reduced fee-for-service plans consists of no capitation expense,
commission expense of approximately 25% of revenues, and general and
administrative expenses of approximately 40% of revenues, leaving an
operating margin of approximately 35% of revenues.
Revenues from third-party administrator arrangements are earned
by managing the claims processing and paying function for groups. The
groups fund the claims and pay a service fee to the Company.
Historically, the cost structure within third-party administrator
arrangements consists of no capitation expense, commission expense of
approximately 5% of revenues, and general and administrative expenses
of approximately 70% of revenues, leaving an operating margin of
approximately 25% of revenues.
DHMI earns its revenues from the provision of management services
to the dental practices. These services include billing and
collections, accounting, marketing, materials management, human
resources, facility management and payor relations. In most markets,
DHMI is paid a percent of practice revenues; however, because of
regulatory limitations, DHMI receives a flat fee in several markets.
The Company operates two distinguishable segments, dental
benefits services and dental practice management. The Company will
report, for the year ending December 31, 1998, its financial
information in accordance with SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information.
History and Growth
The Company's predecessor, American Prepaid Professional
Services, Inc. (American Prepaid), began operations in Florida in
1978. Since 1987 the Company has begun de novo operations in seven
additional states. In December 1994, the Company entered the Texas
market through the acquisitions of DentiCare, Inc. (DentiCare), a
Houston-based managed dental care company, and UniLife Insurance
Company, an indemnity insurer (UniLife). In July 1995, the Company
entered or expanded its presence in additional markets, including
Kentucky, Indiana, Missouri, Kansas and West Virginia, through the
acquisition of CompDent Corporation (CompDent), a Louisville,
Kentucky-based managed dental care company. In January 1996, the
Company acquired Texas Dental Plans, Inc. and affiliated entities
(Texas Dental), a reduced fee-for-service dental company based in San
Antonio, Texas, which increased the Company's presence in Texas,
broadened the Company's product line, and expanded the Company's
operations to an additional seven states. Dental Care Plus
Management, Corp. and its wholly owned subsidiary, CompDent of
Illinois (formerly known as I.H.C.S., Inc.), a Chicago, Illinois-based
third-party administrator and managed dental care provider,
respectively, were acquired in May 1996 and greatly expanded the
Company's presence in Illinois.
In addition to growth by acquisitions, the Company has achieved
internal revenue growth from increases in the number of subscribers, a
shift toward products with higher benefit levels and higher premiums
and, to a much more limited extent, premium rate increases. The
Company has historically introduced an across-the-board rate/benefit
increase of approximately 6% to 8% every three years with a gradual
implementation of the new rates/benefits throughout the subscriber
base resulting in price increases of approximately 3% per year on
average.
Business Combinations
On June 29, 1993, the Company acquired all of the issued and
outstanding capital stock of American Prepaid for approximately $29.5
million in cash. The 1993 acquisition was funded through the
incurrence of $20.0 million of senior indebtedness (the "1993 Loan")
and the issuance of $6.85 million of Subordinated Notes, $1.0 million
of Redeemable Preferred Stock and $1.7 million of common stock. The
Company repaid the entire
<PAGE>
outstanding balance of the 1993 Loan and retired all outstanding
Subordinated Notes and Redeemable Preferred Stock (including accrued
unpaid interest and accumulated dividends) on June 1, 1995, with a
portion of the net proceeds from its initial public offering. The
1993 acquisition has been accounted for using the purchase method of
accounting. The Company recorded $3.0 million related to a
non-competition agreement and $23.5 million of goodwill, which are
being amortized on a straight-line basis over 5 and 40 years,
respectively.
On December 28, 1994, the Company acquired DentiCare and UniLife
for $17.0 million plus approximately $600,000 in transaction costs.
These acquisitions were funded through the incurrence of $12.0 million
of senior indebtedness (the "1994 Loan") and the issuance of $4.0
million of Redeemable Preferred Stock and $1.0 million of common
stock. On June 1, 1995, the Company repaid the entire outstanding
balance of the 1994 loan and retired all outstanding Subordinated
Notes and Redeemable Preferred Stock (including accrued unpaid
interest and accumulated dividends) with a portion of the net proceeds
from its initial public offering. The DentiCare and UniLife
acquisitions have been accounted for using the purchase method of
accounting. The acquired assets and liabilities were recorded at
their estimated fair market values at the date of acquisition, which
in the case of UniLife resulted in a write-down of certain assets. In
connection with the DentiCare acquisition, the Company recorded $15.6
million of goodwill, which is being amortized on a straight-line basis
over 40 years. The Company's strategy regarding UniLife has been to
wind down over time UniLife's dental indemnity insurance business. As
of October 1, 1995, the Company reinsured UniLife's dental indemnity
insurance business and its group term policies with another insurance
company. In April 1996, the Company completed the conversion of all
of UniLife's real estate and other assets into cash and cash
equivalents.
On July 5, 1995, the Company acquired CompDent for $32.5 million
plus approximately $1.1 million in transaction costs. The CompDent
acquisition was funded through the incurrence of $25.0 million of
senior indebtedness under the Company's revolving credit facility and
proceeds from the Company's initial public offering. The Company then
repaid the outstanding indebtedness under its revolving credit
facility with a portion of the net proceeds received from its second
stock offering. The CompDent acquisition has been accounted for using
the purchase method of accounting. The acquired assets and liabilities
were recorded at their estimated fair market values at the date of
acquisition. In connection with the CompDent acquisition, the Company
recorded $34.3 million of goodwill which is being amortized on a
straight-line basis over 40 years.
On January 8, 1996, the Company acquired Texas Dental, a
Texas-based reduced fee-for-service dental company for an aggregate
cash purchase price of approximately $23.0 million including
approximately $540,000 in transaction costs. The Texas Dental
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 acquired assets and
liabilities recorded at their estimated fair market values at the date
of acquisition. Goodwill of $26.0 million was recorded in the
acquisition and is being amortized over 40 years on a straight-line
basis. The reduced fee-for-service products offered by Texas Dental
broaden the Company's existing product line.
Effective May 8, 1996, the Company acquired Dental Care Plus.
The aggregate purchase price for Dental Care Plus was $38.0 million
(including approximately $843,000 in transaction costs), of which the
Company paid approximately $27.0 million in cash and assumed
approximately $11.0 million in accrued liabilities. Dental Care Plus
is based in Chicago, Illinois, and provides 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, resulting in
the Company recording $41.2 million in goodwill which is being
amortized over 40 years on a straight-line basis.
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 is
<PAGE>
being 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.
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, and
with funding mainly from the revolving line of credit. Concurrent with
the acquisition, the Company entered into a forty-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
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 $15.2 million which is being amortized over 40
years. During the fourth quarter of 1997, the Company revised its
allocation of the purchase price of Workman which resulted in an
increase to the excess of purchase price over net assets acquired of
$1.8 million to $17.0 million.
During the third and fourth quarter of 1997, the Company
completed the acquisition of several dental facilities from three
additional dental groups. Effective July 2, 1997, the Company
completed the acquisition of one dental facility located in southern
Florida from the Old Cutler Dental Associates, P.A. ("Old Cutler").
Effective September 26, 1997, the Company completed the acquisition of
one dental facility located in central Tennessee from Robert T.
Winfree, D.D.S., P.C. ("Winfree"). Effective November 7, 1997, the
Company completed the acquisition of Stratman Management Group
("Stratman") and its six dental facilities located in Indiana. The
purchase price of these facilities consisted of $5.0 million in cash
less discharge of liabilities related to the purchased assets.
Funding for the acquisitions was obtained from cash available from
operations and from the Company's revolving line of credit.
Concurrent with the acquisitions, the Company entered into
forty-year agreements to manage the dental practices which are
operating in the dental facilities. Each 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 acquisitions resulted in excess of cost over
fair value of net assets acquired of $5.5 million which is being
amortized over 40 years.
During the fourth quarter, management concluded that the
Company's accounting policy with respect to the recoverability of
goodwill should be changed to discounted projections of future cash
flows using an economic rate of return that would be customary for
evaluating the present value of future cash flows in connection with
current dental benefit company transactions. As a result of this
accounting change, the goodwill attributable to the acquisition of
CompDent Corporation was reduced from $32.1 million to $13.9 million.
Additionally, the goodwill attributable to the acquisition of Dental
Care Plus Management, Corp. was reduced from $39.1 million to $8.8
million, DentiCare, Inc. was reduced from $14.4 million to $6.0
million and American Dental Providers, Inc. and Diamond Dental &
Vision, Inc. was reduced from $2.1 million to $0, or a total reduction
of $59.0 million. The goodwill associated with these acquisitions
will be amortized over the remaining forty-year life.
RESULTS OF OPERATIONS
Year ended December 31, 1997, compared to the year ended December 31,
1996
Revenues increased by $17.6 million, or 12.5%, to $158.7 million
in 1997 from $141.1 million in 1996. Of the increase, $7.9 million,
was primarily attributable to revenues contributed by DHMI which
commenced operations in 1997. The addition of AMDP and DDV and Dental
Care Plus revenues following the acquisitions of these companies
accounted for $0.9 million and $2.1 million, respectively, of this
increase. Internal growth accounted for $6.7 million of the growth in
subscriber premiums.
Other revenue increased by $2.9 million, or 54.7%, to $8.2
million in 1997 from $5.3 million in 1996. The increase was primarily
attributable to $2.0 million of Dental Care Plus third-party
administrator fees and management fees in 1997 following the May 1996
Dental Care Plus acquisition.
Dental care providers' fees and claim costs increased $8.3
million, or 11.3%, to $81.7 million in 1997 from $73.4 million in
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
<PAGE>
represent amounts payable to dental care providers under certain
non-capitated plans. The increase in dental care providers' fees and
claim costs was due in part to a $2.0 million one-time charge
associated with terminating an indemnity relationship. Dental care
providers' fees and claims costs increased to 57.0% from 54.1% of
subscriber premiums in 1997 and 1996, respectively. The increase was
partially the result of the one-time charge mentioned above.
Commission expense increased $1.1 million, or 9.0%, to $13.3
million in 1997 from $12.2 million in 1996. The $1.0 million increase
in commission expense was the result of internal growth in subscriber
premiums. As a percentage of subscriber premiums, commissions
increased to 9.3% in 1997 from 9.0% in 1996.
Premium taxes remained the same in 1997 as a percentage of
subscriber premiums at 0.7%
General and administrative expenses increased $13.9 million, or
45.7%, to $44.3 million in 1997 from $30.4 million in 1996. As a
percentage of total revenues, this expense increased to 27.9 % in 1997
from 21.5% in 1996. Of this increase, $5.0 million, or 35.5%, was
related to the operating costs of DHMI's dental facilities. This
increase as a percentage of revenues is due to higher general and
administrative costs ($2.1 million or 14.8%) added following the
January startup of DHMI. The remaining increase related to the $7.4
million in unusual and one-time charges which were recorded in the
fourth quarter of 1997. The unusual and one-time charges included a
reserve for a surplus note ($2 million), reserve for incurred practice
management startup costs ($1.4 million), litigation settlement costs
($1.6 million) and other costs ($2.4 million). The increases were
partially offset by a $0.6 million decrease from further assimilation
of acquired business which resulted in reductions of general and
administrative costs.
Depreciation and amortization expense increased $59.5 million, or
115.5%, to $64.7 million in 1997 from $5.2 million in 1996. This
includes $59.0 million in write-offs for goodwill impairment. The
goodwill impairment resulted from the Company's determination that the
recoverability of goodwill should be determined through discounted
projections of future flows instead of undiscounted cash flows,
utilizing an economic rate of return that would be customary for
evaluating the present value of future cash flows of current dental
benefit company transactions. Depreciation expense increased $600,000
due to additional office furniture, equipment, and leasehold
improvements and capital expenditures at DHMI. Depreciation expense
in 1998 is expected to be slightly higher due to the addition of
leasehold improvements, and computer and phone equipment.
Interest income increased from $585,000 in 1996 to $725,000 in
1997. This increase is primarily attributed to the rise in interest
rates and a concerted effort to invest cash in higher yielding
instruments.
Interest expense increased to $3.2 million in 1997 from $1.9
million in 1996. The Company had $56.6 million of debt outstanding at
December 31, 1997. At each quarter end, the Company draws from its
credit facility to pay down inter-company balances. The increase is
primarily related to the increase in interest rates and in the amounts
outstanding under the Company's credit facility. Any future
acquisitions may cause the Company to incur additional indebtedness
under its revolving credit facility or otherwise.
In 1997, the Company's effective income tax rate increased to
48.3% (excluding the $59.0 million in write-offs for goodwill
impairment) compared with 44.3% in 1996. The increase is primarily
attributable to additional nondeductible goodwill amortization
recorded in 1997 following the recent acquisitions and the relatively
lower base of net income.
As a result of the above mentioned factors, the net loss for 1997
was $53.7 million or $5.32 per share compared to net income of $9.9
million or $0.97 per share for 1996.
Year ended December 31, 1996, compared to the year ended December 31,
1995
Revenues increased by $34.4 million, or 32.3%, to $141.1 million
in 1996 from $106.7 million in 1995. This increase was primarily
attributable to a $30.9 million, or 29.5% increase in subscriber
premiums to $135.8 million in 1996 from $104.9 million in 1995. The
addition of Texas Dental and Dental Care Plus subscriber premiums
following the acquisitions of these companies accounted for $8.8
million and $10.0 million, respectively, of this increase. The
acquisition of CompDent in July of 1995 impacted 1995 for part of the
year and impacted 1996
<PAGE>
for the full year, resulting in higher subscriber premiums in 1996 of
approximately $16.6 million. Internal growth accounted for $9.7
million of the growth in subscriber premiums. These increases in
subscriber premiums were partially offset by a decrease of $14.2
million in UniLife premiums. Effective October 1, 1995, UniLife
reinsured all of its indemnity insurance with another insurance
company. This completed the Company's strategy upon acquiring UniLife
to wind down UniLife's dental indemnity insurance business.
Other revenue increased by $3.5 million, or 198.5%, to $5.3
million in 1996 from $1.8 million 1995. The increase was primarily
attributable to $3.2 million of Dental Care Plus third-party
administrator fees and management fees in 1996 following the May 1996
Dental Care Plus acquisition.
Dental care providers' fees and claims costs increased $11.2
million, or 18.0%, to $73.4 million in 1996 from $62.2 million in
1995. Dental care providers' fees represent capitation payments paid
to panel dentists under the Company's managed dental care plans.
Under managed dental care plans, capitation payments to panel dentists
are fixed under the participating dental agreement regardless of the
extent of services provided. Dental claim costs represent amounts
payable to dental care providers under certain non-capitated plans.
Dental care providers' fees and claims costs decreased to 54.1% from
59.3% of subscriber premiums in 1996 and 1995, respectively. This
decrease as a percentage of subscriber premiums is due to the
acquisition of Texas Dental which, as a reduced fee-for-service dental
company, has subscriber premiums with no corresponding capitation
expense. Providers' fees and claim costs as a percentage of subscriber
premiums were also lowered by the elimination of UniLife claims costs.
As discussed above, effective October 1, 1995, UniLife entered into a
reinsurance agreement and thus incurred no claims cost after this
date. The addition of Dental Care Plus providers' fees and claims at
61.2% of subscriber premiums following the May 1996 acquisition
partially offset these decreases.
Commission expense increased $1.4 million, or 13.2%, to $12.2
million in 1996 from $10.8 million in 1995. The addition of Texas
Dental and Dental Care Plus commissions in 1996 resulted in a $1.4
million increase while the elimination of UniLife commissions resulted
in a $1.9 million decrease. The acquisition of CompDent in July of
1995 impacted 1995 for part of the year and impacted 1996 for the full
year, resulting in higher commission expense in 1996 of approximately
$0.9 million. The remaining $1.0 million increase in commission
expense was the result of internal growth in subscriber premiums. As
a percentage of subscriber premiums, commissions decreased to 9.0% in
1996 from 10.3% in 1995. This decease related primarily to the
addition of Dental Care Plus commissions at 1.0% of subscriber
premiums and the elimination of UniLife commissions at 13.4% of
subscriber premiums, partially offset by the addition of Texas Dental
commissions at 15.4% of subscriber premiums. Without the effects of
Dental Care Plus, UniLife, and Texas Dental on subscriber premiums and
commissions, commissions as a percentage of subscriber premiums
decreased slightly from 9.8% in 1995 to 9.2% in 1996. The slight
decrease as a percentage of subscriber premiums was primarily
attributable to an increase in the number of large employer groups for
which the Company's direct sales force typically plays an active role
in sales and servicing, resulting in a lower commission rate or no
commissions being paid to independent agents with respect to these
accounts. The expenses associated with the increased number of sales
representatives employed by the Company were reflected in general and
administrative expenses, rather than commissions.
Premium taxes decreased as a percentage of subscriber premiums to
0.7% in 1996 compared with 1.3% in 1995. This decrease was a result
of the addition of Texas Dental and Dental Care Plus subscriber
premiums in 1996 and the elimination of UniLife subscriber premiums in
the third quarter of 1995. Texas Dental is a reduced fee-for-service
dental company and, accordingly, its revenues are not subject to
premium tax in the state of Texas. Dental Care Plus revenues are not
subject to a premium tax in the state of Illinois. UniLife premiums
in 1995 were subject to the Texas premium tax rate of approximately
2.5%.
General and administrative expenses increased $11.0 million, or
56.4%, to $30.4 million in 1996 from $19.4 million in 1995. As a
percentage of total revenues, this expense increased to 21.5% in 1996
from 18.2% in 1995. This increase as a percentage of revenues is due
to a higher general and administrative level added following the
January 1996 acquisition of Texas Dental and the May 1996 acquisition
of Dental Care Plus. The increased use of in-house sales and new
marketing staff, as opposed to independent agents paid commissions
also contributed to the increase. The Company's strategy regarding
acquisitions includes, in part, the reduction of general and
administrative expenses through the elimination of redundant overhead
functions and the extension of the Company's management systems and
policies. While comparing 1996 with 1995, general and administrative
expenses as a percentage of revenue show a year-to-year increase;
quarterly results show that since the second quarter of 1996,
<PAGE>
when the acquisition of Dental Care Plus took place, general and
administrative expenses as a percentage of revenues have decreased
from 22.5% in the second quarter of 1996 to 20.7% in the fourth
quarter of 1996. The Company believes further assimilation of acquired
business will continue to result in reductions of general and
administrative costs, subject to the temporary increases caused by any
future acquisitions.
Depreciation and amortization expense increased $2.4 million, or
89.7%, to $5.1 million in 1996 from $2.7 million in 1995.
Amortization of intangible assets (goodwill and non-compete
agreements) increased $l.8 million to $3.8 million in 1996. Of this
increase, $1.3 million is the result of additional goodwill
amortization recorded following the Texas Dental and Dental Care Plus
acquisitions. The remaining $0.5 million of the increase is primarily
due to the amortization of CompDent goodwill being recorded for only
that portion of 1995 following the acquisitions compared to the full
12 months in 1996. Depreciation expense increased $636,000 due to
additional office furniture, equipment, and leasehold improvements
obtained in conjunction with the acquisitions in January 1996 and May
1996, and for new office space occupied by the Company in September
1996. Depreciation expense in 1997 is expected to be slightly higher
due to the addition of leasehold improvements, and computer and phone
equipment.
Interest income decreased from $735,000 in 1995 to $585,000 in
1996. Interest income consists of interest earned on available cash
balances as well as interest earned on cash balances which are
restricted by state regulatory agencies. Interest income declined due
to the Company having less cash to invest in 1996, due to the
completion of the Texas Dental and Dental Care Plan acquisitions.
Interest expense decreased slightly to $1.9 million in 1996 from
$2.0 million in 1995. The Company had $26.6 million of debt
outstanding from January 1995, of which $1.0 million was retired with
proceeds from operating cash flows and the remainder with proceeds
from the Company's initial public offering in June 1995. The Company
incurred $25.0 million of new indebtedness in July 1995 under its
revolving credit facility to partially finance the CompDent
acquisition and repaid this indebtedness in August 1995 with proceeds
from the second stock offering. In May 1996, $38.0 million was
borrowed under the revolving credit facility to finance the
acquisition of Dental Care Plus. At each quarter end, the Company
draws from its credit facility to pay down inter-company balances.
Any future acquisitions may cause the Company to incur additional
indebtedness under its revolving credit facility or otherwise.
Other expense and income items total $219,000 in 1996, consisting
mainly of the gain on sale of unneeded properties obtained in past
acquisitions.
In 1996, the Company's effective income tax rate increased to
44.3% compared with 42.0% in 1995. The increase is primarily
attributable to additional nondeductible goodwill amortization
recorded in 1996 following the recent acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash in 1997 have been operating
activities and borrowings under its revolving line of credit. The
primary uses of cash for the period were the acquisitions of various
dental practices, AMDP and capital expenditures at DentLease. During
1997, the Company invested excess funds in reverse repurchase
agreements for U.S. government securities. The carrying value of the
agreements approximates fair value because of the short maturity of
the investments and the Company believes that it is not exposed to any
significant risks on its investments in reverse repurchase agreements.
Cash flows from operating activities were $4.3 million and $9.5
million for 1997 and 1996, respectively. Cash flows from operations
consist primarily of subscriber premiums and investment income net of
capitation payments to panel dentists, claims paid, brokers' and
agents' commissions, general and administrative expenses, and income
tax payments. The Company receives some 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 $24.9 million in 1997 and
$64.5 million in 1996. The decrease, in 1997, in cash used relates
primarily to a reduction in acquisitions. While cash of $20.8 million
was used in 1997 to acquire AMDP and various dental practices, the
Company used cash of $62.5 million to purchase Texas Dental and
<PAGE>
Dental Care Plus in 1996. The $1.6 million increase in capital
expenditures for 1997 compared with 1996 is due primarily to purchases
of equipment and leasehold improvements, and enhancements and upgrades
to computer and communications equipment. The Company expects to make
additional capital expenditures of approximately $2.0 million in 1998,
mainly for further enhancements to its computer and telephone
equipment.
Cash flows from financing activities in 1997 were $15.6 million,
primarily representing borrowings under the Company's revolving line
of credit to finance the acquisitions of various dental care practices
and to repay inter-company borrowings to its regulated subsidiary
companies at quarter-ends.
On June 30, 1995, the Company obtained a reducing revolving $35
million line of credit (the "Credit Facility") from banks. On July 5,
1995, to partially finance the acquisition of CompDent, the Company
borrowed $25 million under the Credit Facility. On May 3, 1996, the
Credit Facility was amended to increase the available line of credit
to $65 million. On May 7, 1996, the Company borrowed $38 million
under the Credit Facility to finance the acquisition of Dental Care
Plus. The Credit Facility pursuant to a second amendment, entered
into on March 16, 1998 requires a 50% reduction in available
borrowings on December 31, 1999, and expiration of the Credit Facility
on December 31, 2000. Outstanding indebtedness under the Credit
Facility bears interest, at the Company's option, at a rate equal to
the prime rate plus up to 1/4% or LIBOR plus up to 1 3/4%, with the
margin over the prime rate and LIBOR decreasing as the ratio of
consolidated debt to EBITDA decreases. Currently borrowings under the
Credit Facility bear interest at the LIBOR-based rate. The Credit
Facility prohibits payment of dividends and other distributions and
restricts or prohibits the Company from making certain acquisitions,
incurring indebtedness, incurring liens, disposing of assets or making
investments; and requires it to maintain certain financial ratios on
an ongoing basis. The Credit Facility is collateralized by pledges of
the stock of the Company's direct and indirect subsidiaries. At
December 31, 1997, the Company was in technical violation of three of
the financial ratios as a result of the goodwill impairment and
one-time charges recorded in the fourth quarter. The Company has
received a waiver with respect to such covenants from its lenders. The
Company had $56.6 million of borrowings outstanding as of December 31,
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. 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 Dental Health Management, Inc. will
present capital needs, the extent of which is indeterminate.
Additional financing, under the Credit Facility or otherwise, will be
required in connection with an acquisition or acquisitions which the
Company may consummate in the future.
Under applicable insurance laws of most states in which the
Company conducts business, the Company's subsidiary operating in the
particular state is required to maintain a minimum level of net worth
and reserves. In general, minimum capital requirements are more
stringent for insurance companies, such as UniLife. The Company may
be required from time to time to invest funds in one or more of its
subsidiaries to meet regulatory capital requirements. Applicable laws
generally limit the ability of the Company's subsidiaries to pay
dividends to the extent that required regulatory capital would be
impaired, and dividend payments are further restricted under the
Credit Facility.
During the fourth quarter of 1997, the Company completed an
extensive review of its operation and determined there were changes
that occurred that necessitated a number of unusual and one-time
charges. The charges include $2.0 million for the termination of an
exclusive indemnity relationship, $2.0 million for reserve for a
surplus note, $1.6 million for litigation settlement costs, $1.4
million for a reserve for incurred practice management costs and $2.4
million in other costs. There was also $59.0 million in a write off
for a goodwill impairment. Historically, the goodwill was reviewed on
an undiscounted cash flow basis. It was determined that potential
goodwill impairment should be analyzed on a discounted cash flow basis
utilizing an economic rate of return that would be customary for
evaluating the present value of future cash flows of current dental
benefit company transactions. The Company believes that this method
of valuation better reflects the performance of each acquisition. The
Company does not believe these unusual and one-time charges will
adversely affect its normal cash flow in 1998.
<PAGE>
LITIGATION
The Company's wholly-owned subsidiary, American Prepaid and its
Florida subsidiary, American Dental Plan, Inc. ("ADP"), 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 ADP to make capitation payments
to its participating dentists for the period of time between when a
subscriber enrolls and the time at which the subscriber selects a
participating dentist. The plaintiffs sought to bring the suit as a
class action. On December 4, 1997, a class was certified consisting
of all participating dentists in the states of Florida, Mississippi,
South Carolina, and Tennessee who, since September 1, 1989, have had
Participating Dentist Agreements with American Dental Plan, Inc.
While the Company believes its interpretation and administration
of the Participating Dentist Agreements are correct, the Company
recently entered into a proposed settlement, which awaits final
approval by the Court. The general terms of the settlement provide
for a total payment of $1.3 million to be divided among (1) the class
members who are no longer with ADP, (2) the class representatives, and
(3) the attorneys for the plaintiff class. Additional costs associated
with this settlement will be approximately $0.3 million.
The settlement also requires that ADP amend its Participating
Dental Agreement to provide that it will pay capitation to the dentist
when there has been a delay between the time a subscriber initially
enrolls in the dental plan and the date they select a dentist, for all
subscribers who enroll after January 1, 1999. In addition, ADP has
agreed to provide additional notices to subscribers who have not
selected a dentist.
The proposed settlement is subject to the notification of the
class members, a fairness hearing and approval by the court.
Management does not believe there are currently any asserted or
unasserted claims that will have a material adverse effect on the
financial position of the Company.
INFLATION
The Company does not believe that its financial performance has
been or will be materially affected by inflation.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's actual results could differ materially from its
historical results or from any forward-looking statements made or
incorporated into this Annual Report. Factors that may cause such
differences include: the Company's ability to successfully complete
new acquisitions and integrate acquired companies; the Company's
ability to successfully expand its business to include the management
of dental practices; the Company's ability to attract and retain
qualified personnel and management; changes in state insurance laws
and related government regulations; increased competition and growth
in the dental benefits coverage market, and other unanticipated
changes in economic conditions.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 19 in the Company's consolidated financial statements
included herein.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Company for the
fiscal year ended December 31, 1997 set forth on pages F-1 through
F-36 herein.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information appearing under the captions "Information
Regarding Directors" and "Executive Officers" in the registrant's
definitive proxy statement relating to the Annual Meeting of
Stockholders to be held on April 30, 1998 is incorporated herein by
reference.
Item 11. EXECUTIVE COMPENSATION.
The information appearing under the caption "Executive
Compensation" in the registrant's definitive Proxy statement relating
to the Annual Meeting of Stockholders to be held on April 30, 1998 is
incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information appearing under the caption "Principal and
Management Stockholders" in the registrant's definitive Proxy
statement relating to the Annual Meeting of Stockholders to be held on
April 30, 1998 is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a)(1) Financial Statements
The response to this Portion of Item 14 is submitted as a
separate section of this Annual Report beginning on page S-1.
(a)(2) Schedules
The response to this portion of Item 14 is submitted as a
separate section of this Annual Report beginning on page S-5.
(a)(3) Exhibits
Exhibits 10.8 through 10.27 constitute all of the management
contracts and compensation plans and arrangements of the Company
required to be filed as exhibits to this Annual Report.
1. The following is a complete list of Exhibits filed or
incorporated by reference as part of this Annual Report.
<PAGE>
Exhibit No. Description
3.1 Amended and Restated Certificate of Incorporation (8)
3.2 Amended and Restated By-laws (1)
4.1 Specimen certificate for shares of the Company's Common
Stock (2)
4.2 Shareholder Rights Agreement, dated as of August 16,
1996, between the Company and State Street Bank and
Trust Company, as Rights Agent. (7)
4.3 Certificate of Designations, Preferences, and Rights of
a Series of Preferred Stock of CompDent Corporation
(11)
10.1 First Amendment to the Credit Agreement among the
Company, American Prepaid, the lenders named therein
and First Union National Bank of North Carolina, as
Agent, dated May 3, 1996 (10)
10.2 Parent Guaranty of the Company in favor of First Union
National Bank of North Carolina, dated July 5, 1995 (4)
10.3 Parent Pledge Agreement between the Company and First
Union National Bank of North Carolina, dated July 5,
1995 (4)
10.4 Borrower Pledge Agreement between American Prepaid and
First Union National Bank of North Carolina, dated July
5, 1995 (4)
10.6 Amended and Restated Investment and Stockholders'
Agreement dated as of April 26, 1995 among the Company,
American Prepaid, the Brains, the TA Investors, the
Chestnut Investors and the Management Investors (2)
10.8 Employment Agreement dated May 24, 1995 between American
Prepaid and David R. Klock (1)
10.9 Employment Agreement dated May 24, 1995 between American
Prepaid and Phyllis A. Klock (1)
10.10 Employment Agreement dated May 24, 1995 between
American Prepaid and Sharon S. Graham (1)
10.10A Employment Agreement dated April 1, 1997 between the
Company and Philip Hertik (12)
10.13 Key Executive Insurance Policies for David R. Klock and
Phyllis A. Klock (3)
10.14 Key Executive Insurance Policy for Sharon S. Graham (1)
10.15 Non-Qualified Stock Option Agreement dated November 1,
1993 between Philip Hertik and the Company (3)
10.16 Non-Qualified Stock Option Agreement dated as of
November 1, 1993 between Joseph E. Stephenson and the
Company (3)
10.17 Non-Qualified Stock Option Agreement dated as of
September 25, 1995 between Joseph Ciffolillo and the
Company (9)
10.18 The Company's 1994 Stock Option and Grant Plan (3)
10.19 Stock Redemption Agreement dated July 29, 1994 between
the Company and David R. Klock for 2,500 shares at $5.33
per share (3)
10.20 Amended and Restated CompDent Corporation 401(k)
Standardized Profit Sharing Plan effective January 1,
1997 (11)
10.21 Form of Indemnity Agreement between the Company and
each of its directors (2)
10.22 Employment Agreement dated February 1, 1996 by and
between the Company and Bruce A. Mitchell (6)
10.23 The Company's Employee Stock Purchase Plan (9)
10.24* The Company's Non-Employee Directors Stock Option Plan,
as amended
10.25 Form of Non-Qualified Stock Option Agreement under the
Company's Non-Employee Directors' Stock Option Plan (11)
10.26 The Company's 1997 Stock Option Plan (12)
10.27 Forms of Non-Qualified Stock Option Agreement under the
Company's 1994 Stock Option and Grant Plan and 1997 Stock
Option Plan (12)
10.27A Forms of Non-Qualified Stock Option Agreement issued in
connection with that certain Asset Purchase Agreement
dated June 13, 1997 by and among the Company, Dental
Health Management, Inc., DentLease, Inc., Workman
Management Group, Ltd., Associated Dental Professionals,
Ltd., Premier Management Group, Ltd., Supreme Dental
Management, Ltd., Elite Management Group, Ltd., Paramount
Dental Management, Ltd. and the Stockholders thereof (13)
10.28 Agreement by and between Shenandoah Life Insurance
Company and American Prepaid, effective December 27, 1993
(3)
10.29 Agreement by and between Shenandoah Life Insurance
Company and ADP-NC, effective January 20, 1994 (3)
<PAGE>
10.30 Agreement by and between Shenandoah Life Insurance
Company and ADP-GA, effective January 20, 1994 (3)
10.31 Agreement by and between Shenandoah Life Insurance
Company and ADP, effective January 20, 1994 (3)
10.32 Agreement by and between Shenandoah Life Insurance
Company and American Dental Plan of Alabama, Inc.,
effective January 20, 1994 (3)
10.33 Agreement by and between Shenandoah Life Insurance
Company and American Prepaid Dental Plan of Ohio, Inc.,
effective January 20, 1994 (3)
10.34 Prepaid Product Marketing/Administration Agreement by
and between The Centennial Life Insurance Company and
CompDent Corporation, effective January 1, 1995 (1)
10.35 Indemnity Products Marketing/Administrative Agreement
by and between the Centennial Life Insurance Company and
CompDent Corporation, effective January 1, 1995 (1)
10.36 Lease Agreement dated December 22, 1995, by and between
Mansell Overlook 100, LLC, and CompDent Corporation for
property located at 100 Mansell Court East, Roswell, GA
30076
13.1 Annual Report to Stockholders for the fiscal year ended
December 31, 1997 (11)
18.1* Letter of Coopers & Lybrand L.L.P.
21.1 Subsidiaries of the Company (11)
23.1* Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
___________
(1) Filed as an exhibit to the Registrant's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on
August 4, 1995 (File No. 33-95444) and incorporated herein by
reference thereto.
(2) Filed as an exhibit to Pre-effective Amendment No. 1 to the
Registrant's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on April 27, 1995 (File No.
33-90316) and incorporated herein by reference thereto.
(3) Filed as an exhibit to the Registrant's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on
March 14, 1995 (File No. 33-90316) and incorporated herein by
reference thereto.
(4) Filed as an exhibit to the Registrant's Current Report on Form
8-K filed with the Securities and Exchange Commission on July 5,
1995 and incorporated herein by reference thereto.
(5) Filed as an exhibit to the Registrant's Current Report on Form
8-K filed with the Securities and Exchange Commission on January
8, 1996 and incorporated herein by reference thereto.
(6) Filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the period ended March 31, 1996 filed with the
Securities and Exchange Commission on May 15, 1996 and
incorporated herein by reference thereto.
(7) Filed as an exhibit to the Registrant's Annual Report on Form
10-K for the period ended December 31, 1995 filed with the
Securities and Exchange Commission on March 28, 1996 and
incorporated herein by reference thereto.
(8) Filed as an exhibit to the Registrant's Current Report on Form
8-K filed with the Securities and Exchange Commission on August
20, 1996 and incorporated herein by reference thereto.
(9) Filed as an exhibit to the Registrant's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on
September 18, 1996 (File No. 333-12227) and incorporated herein
by reference thereto.
<PAGE>
(10) Filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 1996 filed with the Securities
and Exchange Commission on August 14, 1996 and incorporated
herein by reference thereto.
(11) Filed as an exhibit to the Registrant's Annual Report on Form
10-K for the Period ended December 31, 1997 filed with the
Securities and Exchange Commission on March 31, 1997 and
incorporated herein by reference thereto.
(12) Filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 1997 filed with the Securities
and Exchange Commission on July 14, 1997 and incorporated herein
by reference thereto.
(13) Filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1997 filed with the
Securities and Exchange Commission on November 13, 1997 and
incorporated herein by reference thereto.
(b) Reports on Form 8-K.
The Registrant did not file any reports on Form 8-K during the
last quarter of the period covered by this Annual Report.
(c) Exhibits.
The response to this portion of Item 14 is contained in Item
14(a)(3) of this report.
(D) Financial Statement Schedules.
The response to this portion of Item 14 is submitted as a
separate section of this Annual Report begins on page S-1.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
COMPDENT CORPORATION
By:/s/ David R. Klock
David R. Klock
Chairman of the Board and
Chief Executive Officer
Dated: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ David R. Klock Chairman of the Board March 27, 1998
David R. Klock and Chief Executive
Officer (Principal
Executive Officer)
and Director
/s/ Keith J. Yoder Chief Financial Officer March 27, 1998
Keith J. Yoder And Treasurer (Principal
Financial and Accounting
Officer)
/s/ Phyllis A. Klock President and Chief March 27, 1998
Phyllis A. Klock Operating Officer
and Director
/s/ Joseph Ciffolillo Director March 27, 1998
Joseph Ciffolillo
/s/ Philip Hertik Director March 27, 1998
Philip Hertik
/s/ William G. Jens, Jr. Director March 27, 1998
William G. Jens, Jr.
/s/ David F. Scott, Jr. Director March 27, 1998
David F. Scott, Jr.
/s/ Joseph E. Stephenson Director March 27, 1998
Joseph E. Stephenson
<PAGE>
<PAGE>
CompDent Corporation and Subsidiaries
Table of Contents
Pages
Report of Independent Accountants F-2
Financial Statements:
Consolidated Balance Sheets
December 31, 1997 and 1996 F-3 - F-4
Consolidated Statements of Operations
for the years ended December 31, 1997, 1996
and 1995 F- 5
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997, 1996
and 1995 F-6
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996
and 1995 F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-36
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
CompDent Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of
CompDent Corporation and subsidiaries (collectively, the "Company") as
of December 31, 1997 and 1996, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of CompDent Corporation and subsidiaries as of
December 31, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
As discussed in Note 7 to the consolidated financial statements, in
1997, the Company changed its method of assessing the recoverability
of Excess of Purchase Price over Net Assets Acquired.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
February 9, 1998, except as to the information presented
in Note 8, for which the date is March 16, 1998
<PAGE>
<TABLE>
CompDent Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 1997 and 1996
(Dollars in Thousands, Except Share and Per Share Data)
1997 1996
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents, including reverse repurchase agreements
of $18,875 (see Note 2) $ 21,963 $ 26,959
Premiums receivable from subscribers 5,554 3,121
Patient accounts receivable, net of allowance for doubtful accounts
of $1,188 in 1997 1,668
Income taxes receivable 175 247
Deferred income taxes 5,081 3,106
Other current assets 2,842 650
-------- --------
Total current assets 37,283 34,083
Restricted funds 2,321 2,070
Property and equipment, net of accumulated depreciation 6,292 2,977
Excess of purchase price over net assets acquired 96,296 135,040
Noncompetition agreements 325 945
Reinsurance receivable 5,417 5,388
Investment in DHDC (see Note 2) 1,500
Deferred income taxes 2,026
Other assets 1,437 1,638
-------- --------
$150,871 $184,167
======== ========
</TABLE>
<TABLE>
CompDent Corporation and Subsidiaries
Consolidated Balance Sheets, Continued
December 31, 1997 and 1996
(Dollars in Thousands, Except Share and Per Share Data)
1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Unearned revenue $ 9,538 $ 9,582
Accounts payable and accrued expenses 14,855 10,956
Accrued interest payable 109 390
Dental claims reserves 1,502 1,421
Other current liabilities 63 1,924
-------- --------
Total current liabilities 26,067 24,273
-------- --------
Aggregate reserves for life policies and contracts 5,331 5,338
Notes payable 56,595 41,663
Deferred tax liability 1,887
Deferred compensation expense 298 338
Other liabilities 417 372
-------- --------
Total liabilities 90,595 71,984
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares
authorized at December 31, 1997 and 1996, none
issued at December 31, 1997 and 1996
Common stock, $.01 par value, 50,000,000 shares
authorized at December 31, 1997 and 1996, 10,112,629
and 10,066,004 shares issued and outstanding at
December 31, 1997 and 1996, respectively 101 101
Additional paid-in capital 97,618 95,820
Retained (deficit) earnings (37,443) 16,262
-------- --------
Total stockholders' equity 60,276 112,183
-------- --------
$150,871 $184,167
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
CompDent Corporation and Subsidiaries
Consolidated Statements of Operations
for the years ended December 31, 1997, 1996 and 1995
(Dollars in Thousands, Except Share and Per Share Data)
1997 1996 1995
<S> <C> <C> <C>
Revenues:
Subscriber premiums $ 143,396 $ 135,807 $ 104,898
Affiliated practice revenue 7,113
Other revenue 8,217 5,262 1,763
----------- ----------- -----------
Total revenue 158,726 141,069 106,661
----------- ----------- -----------
Expenses:
Dental care providers' fees and claim costs 81,690 73,431 62,218
Commissions 13,272 12,184 10,763
Premium taxes 1,047 1,018 1,392
General and administrative 44,318 30,394 19,435
Depreciation and amortization 5,735 5,153 2,717
Goodwill impairment (see Note 7) 58,953
----------- ----------- -----------
Total expenses 205,015 122,180 96,525
----------- ----------- -----------
Operating (loss) income (46,289) 18,889 10,136
----------- ----------- -----------
Other expense (income):
Interest income (725) (585) (735)
Interest expense 3,239 1,935 1,970
Other, net 2 (219) (68)
----------- ----------- -----------
Total other expense 2,516 1,131 1,167
----------- ----------- -----------
(Loss) income before provision for income taxes
and extraordinary item (48,805) 17,758 8,969
Income tax provision 4,900 7,866 3,765
----------- ----------- -----------
(Loss) income before extraordinary item (53,705) 9,892 5,204
Extraordinary loss on early extinguishment of debt,
net of applicable tax benefit of $305 (see Note 9) (498)
----------- ----------- -----------
Net (loss) income $ (53,705) $ 9,892 $ 4,706
=========== =========== ===========
(Loss) income per common share - basic:
(Loss) income before extraordinary item $ (5.32) $ 0.98 $ 0.69
Extraordinary loss (0.07)
----------- ----------- -----------
Net (loss) income per common share $ (5.32) $ 0.98 $ 0.62
=========== =========== ===========
(Loss) income per common share - diluted:
(Loss) income before extraordinary item $ (5.32) $ 0.97 $ 0.68
Extraordinary loss (0.07)
----------- ----------- -----------
Net (loss) income per common share (5.32) $ 0.97 $ 0.61
=========== =========== ===========
Weighted average common shares outstanding 10,098,323 10,048,513 7,240,600
=========== =========== ===========
Weighted average common shares outstanding
with dilutive securities 10,098,323 10,176,756 7,351,655
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
CompDent Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995
(Dollars and Shares in Thousands)
Class A Additional Retained
Common Stock Common Stock Paid-In Earnings
Shares Value Shares Value Capital (Deficit) Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 1,843 $ 18 2,305 $23 $ 2,277 $ 1,882 $ 4,200
Issuance of Common Stock in initial
public offering, net of issuance costs 3,933 40 51,402 51,442
Conversion of Class A Common Stock
to Common Stock in connection with
public offering (1,843) (18) 1,843 18
Issuance of Common Stock in second
offering, net of issuance costs 1,935 19 42,028 42,047
Net income 4,706 4,706
Accumulated preferred stock dividend (218) (218)
------ ---- ------ --- ------- ------- -------
Balance, December 31, 1995 0 0 10,016 100 95,707 6,370 102,177
Issuance of Common Stock pursuant
to option agreements 48 1 65 66
Issuance of Common Stock pursuant
to employee stock purchase plan 2 48 48
Net income 9,892 9,892
------ ---- ------ --- ------- ------- -------
Balance, December 31,1996 0 0 10,066 101 95,820 16,262 112,183
Issuance of Common Stock pursuant
to purchase agreement (see Note 4) 40 1,141 1,141
Issuance of Common Stock pursuant
to option agreements 4 21 21
Issuance of Common Stock pursuant
to employee stock purchase plan 3 53 53
Tax benefit from issuance of Common
Stock (nonqualified options) 583 583
Net loss (53,705) (53,705)
------ ---- ------ --- ------- ------- -------
Balance, December 31, 1997 0 $ 0 10,113 $101 $97,618 $(37,443) $60,276
====== ==== ====== ==== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
CompDent Corporation and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995
(Dollars in Thousands)
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $(53,705) $ 9,892 $ 4,706
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 5,735 5,248 2,855
Goodwill impairment 58,953
(Gain) loss on sale of assets held for sale (174) 23
Gain on sale of property and equipment (12) (53)
Loss on sale or property and equipment 65
Bad debt expense 183
Extraordinary loss on early extinguishment of debt 803
Deferred income tax expense (benefit) 2,136 1,526 (255)
Changes in assets and liabilities:
Premiums receivable from subscribers (2,433) 1,813 (203)
Patient receivables (1,029)
Income taxes receivable 71 (231) 213
Other assets (3,487) (73) (1,181)
Unearned revenue (59) (1,445) 1,213
Accounts payable and accrued expenses (300) (3,200) (424)
Income taxes payable (903) 854
Other liabilities (1,781) (2,895) (146)
-------- ------- -------
Net cash provided by operating activities 4,337 9,505 8,458
-------- ------- -------
Cash flows from investing activities:
Additions to property and equipment (3,985) (2,394) (1,076)
Proceeds from sale of assets held for sale 694 1,323
Increase in restricted cash (175) (607) (106)
Proceeds from sale of property and equipment 37 253
Cash surrender value of life insurance (28) 15 (28)
Purchases of businesses, net of cash acquired (20,770) (62,462) (31,188)
-------- ------- -------
Net cash used in investing activities (24,921) (64,501) (31,075)
-------- ------- -------
Cash flows from financing activities:
Repayment of notes payable (26,600)
Borrowings under credit agreement 59,456 57,697 25,000
Repayments under credit agreement (44,525) (16,034) (25,000)
Loan fees paid (112) (240)
Repayment of subordinated notes (7,947)
Retirement of preferred stock (5,377)
Proceeds from initial public offering, net of issuance costs 51,442
Proceeds from second public offering, net of issuance costs 42,047
Proceeds from exercise of stock options 21 66
Proceeds from employee stock purchase plan 53 48
Tax benefit realized from exercise of nonqualified stock options 583
Other (98)
-------- ------- -------
Net cash provided by financing activities 15,588 41,567 53,325
-------- ------- -------
(Decrease) increase in cash and cash equivalents (4,996) (13,429) 30,708
Cash and cash equivalents, beginning of period 26,959 40,388 9,680
-------- ------- -------
Cash and cash equivalents, end of period $ 21,963 $26,959 $40,388
======== ======= =======
</TABLE>
<PAGE>
CompDent Corporation and Subsidiaries
Consolidated Statements of Cash Flows, Continued
for the years ended December 31, 1997, 1996 and 1995
(Dollars in Thousands)
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,349 $ 1,450 $ 1,961
======== ======= =======
Income taxes $ 1,839 $ 7,474 $ 2,619
======== ======= =======
Non-cash investing and financing activities:
Stock issued in exchange for business acquired (see Note 4) $ 1,141
========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
CompDent Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in Thousands, Except Share and Per Share Data)
1. Organization and Basis of Presentation
CompDent Corporation and subsidiaries (collectively, the
"Company") operate a system of dental benefit plans in more than
23 states. The Company's primary source of revenue is managed
dental care plans offered either separately or together with a
traditional indemnity insurance plan, underwritten by a third
party, under a "dual-choice" plan. The Company markets its plans
primarily through independent agents to private and governmental
employers. Dental services are provided through a network of
selected independent dentists who are responsible for each
member's individual dental care. The Company also manages dental
practices which provide general dentistry services. The Company
currently conducts business principally in Florida, Georgia,
Kentucky, Texas, Illinois, Indiana, and Ohio. For the years ended
December 31, 1997, 1996, and 1995, Florida operations accounted
for approximately 34%, 35%, and 42%, respectively, of the
Company's revenues.
During 1997, the Company, through its subsidiary Dental Health
Management, Inc. (DHMI), acquired and began managing dental
practices which provide general dentistry services. Collectively,
29 dental offices located in Illinois, Florida, Tennessee, and
Indiana were acquired during the year and are now being managed
by DHMI.
2. Significant Accounting Policies
Basis of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly owned
subsidiary, American Prepaid Professional Services, Inc.
("American Prepaid"), and through American Prepaid, the following
wholly owned subsidiaries: American Dental Plan, Inc. (a Florida
corporation), American Dental Plan of Georgia, Inc., American
Prepaid Dental Plan of Ohio, Inc., American Dental Plan of
Alabama, Inc., American Dental Plan, Inc. (a North Carolina
corporation), American Dental Plan of North Carolina, Inc.,
DentiCare, Inc. ("DentiCare"), UniLife Insurance Company
("UniLife"), CompDent Corporation and its wholly owned
subsidiaries, Texas Dental Plans, Inc., National Dental Plans,
Inc., Dental Plans International, Inc., Dental Provider
Resources, Inc., Dental Care Plus Management Corp. and its wholly
owned subsidiary, CompDent of Illinois, Inc. (formerly I.H.C.S.,
Inc.), Diamond Dental of Arkansas, Inc., American Dental
Providers of Arkansas, Inc., DentLease, Inc., and DHMI. All
significant intercompany balances and transactions have been
eliminated in consolidation.
Subscriber Premiums - Managed care subscriber premiums revenue is
recognized as earned over the related contract period. The
unexpired portion of such revenue collected is reported as
unearned revenue in the consolidated balance sheets. Indemnity
dental and life premiums are recognized as earned on a pro rata
basis over the risk coverage periods. Reserves are provided for
the portion of premiums written for dental and life insurance
which relate to the unexpired coverage period.
<PAGE>
Affiliated Practice Revenue - Affiliated or dental practice
revenue is recognized as services are provided and includes
fee-for-service revenue as well as revenue from contracts with
capitated managed dental care plans for general dentistry
services. Revenue is reported at estimated realizable amounts
from third-party payors and patients for services rendered, net
of contractual and other adjustments. Also included in affiliated
practice revenue are contracted management fees for
administrative services provided to Dental Health Development
Corporation (DHDC) by DHMI.
Other Revenue - Other revenue consists of the following:
1997 1996 1995
Indemnity income $1,839 $1,558 $ 747
HCS management fee (see Note 12) 3,103 1,749
Administrative services and other 3,275 1,955 1,016
------ ------ ------
Total $8,217 $5,262 $1,763
====== ====== ======
Dental Care Providers' Fees and Claim Costs - The Company
contracts with various independent dentists to provide services
to covered enrollees. Most dentists participating in the managed
dental care plan are compensated by the Company on a capitation
basis. Indemnity dental and life, and specialty dental benefits
are charged to expense in the period that the claims are
incurred.
Advertising Costs - Costs of advertising are expensed when
incurred.
Cash and Cash Equivalents - The Company considers all highly
liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
Concentrations of Credit Risk - The Company collects the majority
of its revenue before services are provided. However, in
instances where this does not occur, the Company extends credit
without requiring collateral. Management believes exposure to
losses on receivables is minimal due to the nature of this
business and the fact that the financial condition of the
Company's groups is monitored closely. Also, the dental offices
grant credit without collateral to their patients, most of whom
are local residents and are insured under third-party payor
agreements. The Company does not believe these receivables
represent any significant concentrated credit risk.
During 1997, the Company invested excess funds in reverse
repurchase agreements for U.S. government securities. At December
31, 1997, the Company had purchased $18,875 of U.S. government
securities under agreements to resell them on a specified date.
Generally, the maturity date of the Company's reverse repurchase
agreements is within five business days of the purchase. Due to
the short-term nature of the agreements, the Company does not
take possession of the securities, which are instead held at the
Company's principal bank from which
<PAGE>
it purchases the securities. In the event of a bank failure,
there could be a delay in selling the securities; however, the
Company evaluates the stability of the financial institution with
which it enters into agreements. The carrying value of the
agreements approximates fair market value because of the short
maturity of the investments, and the Company believes that it is
not exposed to any significant risk of loss on its investments in
reverse repurchase agreements and has never recognized a loss on
such transactions. Exclusive of the reverse repurchase
agreements, the Company's cash and restricted funds in financial
institutions exceeded the federally insured deposit limits by
$3,992 and $27,336 at December 31, 1997 and 1996, respectively.
Patient Accounts Receivable - Current operations are charged with
a provision for uncollectible accounts based upon circumstances
which affect the collectibility of receivables. Accounts deemed
uncollectible are charged against the allowance. Accounts
receivable are also reported net of contractual adjustments which
represent the difference between established billing rates and
estimated reimbursement from patients and other third-party
payors.
Property and Equipment - Property and equipment is carried at
cost less accumulated depreciation which is computed using the
straight-line method over the estimated useful lives of two to
five years of the related assets. Maintenance and repairs are
charged to expense as incurred. Upon sale, retirement, or other
disposition of these assets, the cost and the related accumulated
depreciation are removed from the respective accounts and any
gain or loss on the disposition is included in income.
Intangible Assets - Deferred financing costs are amortized as an
increase to interest expense on a straight-line basis, which
approximates the effective interest method, over the terms of the
related debt agreements (see Note 8). Accumulated amortization at
December 31, 1997 and 1996, was $241 and $130, respectively.
Noncompetition agreements are amortized on a straight-line basis
over the terms of the related agreements. Accumulated
amortization at December 31, 1997 and 1996, was $2,765 and
$2,135, respectively.
The excess of purchase price over net assets acquired (goodwill)
is being amortized on a straight-line basis over 40 years. The
Company periodically assesses the recoverability and the
amortization period of the goodwill by determining whether the
amount can be recovered through a projection of future discounted
cash flows of the business acquired. Prior to 1997, cash flows
were undiscounted. At December 31, 1997, the Company adopted a
change in accounting for assessing the recoverability of excess
cost by discounting projected future cash flows of the Company's
acquired entities (see Note 7).
In connection with the allocation of purchase price to intangible
assets generated from the dental practice group acquisitions (see
Note 4), the Company analyzed the nature of each dental group
practice with which a Management Agreement was entered into,
including the number of dentists in each dental practice group,
number of dental offices and ability to recruit additional
<PAGE>
dentists, the dental group practice's relative market position,
the length of time each dental group practice has been in
existence, and the term and enforceability of the Management
Agreement. The Management Agreements are for a term of 40 years
and cannot be terminated by the relevant P.C. without consent of
the Company or without cause, consisting primarily of bankruptcy,
material default, or failure to perform under the terms of the
Agreement by the Company.
The Company believes that there is no material value allocable to
the employment and noncompete agreements entered into between the
P.C.s and the individual dentists, since the primary economic
beneficiaries of these agreements are the P.C.s, which are
entities that the Company does not legally control. The Company
believes that the dental group practices operated by the P.C.s
with which it has Management Agreements are long-lived entities
with an indeterminable life and that the dentists, customer
demographics and various contracts will be continuously replaced.
The amounts allocated to the Management Agreements are being
amortized on a straight-line method over 40 years.
Investment in DHDC - During 1997, the Company invested $1,500 in
exchange for a 19% ownership interest in DHDC. DHDC is a dental
management company specializing in developing and managing
start-up dental practices. The Company has an option to purchase
the remaining equity at specified dates; however, there is no
obligation to buy it.
The Company does not have the ability to exert significant
influence over the operations of DHDC and, therefore, carries its
investment in it at cost.
Income Taxes - Under Statement of Financial Accounting Standards
(SFAS) No. 109, deferred income taxes are provided based on the
estimated future tax effects of differences between financial
statement carrying amounts and the tax bases of existing assets
and liabilities.
The Company and its subsidiaries file a consolidated U.S. federal
income tax return. Subsidiaries are allocated a tax provision as
if each subsidiary filed separate income tax returns.
Dental Claims Reserves - The Company's financial position
includes liabilities associated with indemnity and specialty
insurance coverage. Dental claims reserves include provisions for
reported claims and claims incurred but not reported based upon
analyses of historical claim development patterns. Estimates and
assumptions with respect to the Company's dental claims reserves
are required in accordance with generally accepted accounting
principles. Actual results could differ from these estimates.
Changes in these estimates are reflected in the results of
operations in the period in which such changes occur.
Aggregate Reserve for Policies and Contracts - The Company's
financial position includes liabilities associated with indemnity
insurance coverage. Liabilities for future life policy benefits
are computed by the net level premium method based upon estimated
future investment yield, mortality and withdrawal assumptions,
commensurate with the Company's experience. Assumed mortality is
based on various industry published tables, modified as
appropriate for the Company's actual experience.
<PAGE>
Fair Value of Financial Instruments - The carrying amount of the
Company's cash and cash equivalents and restricted funds
approximate fair value because of the short maturity of these
instruments. The fair value of the Company's notes payable
approximates its carrying amount because the interest rate
associated with the debt is variable. The investment in DHDC is
carried at cost as the Company does not maintain control or
significant ownership. The Company's cost approximates the
estimated fair value as of December 31, 1997.
Long-Lived Assets - In accordance with SFAS No. 121, the Company
periodically reviews long-lived assets and certain identifiable
intangibles for impairment noting events or changes that indicate
the carrying amount may not be recoverable.
Stock-Based Compensation - The Company applies the accounting
provisions of Accounting Principles Board (APB) Opinion No. 25 to
its stock-based employee compensation arrangements and the
disclosure provisions of SFAS No. 123.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from
those estimates.
Earnings Per Share - In 1997, the Company adopted the provisions
of SFAS No. 128, Earnings per Share, which establishes standards
for computing and presenting earnings per share ("EPS") and
applies to entities with publicly held common stock or potential
common stock. Earnings per share are computed by deducting
preferred stock dividends ($218 for the year ended December 31,
1995) from income before extraordinary items and cumulative
accounting changes. 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. The number of common stock equivalents is determined
using the treasury stock method. Options have a dilutive effect
under the treasury stock method only when the average market
price of the common stock during the period exceeds the exercise
price of the options.
Reclassifications - Certain amounts for 1996 have been
reclassified to conform with the 1997 presentation.
3. Regulatory Requirements and Restricted Funds
The Company has set aside certificates of deposit bearing
interest at variable rates as required by various state statutes.
Additionally, the subsidiaries of American Prepaid are required
to maintain certain levels of regulatory capital for statutory
reporting. At December 31, 1997 and 1996, the various
subsidiaries were required to cumulatively maintain approximately
$3,927
<PAGE>
and $3,663, respectively, in capital and surplus. Accordingly,
the subsidiaries may be limited in their ability to pay dividends
to American Prepaid, and it in turn to the Company.
4. 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
$23,000. 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 business
acquired included from the effective date of the acquisition. The
acquisition resulted in excess of purchase price over net assets
acquired of $26,000 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:
Fair value of assets acquired, including goodwill $27,239
Cash paid for assets acquired, net of cash acquired (23,132)
Acquisition costs paid (540)
-------
Liabilities assumed $ 3,567
=======
Effective May 8, 1996, the Company acquired all of the
outstanding capital stock and options of Dental Care Plus
Management, Corp. ("Dental Care"). The aggregate purchase price
for Dental Care and its wholly owned subsidiary, CompDent of
Illinois, Inc. was $38,000, of which the Company paid
approximately $27,000 in cash and assumed approximately $11,000
in accrued liabilities. Dental Care and its subsidiary, CompDent
of Illinois, are based in Chicago, Illinois, and provide managed
dental care services through a network of dental care providers.
Dental Care also acts as a third party administrator and provides
management services to Health Care Systems, Inc. (HCS), a
non-profit dental company. The Company financed the purchase of
Dental Care as well as satisfaction of the assumed liabilities by
drawing down the Company's revolving line of credit. The
acquisition of Dental Care was accounted for using the purchase
method of accounting with the results of operations of the
businesses acquired included from the effective date of the
acquisition. The acquisition resulted in excess of purchase price
over net assets acquired of $39,700 which is being amortized over
40 years. During the third quarter of 1996, the Company finalized
its allocation of the purchase price of Dental Care which
resulted in an increase to excess of purchase price over net
assets acquired of $1,500 to $41,200.
<PAGE>
The following is a summary of assets acquired, liabilities
assumed, and consideration paid in connection with the
acquisition:
Fair value of assets acquired, including goodwill $46,770
Cash paid for assets acquired, net of cash acquired (26,836)
Acquisition costs paid (843)
-------
Liabilities assumed $19,091
=======
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 $1,700
consisted of $500 in cash and $1,200 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 $2,900 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 $500 to $2,400.
The following is a summary of assets acquired, liabilities
assumed and consideration paid in connection with the
acquisition:
Fair value of assets acquired, including goodwill $2,652
Cash paid and fair value of stock issued for assets
acquired, net of cash acquired (1,614)
Acquisition costs paid (416)
------
Liabilities assumed $ 622
======
During the fourth quarter of 1997, the Company assessed the
recoverability of goodwill, concluding that certain goodwill
generated from the acquisitions of Dental Care, AMDP, and DDV was
impaired (see Note 7).
Effective July 2, 1997, the Company completed the acquisition of
twenty-one dental facilities from The Workman Management Group,
LTD ("Workman"). The dental facilities are located in central and
southern Illinois. The purchase price consisted of $15,500 in
cash, and 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
<PAGE>
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 $15,200
which will be amortized over 40 years. During the fourth quarter
of 1997, the Company revised its allocation of the purchase price
of Workman which resulted in an increase to the excess of
purchase price over net assets acquired of $1,780 to $16,980.
The following is a summary of assets acquired, liabilities
assumed, and consideration paid in connection with the
acquisition:
Fair value of assets acquired, including goodwill $18,040
Cash paid for assets acquired, net of cash acquired (15,340)
Acquisition costs paid (990)
-------
Liabilities assumed $ 1,710
=======
During the third and fourth quarters of 1997, the Company
completed the acquisition of several dental facilities from three
additional dental groups. Effective July 2, 1997, the Company
completed the acquisition of one dental facility located in
southern Florida from the Old Cutler Dental Associates, P.A.
("Old Cutler"). Effective September 26, 1997, the Company
completed the acquisition of one dental facility located in
central Tennessee from Robert T. Winfree, D.D.S., P.C.
("Winfree"). Effective November 7, 1997, the Company completed
the acquisition of Stratman Management Group ("Stratman") and its
six dental facilities located in Indiana. The purchase price of
these facilities consisted of $4,957 in cash less discharge of
liabilities related to the purchased assets. Funding for the
acquisitions was obtained from cash available from operations and
from the Company's revolving line of credit. Concurrent with the
acquisitions, the Company entered into 40-year agreements to
manage the dental practices which are operating in the dental
facilities. Each 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 acquisitions resulted in excess of cost over
fair value of net assets acquired of $5,490 which will be
amortized over 40 years. During the fourth quarter of 1997, the
Company revised its allocation of the purchase prices for Old
Cutler, Winfree, and Stratman which resulted in an increase to
the excess of purchase price over net assets acquired of $38 to
$5,528.
The following is a summary of assets acquired, liabilities
assumed and consideration paid in connection with the
acquisitions:
Fair value of assets acquired, including goodwill $6,055
Cash paid for assets acquired, net of cash acquired (4,957)
Acquisition costs paid (227)
------
Liabilities assumed $ 871
======
<PAGE>
Unaudited pro forma results of operations of the Company for the
years ended December 31, 1997 and 1996 are included below. Such
pro forma presentation has been prepared assuming that the Dental
Care, AMDP, DDV, Workman, Old Cutler, Winfree, and Stratman
acquisitions had occurred as of January 1, 1997 and January 1,
1996.
1997 1996
Revenues $163,900 $170,313
======== ========
Net (loss) income $(54,460) $ 6,177
======== ========
Net (loss) income per common share $ (5.38) $ .60
======== ========
The unaudited pro forma results include the historical accounts
of the Company, and historical accounts of the acquired
businesses and pro forma adjustments including the amortization
of the excess purchase price over the fair value of the net
assets acquired, the increase in depreciation expense related to
acquired property and equipment, the increase in interest expense
related to the incurral of debt to fund the acquisitions, the
reduction of revenues for an intercompany management fee charged
by Dental Care to its subsidiary, CompDent of Illinois, the
elimination of consulting costs incurred by Dental Care under
various contractual arrangements with related entities of Dental
Care which were terminated upon the Company's purchase of Dental
Care, 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.
5. Property and Equipment
Property and equipment is comprised of the following as of
December 31, 1997 and 1996:
1997 1996
Office furniture and equipment $2,003 $1,836
Data processing equipment and software 4,431 3,085
Leasehold improvements 2,245 1,278
Dental equipment 1,125
------ ------
9,804 6,199
Less: accumulated amortization and
depreciation (3,512) (3,222)
------ ------
Property and equipment, net $6,292 $2,977
====== ======
Depreciation expense was $1,275, $1,350, and $719, for the years
ended December 31, 1997, 1996, and 1995, respectively.
Accumulated depreciation on assets held for leasing at December
31, 1997 approximated $321.
<PAGE>
6. Income Taxes
Income tax expense includes income taxes currently payable and
those deferred because of temporary differences between the
financial statement and tax bases of assets and liabilities.
Income tax expense consists of the following:
1997 1996 1995
Current payable:
Federal $ 5,494 $ 5,286 $ 3,427
State 900 1,054 593
------- ------- -------
6,394 6,340 4,020
------- ------- -------
Deferred:
Federal (1,284) 1,386 (217)
State (210) 140 (38)
------- ------- -------
(1,494) 1,526 (255)
------- ------- -------
$ 4,900 $ 7,866 $ 3,765
======= ======= =======
The differences between actual income tax (benefit) expense and
income tax (benefit) expense computed using the federal statutory
income tax rate were as follows:
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
Computed "expected" tax (benefit) expense $(17,082) $6,215 $3,049
Nondeductible goodwill amortization 21,870 1,106 477
Tax-exempt interest (57) (73) (89)
State income taxes, net of federal benefit 419 825 357
(Decrease) increase in valuation allowance (188) (131) 88
Other, net (62) (76) (117)
-------- ------ ------
Income tax expense $ 4,900 $7,866 $3,765
======== ====== ======
</TABLE>
<PAGE>
Components of deferred tax assets and liabilities as of
December 31, 1997 and 1996 are as follows:
<TABLE>
1997 1996
<S> <C> <C>
Deferred tax assets:
Unearned revenue $ 447 $ 215
Investment in affiliate 33 36
Property and equipment, net 469 288
Accrued liabilities 4,739 3,503
Net operating loss carryforwards 1,625 5,065
Capital loss carryforward 158 204
------ ------
Total deferred tax asset 7,471 9,311
Valuation allowance (1,301) (974)
------ ------
Net deferred tax asset 6,170 8,337
------ ------
Deferred tax liabilities:
Reserves 2,752 3,205
Deductible goodwill 224
------ ------
Total deferred tax liability 2,976 3,205
------ ------
Total net deferred tax asset $3,194 $5,132
====== ======
</TABLE>
From December 31, 1996 to December 31, 1997, the valuation
allowance increased by $327 as a result of valuation allowances
recorded in purchase accounting of $515 offset by a reduction of
$188 due to the utilization of certain net operating and capital
loss carryforwards associated with UniLife.
SFAS No. 109 specifies that deferred tax assets are to be reduced
by a valuation allowance if it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
The Company has established valuation allowances primarily for
net operating loss carryforwards and capital loss carryforwards
related to certain acquired companies due to uncertainty
surrounding their utilization prior to expiration. For similar
reasons the Company has established a valuation allowance for
certain state operating loss carryforwards generated at the
holding company level.
To the extent that certain of the preacquisition loss
carryforwards are utilized in the future and the associated
valuation allowance reduced, the tax benefit thereof will be
allocated to reduce excess of purchase price over net assets
acquired. At December 31, 1997, the portion of the valuation
allowance, if utilized, that would reduce excess of purchase
price over net assets acquired is approximately $515.
<PAGE>
At December 31, 1997, certain subsidiaries have federal and state
net operating loss carryforwards expiring as follows:
Year of Expiration Federal State
1998 $ 76
2000 72
2001 21
2002 $ 801
2003 706
2007 564
2008 903
2009 66 236
2010 1,271
2011 324 11,519
2012 479 1,773
------ -------
$2,376 $16,435
======= =======
Currently, the 1996 consolidated tax return is under examination
by the Internal Revenue Service. The Company does not anticipate
any material adjustments as a result of the examination.
7. Accounting for Purchase Price Over Net Assets Acquired (Goodwill)
The Company's accounting policy is to amortize goodwill on a
straight-line basis over a 40-year period. Historically, the
Company periodically assessed the recoverability of its goodwill
through undiscounted cash flows, excluding interest expense and
amortization, over the remaining life of such goodwill.
During the fourth quarter of 1997, management evaluated goodwill
impairment pursuant to their existing policy. The evaluation
indicated no impairment which is contrary to events occurring in
the fourth quarter, primarily a reevaluation of growth rates and
an inability to expand dental panel of certain acquired companies
to anticipated levels. The industry and, specifically the
Company, has not exhibited the growth rates or sustained stock
price levels consistent with historical purchase assumptions
resulting in impaired goodwill.
Consistently applying the historical policy would not result in
the recognition of impairment; therefore, management concluded
that the Company's accounting policy with respect to the
recoverability of goodwill should be changed to discount
projections of future cash flows using an economic rate of return
that would be customary for evaluating the present value of
future cash flows in connection with current dental benefit
company transactions. As a result of this accounting change, the
goodwill attributable to the acquisition of CompDent Corporation
was reduced from $32,080 to $13,869. Additionally, the goodwill
attributable to the acquisition of Dental Care Plus Management,
Corp. was reduced from $39,052 to $8,818, DentiCare, Inc.
<PAGE>
from $14,433 to $6,010 and American Dental Providers, Inc. and
Diamond Dental & Vision, Inc. from $2,085 to $0, or a total
reduction of $58,953.
The Company tested the recoverability of the remaining goodwill
of $67,599 relating to the American Prepaid Professional
Services, Texas Dental Plans, Inc. acquisitions and various
dental facilities acquired by Dental Health Management, Inc., and
based on the above methodology utilized, management concluded
that such goodwill appeared to be fully recoverable.
Because such a change in accounting was determined to be
inseparable from a change in an estimate, such reduction was
reflected as a charge to operating earnings, as opposed to being
reflected as the cumulative effect of a change in an accounting
principle.
8. Long-Term Debt
Long-term debt consists of the following at December 31, 1997 and
1996:
1997 1996
Notes payable pursuant to a $65,000
reducing revolving line of credit
agreement with banks (interest
accrues at prime plus up to 1/4% or
LIBOR plus up to 1-3/4%, with the margin
over prime and LIBOR decreasing as the
ratio of consolidated debt to EBITDA
(as defined) decreases; American
Prepaid's borrowing rate at
December 31, 1997 was 7.1%) $ 56,595 $41,663
======== =======
American Prepaid has a reducing revolving $65,000 line of credit
(the "Credit Facility") from a combination of lenders, as amended
by the First Amendment which increased the line of credit from
$35,000. American Prepaid pays a commitment fee of 0.375% per
annum on any unused portion of the Credit Facility.
The Credit Facility prohibits payment of dividends and other
distributions and restricts or prohibits American Prepaid from
making certain acquisitions, incurring indebtedness, incurring
liens, disposing of assets or making investments without the
lender's approval, 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 and American Prepaid's
direct and indirect subsidiaries.
At December 31, 1997, the Company was in technical violation of
three of the financial ratios primarily as a result of the
goodwill impairment (see Note 7) and one-time and unusual charges
recorded in the fourth quarter. These charges included $2,000 to
terminate an exclusive indemnity relationship, $2,000 to reserve
for a surplus note, $1,400 to reserve for incurred practice
management startup costs, $1,600 for litigation settlement costs,
and $2,400 of other costs. The Company has received a waiver with
respect to such covenants from its lenders.
<PAGE>
As of March 16, 1998, the Credit Facility has been amended by the
Second Amendment which reduces the minimum net worth requirement
for future periods and modifies the scheduled reductions in the
aggregate commitment. Prior to the Second Amendment, the Credit
Facility required a 33% reduction in available borrowings for
each year ending December 31, 2000, 1999, and 1998. The Credit
Facility, as amended, reduces the available borrowings to $32,500
at December 31, 1999 with the remaining balance due on December
31, 2000.
Aggregate maturities as set forth in the Second Amendment are as
follows:
Year Ending December 31:
1999 $24,095
2000 32,500
-------
$56,595
=======
9. Stock Offerings
In anticipation of an initial public offering (IPO), the
Company's Board of Directors, effective March 31, 1995, increased
the number of shares authorized to 7,380,000 and effected a
1.8-for-1 stock split, effective in the form of a dividend. All
references to the number of Company shares authorized, issued and
outstanding have been adjusted to reflect the stock split on a
retroactive basis.
On May 24, 1995, the Company's IPO of 3,420,000 shares of common
stock at an offering price of $14.50 per share was declared
effective by the Securities and Exchange Commission. On June 1,
1995, the Company completed the IPO, issued the common stock and
received net proceeds (after deducting issuance costs) of
$44,527. On June 1, 1995, the Company sold an additional 513,000
shares of common stock at the initial offering price of $14.50
per share pursuant to the exercise of the overallotment option
granted to the underwriters in the IPO. Net proceeds of $6,915
(after deducting issuance costs) were received by the Company.
In accordance with the terms of the Class A common stock, upon
consummation of the IPO, each outstanding share of Class A common
stock converted to an outstanding share of common stock. In
addition, all options to purchase Class A common stock converted
to options to purchase common stock. All references to Class A
common stock, where appropriate, have been changed to reflect the
conversion to common stock.
In accordance with the terms of the then existing 10% cumulative
redeemable preferred stock and the 10% subordinated notes, the
Company used approximately $5,400 and $7,900 of the net proceeds
of the IPO to redeem the preferred stock and accumulated
dividends thereon and the subordinated notes and accrued interest
thereon, respectively. During the year ended December 31, 1995
the Company accumulated $218 in dividends through a charge to
retained earnings and a credit to the carrying value of the
preferred shares. In addition, the Company
<PAGE>
used approximately $26,600 of the net proceeds of the IPO to
repay both of the then existing term loans payable to the bank.
The repayment of the term loans in the second quarter resulted in
a pretax extraordinary loss (due to the write-off of unamortized
loan fees) on early extinguishment of debt of $498, net of a tax
benefit of $305.
On April 18, 1995, the Company's stockholders approved an
amendment to the Company's Certificate of Incorporation to
increase the number of authorized shares of common stock to
18,000,000 and to authorize the issuance of 2,000,000 shares of
preferred stock, par value $0.01 per share, with such rights and
preferences as the Board of Directors may establish from time to
time. The stockholders then approved the elimination of the 10%
cumulative preferred stock and the Class A common stock. Upon
completion of the IPO and after the redemption of the preferred
stock and the conversion of the Class A common stock to common
stock, the Company filed certificates with the State of Delaware
prohibiting the issuance of either form of stock.
On August 22, 1995, a second stock offering of 3,400,000 shares
of the Company's common stock at an offering price of $23.25 per
share was declared effective by the Securities and Exchange
Commission. Of the 3,400,000 shares offered, 1,500,000 were sold
by the Company and 1,900,000 shares were sold by selling
stockholders. The Company also sold 435,000 of the 510,000
underwriter over-allotment shares. On August 25, 1995, the
Company completed the second stock offering, issued 1,935,000
shares of common stock and received net proceeds (after deducting
issuance costs) of $42,047. $25,000 in proceeds from the second
stock offering were used to repay outstanding indebtedness under
the Company's revolving credit facility.
On April 29, 1996, the Company's stockholders approved an
amendment to the Company's Certificate of Incorporation to
increase the number of authorized shares of common stock from
18,000,000 to 50,000,000.
10. Stock Options
Under the 1994 Stock Option and Grant Plan (the "1994 Plan"), the
Company may issue to officers, employees, consultants, and other
key persons options to purchase up to 360,000 shares of the
Company's common stock. The Option Committee may specify periods
which options may be exercised following retirement or
termination of employment.
During 1997, the Company established the 1997 Stock Option Plan
(the "1997 Plan") whereby the Company may issue to officers,
employees, directors, consultants, advisors, and other key
persons options to purchase up to 500,000 shares of the Company's
common stock. Unless specified by the Option Committee, options
are automatically terminated upon termination of employment. The
1997 Plan is subject to shareholder approval. A proxy vote is
scheduled for the annual shareholder's meeting in April 30, 1998.
<PAGE>
The 1994 and 1997 Plans allow for incentive and nonqualified
stock options. Options granted are at an exercise price which is
determined by the Option Committee of the Board of Directors. The
exercise price of the incentive stock options shall not be less
than fair market value of the stock on the date of grant. Options
are exercisable in installments as designated by the Option
Committee. Options granted under the plans shall expire no later
than ten years after date of grant.
During 1996, the Company established the Non-Employee Director's
Stock Option Plan (the "Director's Plan") whereby the Company may
issue to directors nonqualified options to purchase up to 100,000
shares of the Company's common stock. Options granted are at an
exercise price which is determined by the Option Committee of the
Board of Directors. The exercise price of the incentive stock
options shall not be less than fair market value of the stock on
the date of grant. Options vest ratably over a four-year period.
Options granted under the plan shall expire no later than ten
years after date of grant.
During 1997, the Company granted 268,000 nonqualified stock
options outside of the 1994, 1997, and Director's Plans. In
addition, there were 50,000 stock options outstanding that were
issued in 1996 and are not part of any plan. In connection with
the Workman acquisition (see Note 4), 70,000 options were granted
and expire at the end of five years. The Company also granted
198,000 stock options to new employees. Options vest in
installments as designated by the Option Committee and expire no
later than ten years after date of the grant.
Prior to the adoption of the Director's Plan, the Company had
granted options to certain of its directors to purchase 72,000
shares of common stock at $.49 per share. These options vest 25%
per year and, unless exercised, expire at the end of six years. A
total of 36,000, 18,000, and 36,000 of these options were
exercisable at December 31, 1997, 1996, and 1995, respectively.
During 1997, no options were exercised.
On April 30, 1997, the 1996 Stock Option Plan (the "1996 Plan")
was defeated by a proxy vote of the shareholders, thus rescinding
the 320,000 stock options that had been granted during 1996. The
following tables have been restated to reflect this transaction.
<PAGE>
Pertinent information regarding the Plans are as follows:
<TABLE>
Weighted
Number Range of Average
of Exercise Exercise Vesting
Options Prices Price Provisions
<S> <C> <C> <C> <C>
Options outstanding, December 31, 1994 127,800 $.49 - 5.89 $ 2.31 25%/year
Options granted 112,400 14.50 - 29.00 24.82 25%/year
Options canceled (28,800) 5.89 - 14.50 10.20
---------
Options outstanding, December 31, 1995 211,400 .49 - 29.00 13.21 25%/year
Options granted 187,000 29.25 - 42.75 34.29 25%/year
Options granted 140,000 29.25 29.75 immediate
Options canceled (36,700) 2.96 - 29.75 23.97
Options exercised (47,700) .49 - 5.89 1.37
---------
Options outstanding, December 31, 1996 454,000 .49 - 42.75 27.62
Options granted 457,000 16.34 - 30.25 22.13 25%/year
Options granted 200,000 16.12 - 30.25 18.36 immediate
Options canceled (24,500) 29.00 - 39.50 32.55
Options exercised (3,500) .49 0.49
---------
Options outstanding, December 31, 1997 1,083,000 $.49 - 42.75 $23.56
=========
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
Options Outstanding Options Exercisable
Weighted
Number Average Weighted Weighted
Out- Remaining Average Number Average
Range of standing Contractual Exercise Exercisable Exercise
Exercise 12/31/97 Life (Years) Price 12/31/97 Price
<S> <C> <C> <C> <C> <C>
$.49 - 5.89 55,000 6.27 $ 1.88 48,250 $ 1.45
$14.50 - 20.50 492,000 9.55 18.86 199,000 17.59
$23.22 - 30.25 408,000 8.91 28.01 182,750 29.69
$36.25 - 42.75 128,000 8.28 36.71 32,000 36.71
--------- ---- ------ ------- ------
Total 1,083,000 9.04 $23.56 462,000 $22.01
========= ==== ====== ======= ======
</TABLE>
The options above were issued at exercise prices which
approximate fair market value at the date of grant. At December
31, 1997, 215,800 shares are available for grant under the
various plans.
At December 31, 1997 and 1996, the Company has stock options
outstanding under three stock-based compensation plans and other
agreements which are described above. The
<PAGE>
Company also has an Employee Stock Purchase Plan which allows
employees to purchase common stock at certain times during the
year. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its stock plans. Accordingly,
no compensation cost has been recognized for its fixed stock
options or stock purchase plan with the exception of the Workman
options. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the
method prescribed in SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
Net (loss) income - as reported $(53,705) $9,892 $4,706
Net (loss) income - pro forma $(55,162) $8,611 $4,654
Earnings per share (basic) - as reported $ (5.32) $ 0.98 $ 0.62
Earnings per share (basic) - pro forma $ (5.46) $ 0.86 $ 0.61
Earnings per share (diluted) - as reported $ (5.32) $ 0.97 $ 0.61
Earnings per share (diluted) - pro forma $ (5.46) $ 0.86 $ 0.61
</TABLE>
The pro forma amounts reflected above are not representative of
the effects on reported net income in future years because, in
general, the options granted typically do not vest for several
years and additional awards are made each year.
The fair value of each option grant is estimated on the grant
date using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
1997 1996 1995
Dividend yield 0% 0% 0%
Expected life (years) 3.4 4.2 5.0
Expected volatility 56.2% 41.45% 41.45%
Risk-free interest rate 6.04% 5.80% 6.05%
The Company has a stock redemption agreement with its Chairman
under which the Company may, contingent upon a certain former
member of management exercising options, redeem up to 4,500
shares of common stock issued to the Chairman at a redemption
price of $2.96. The agreement is in effect until all shares are
redeemed or the certain former member of management's options are
no longer exercisable.
11. Employee Benefit Plan
The Company maintains a 401(k) profit sharing plan for all
full-time employees who have completed six months of service. The
plan allows employees to defer from 1% to 20% of their
<PAGE>
earnings on a pretax basis through contributions to the plan.
Employer matching contributions are based upon a fixed percentage
of voluntary employee contributions. Employer profit sharing
contributions are based upon a fixed percentage of qualifying
plan participants' annual compensation. Both employer matching
and profit sharing contribution levels are discretionary and are
determined by the Company and approved by the Board of Directors
on an annual basis. Employees are always 100% vested in their
contributions and become fully vested in employer contributions
after five years of service. On December 1, 1997, a 401(k) plan
was created for employees of DHMI. The Company also maintains the
401(k) plans of the companies that it acquires until such time as
they are merged into the Company's existing plan. At December
31, 1997, the Company had terminated the plans relating to the
Texas Dental acquisition and rolled participants into the
Company's plan, and merged the plan relating to the Dental Care
acquisition. At December 31, 1997, former employees of AMDP and
DDV were eligible to participate in the Company's plan. The
Company contributed a total of $91, $203 and $82 to all of the
plans during 1997, 1996, and 1995, respectively.
12. Related Party Transactions
In 1997, DHMI and DHDC entered into a contractual management
agreement by which DHDC pays a monthly fee to DHMI for accounting
and information system services as well as general and
administrative expenses. Management fees recognized for the year
ended December 31, 1997 were $1,854. At December 31, 1997,
approximately $605 was due from DHDC.
During 1997, DentLease acquired and held various operating lease
agreements for office space and equipment relating to DHMI and
DHDC acquisitions and operations (see Note 13). Collective future
rentals on existing leases with DHDC as of December 31, 1997 are
as follows:
Year Ending December 31:
1998 $ 258
1999 258
2000 258
2001 258
2002 258
Thereafter 179
------
$1,469
======
As part of the Dental Care purchase, the Company assumed an
agreement whereby Dental Care provides marketing, processing, and
other administrative services to HCS, a non-profit dental
company. The management fee may be waived if HCS will have a net
loss after recognition of the fee and cannot exceed 30% of net
premiums, as defined in the agreement. The management fee for the
years ended December 31, 1997 and 1996 were $3,103 and $1,749,
respectively. At December 31, 1997, approximately $146 was due
from HCS. At December 31, 1996, approximately $1,100 was due to
HCS.
<PAGE>
The Company has an agreement with a former stockholder of
American Prepaid who is also a current stockholder of the Company
that provides for such stockholder to receive certain future
payments for a ten-year period upon retirement. The stockholder
retired in 1993 and commenced receiving payments upon retirement.
Amounts accrued for such future payments were $288 and $329 as of
December 31, 1997 and 1996, respectively. Deferred compensation
expense recognized pursuant to this agreement was $41, $38, and
$35 for the years ended December 31, 1997, 1996, and 1995,
respectively.
The Company has an agreement with a former stockholder of
American Prepaid who is also a current stockholder of the Company
that provides for such stockholder to receive future payment of
medical costs. The Company has recorded an actuarially determined
liability of approximately $245 at December 31, 1997 and 1996.
The discount rate and medical cost trend rate used to compute
this benefit was 7% and 10%, respectively. A 1% increase in the
medical cost trend rate would increase the liability by
approximately $18. Expense recognized pursuant to this agreement
was $7, $6, and $13 for the years ended December 31, 1997, 1996,
and 1995, respectively.
The Company has consulting agreements in place with a former
director and the former president of American Prepaid. The
consulting agreement with the former president expired in 1996,
while the agreement with the former director expires in 1998 and
requires annual payments of $55. Payments made pursuant to these
agreements were $55, $165, and $165, respectively, for each of
the years in the three year period ended December 31, 1997.
13. Operating Lease Commitments
The Company leases office facilities and certain office equipment
under various operating leases expiring through 2006. Collective
future minimum lease payments under these agreements as of
December 31, 1997 are as follows:
Year Ending December 31:
1998 $ 3,478
1999 3,304
2000 2,984
2001 2,950
2002 2,783
Thereafter 2,372
-------
$17,871
=======
Rental expense under such leases for the years ended December 31,
1997, 1996, and 1995 was $2,359, $1,770, and $741, respectively.
<PAGE>
14. Arrangement with Indemnity Insurers
Effective January 1, 1996, the Company entered into a two-year
agreement with an unrelated indemnity insurer, wherein the
Company may offer dual-choice (managed or indemnity) dental
coverage. For subscribers in groups offering dual-choice dental
coverage, subscribers select the type of coverage desired, and
indemnity coverage is underwritten by the indemnity insurer. The
Company invoices and collects all dual choice premiums. The
Company retains 100% of all premiums related to the managed
product and 10% of indemnity premiums collected under the
dual-choice plan to cover commissions and processing costs. The
remaining 90% of indemnity premiums are remitted to the indemnity
carrier. The agreement also provides for additional payments to
the indemnity insurer dependent on loss ratios of the underlying
business. The Company records retention of indemnity premiums as
other income. Any additional payments subject to the risk sharing
provisions of the agreement are recorded as additions to dental
care providers' fees and claim costs.
The Company has an arrangement with another unrelated indemnity
insurer, expiring December 31, 1997, wherein the Company may
offer indemnity dental coverage. The indemnity coverage is
underwritten by the indemnity insurer. The Company invoices and
collects all indemnity premiums, retaining 25% of all gross
premiums collected to cover commissions and processing costs. The
Company records these indemnity premiums as other income. The
Company is not liable under indemnity insurance underwritten by
the insurer.
In certain states, this indemnity insurer also underwrites
prepaid and indemnity dental plans. Under this arrangement, the
indemnity carrier receives 2% of prepaid premiums (plus
applicable premium taxes).
15. Reinsurance
In 1992, UniLife ceased writing life insurance, other than a
small amount of group life, and ceded substantially all of its
existing ordinary life insurance to another insurer. The face
amount of these ceded ordinary life policies is $14,974 and
$15,611 at December 31, 1997 and 1996, respectively. UniLife has
recorded aggregate reserves of $5,331 and $5,338 and
corresponding receivables from reinsurer for the same amount at
December 31, 1997 and 1996, respectively.
Additionally, for its group life policies, UniLife had ceded
amounts in excess of $10 on any one term life policy. The face
amount of these policies at December 31, 1996 was $91,520, of
which $54,837 is subject to reinsurance. As of October 1, 1995,
pursuant to the reinsurance arrangement mentioned below, all of
the $91,520 is reinsured by a combination of reinsurers.
Effective October 1, 1995, UniLife reinsured all of its dental
indemnity and life insurance with one of the Company's unrelated
indemnity insurers (see Note 14). For the period October 1, 1995
to December 31, 1995, UniLife administered the policies and
received a fee, based upon net premiums, from the indemnity
insurer.
<PAGE>
Effective January 1, 1996, UniLife and the indemnity insurer
entered into an assumption reinsurance agreement, transferring
all risk from UniLife to the indemnity insurer and notifying the
policyholders of the transaction. For three years, the indemnity
insurer will pay UniLife a ceding commission of 2% of dental
indemnity premiums recognized on the policies transferred from
UniLife.
Non-assumption reinsurance contracts do not relieve the Company
from its obligations to policyholders. Failure of reinsurers to
honor their obligations could result in losses to the Company;
therefore, allowances are established if amounts are determined
to be uncollectible. Management monitors the financial condition
of its reinsurers on a routine basis. Any exposure from
deterioration of reinsurers' financial condition would be
recognized currently.
The following table summarizes the effects of reinsurance on
premiums, benefits and surrenders for the years ended December
31, 1997, 1996, and 1995:
1997 1996 1995
Direct premiums earned $ 159 $ 218 $19,083
Premiums assumed 1,592
Premiums ceded (159) (218) (4,616)
----- ----- -------
Net premiums earned $ 0 $ 0 16,059
===== ===== =======
Direct benefits $ 75 $ 165 $14,393
Benefits assumed 1,163
Benefits ceded (75) (165) (3,425)
----- ----- -------
Net benefits $ 0 $ 0 $12,131
===== ===== =======
Direct surrenders $ 190
Surrenders ceded (190)
-----
Net surrenders $ 0
=====
<PAGE>
Activity in the dental claims reserves for the years ended
December 31 is summarized as follows:
1997 1996
Balance, January 1 $1,421 $1,308
Reinsurance receivables 1,129
------ ------
Net balance, January 1 1,421 2,437
------ ------
Dental claims reserves assumed in
connection with purchase of
CompDent of Illinois 220
Prior claims reserves ceded during
current year (1,978)
Incurred related to:
Current year 8,902 7,388
Prior years (475) (262)
------ ------
Total incurred 8,427 7,126
------ ------
Paid related to:
Current year 7,400 5,967
Prior years 946 417
------ ------
Total paid 8,346 6,384
------ ------
Balance, December 31 $1,502 $1,421
====== ======
16. Contingencies
The Company was a defendant to a civil compliant filed by three
participating dentists (one of which later withdrew) who had
entered into Participating Dentist Agreements with various
subsidiaries of the Company ("Subsidiaries"). The complaint
alleged a breach of contract and sought damages based on the
failure of each subsidiary to make capitation payments to the
participating dentists for the period of time between when the
affected subscribers enroll and the time at which the subscribers
select a dentist. The plaintiffs in July of 1996 were originally
denied class certification by the trial court. However, the
plaintiffs successfully appealed this ruling and the class was
certified.
The Company believes its interpretation and administration of the
Participating Dentist Agreements were correct. However, due to
the costs involved in protracted litigation, the Company agreed
to a proposed settlement on December 2, 1997. The settlement
costs including attorney's fees, payments to the class and its
representatives, and various other payments will be approximately
$1,600. This charge is included in general and administrative
expenses in the statement of operations.
The settlement also requires that the Subsidiaries amend the
Participating Dental Agreements to provide that it will pay
capitation to the dentist when there has been a delay between the
time a subscriber initially enrolls in the dental plan and the
date they select a dentist for all subscribers
<PAGE>
who enroll after January 1, 1999. In addition, the Subsidiaries
have agreed to provide additional notices to subscribers who have
not selected a dentist.
The proposed settlement is subject to the notification of the
class members, a fairness hearing, and approval by the court.
Various legal proceedings have arisen or may arise in the normal
course of business. Management does not believe that there are
currently any asserted or unasserted claims that will have a
material adverse effect on the financial position, results of
operations, or cash flows of the Company.
17. Employee Stock Purchase Plan
During 1996, the Company adopted an Employee Stock Purchase Plan
to provide substantially all employees who have completed six
months of service an opportunity to purchase shares of its common
stock through payroll deductions. Annually, on December 31,
participant account balances are used to purchase whole shares of
stock at the lesser of 85% of the fair market value of shares on
January 1 (offering date) (August 1, 1996 for initial offering
period) or December 31 (exercise date). The aggregate number of
shares purchased annually by an employee are subject to
limitations imposed by the Internal Revenue Code. A total of
100,000 shares are available for purchase under the plan. There
were 3,090 and 1,611 shares issued under the plan at December 31,
1997 and 1996, respectively, at an exercise price of $17.24 and
$29.96, respectively.
18. Earnings Per Share
The calculation of basic and diluted EPS is as follows:
<TABLE>
For The Year Ended 1997 For The Year Ended 1996 For The Year Ended 1995
Income Shares Per- Income Shares Per- Income Shares Per-
(Num- (Denom- Share (Num- (Denom- Share (Num- (Denom- Share
erator) inator) Amount erator) inator) Amount inator) inator) Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Loss) income before
extraordinary item $(53,705) $9,892 $5,204
Extraordinary loss (498)
-------- ------ ------
Net (loss)
income (53,705) 9,892 4,706
Less preferred
dividends (218)
-------- ------ ------
Basic EPS
(Loss) income
available to
common stockholders (53,705) 10,098,323 $(5.32) 9,892 10,048,513 $0.98 4,488 7,240,600 $0.62
Effect of dilutive
securities
Stock options 128,243 (0.01) 111,055 (0.01)
-------- ---------- ------ ------ ---------- ----- ------ --------- -----
Diluted EPS
(Loss) income
available to
common stock-
holders plus
assumed
conversions $(53,705) 10,098,323 $(5.32) $9,892 10,176,756 $0.97 $4,488 7,351,655 $0.61
======== ========== ====== ====== ========== ===== ====== ========= =====
</TABLE>
<PAGE>
In accordance with SFAS No. 128, the 1995 and 1996 EPS have been
restated to conform with basic and diluted EPS as defined by the
pronouncement. Diluted EPS is equivalent to "net income per
common share" as previously reported since dilutive common stock
equivalents are included in the denominator in both calculations.
Options to purchase 479,000 shares of common stock ranging from
$24.88 to $42.75 per share were outstanding during 1997 but are
not included in the computation of 1997 diluted EPS because the
options' exercise price was greater than the average market price
of the common shares. The options, which expire through November
2007, were still outstanding at December 31, 1997. Additionally,
common stock equivalents of 112,937 were excluded as the effect
is anti-dilutive due to the net loss in 1997.
Options to purchase 32,000 shares of common stock ranging from
$39.50 to $42.75 per share were outstanding during 1996 but are
not included in the computation of 1996 diluted EPS because the
options' exercise price was greater than the average market price
of the common shares.
All options to purchase common stock were included in the 1995
diluted EPS.
19. Recently Issued Accounting Standards
The Board has issued SFAS No. 130, Reporting Comprehensive
Income, that 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
<PAGE>
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.
The Emerging Issues Task Force (EITF) has issued EITF Issue No.
97-2 ("Issue 97-2"), Application of FASB Statement No. 94,
Consolidation of All Majority-Owned Subsidiaries, and APB Opinion
No. 16, Business Combinations, to Physician Practice Management
Entities and Certain Other Entities with Contractual Management
Arrangements, that establishes standards for determining whether
a physician practice management group ("PPM") has a controlling
financial interest in a physician practice based on a contractual
management agreement. For purposes of Issue 97-2, the practices
of medicine, dentistry, and veterinary science are collectively
referred to as "physician practices."
Under Issue 97-2, when such a controlling financial interest
exists, consolidation of the physician practice is required. A
controlling financial interest is defined based on the term of
the contractual arrangement, control over decision making, and
the extent of the PPM's financial interest in the physician
practice and is deemed to exist if the following six criteria are
met: 1) the contractual arrangement has a term that is either (i)
the entire remaining legal life of the physician practice entity
or (ii) a period of 10 years or more; 2) the contractual
arrangement is not terminable by the physician practice except in
the case of gross negligence, fraud, or other illegal acts by the
PPM, or bankruptcy of the PPM; 3) PPM has exclusive authority
over all decision making related to ongoing, major, or central
operations of the physician practice, except for the dispensing
of medical services; 4) PPM has exclusive authority over all
decision making related to total practice compensation of the
licensed medical professionals as well as the ability to
establish and implement guidelines for the selection, hiring, and
firing of them; 5) PPM's financial interest in the physician
practice is unilaterally salable or transferable by the PPM; 6)
PPM's financial interest in the physician practice provides the
PPM with the right to receive income as on-going fees and as
proceeds from the sale of its interest in the physician
<PAGE>
practice, in an amount that fluctuates based on the performance
of the operations of the physician practice and the change in the
fair value thereof. If the six criteria are met, then the
transaction between the PPM and physician practice in which the
PPM executes a management agreement with the physician practice
is considered to be a business combination to be accounted for
under APB 16. Finally, Issue 97-2 establishes the presumption
that an employee of a physician practice that is consolidated by
the PPM should be considered an employee of the PPM and its
subsidiaries for purposes of determining the method of accounting
for stock-based compensation.
For all arrangements that exist on November 20, 1997, this Issue
is effective for financial statements for fiscal years ending
after December 15, 1998. The effect of initially applying the
consensus may be reported as the effect of a change in accounting
principle or may be retroactively reported by restating the
financial statements of prior periods.
The Company is currently evaluating the four dental acquisitions
made during 1997 (see Note 4) to determine compliance with the
provisions of Issue 97-2.
20. Selected Quarterly Data (Unaudited)
The following table, which has not been audited by independent
accountants, sets forth summary unaudited quarterly financial
information of the Company for each quarter in 1997 and 1996.
In the opinion of management, such information has been prepared
on the same basis as the audited consolidated financial
statements appearing elsewhere in this annual report and reflects
all adjustments necessary for a fair presentation of such
unaudited consolidated quarterly results. The quarterly results
should be read in conjunction with the audited consolidated
financial statements of the Company. Results of operations for
any particular quarter are not necessarily indicative of results
of operations for a full year.
<PAGE>
<TABLE>
1996 1997
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Subscriber premiums $30,831 $33,384 $35,443 $36,149 $35,636 $35,852 $35,982 $35,926
Affiliated practice
revenue 3,343 3,774
Other revenue 554 1,377 1,704 1,627 2,199 2,348 1,809 1,857
------- ------- ------- ------- ------- ------- ------- -------
Total revenue 31,385 34,761 137,147 37,776 37,835 38,200 41,134 41,557
------- ------- ------- ------- ------- ------- ------- -------
Expenses:
Dental care providers'
fees and claim
costs 16,481 17,967 19,196 19,787 19,544 19,906 19,849 22,391
Commissions 3,013 3,091 2,949 3,131 3,172 3,192 3,552 3,356
Premium taxes 259 264 264 231 265 256 263 263
General and
administrative 6,771 7,831 7,964 7,828 7,860 7,967 10,231 18,260
Depreciation and
amortization 1,047 1,287 1,389 1,430 1,321 1,355 1,553 1,506
Goodwill impairment 58,953
------- ------- ------- ------- ------- ------- ------- -------
Total expenses 27,571 30,440 31,762 32,407 32,162 32,676 35,448 104,729
------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss) 3,814 4,321 5,385 5,369 5,673 5,524 5,686
(63,172)
Interest (income)
expense, net (107) 289 580 588 547 484 704 779
Other (income)
expense, net (10) (299) 96 (6) (45) (16) (5) 68
------- ------- ------- ------- ------- ------- ------- -------
Income (loss)
before provisions
for income taxes 3,931 4,331 4,709 4,787 5,171 5,056 4,987
(64,019)
Income tax provision
(benefit) 1,694 1,924 2,103 2,145 2,332 2,172 2,055
(1,659)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) $ 2,237 $ 2,407 $ 2,606 $ 2,642 $ 2,839 $ 2,884 $ 2,932
$(62,360)
======= ======= ======= ======= ======= ======= =======
========
</TABLE>
The Company experiences no significant seasonality revenues with
respect to its revenue. However, because the enrollment of new
groups and changes in membership are typically concentrated in
the first quarter of each year, the Company generally experiences
an increase in general and administrative expense in the
preceding fourth quarter resulting from higher staffing levels
and printing and communication costs.
<PAGE>
Report of Independent Accountants
In connection with our audit of the consolidated financial statements
of CompDent Corporation and subsidiaries as of December 31, 1997 and
1996, and for the years then ended, which financial statements are
included in the annual report, we have also audited the financial
statement schedules as of December 31, 1997 and 1996 and for the years
then ended listed in Item 14 herein.
In our opinion, these financial statement schedules, when considered
in relation to the basic financial statements taken as a whole
presents fairly, in all material respects, the information required to
be included therein.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
February 9, 1998, except as to the information presented
in Note 8, for which the date is March 16, 1998.
<PAGE>
CompDent Corporation (Parent Company)
Schedule I - Condensed Financial Information of Registrant
Balance Sheets
December 31, 1997 and 1996
(Dollars in Thousands)
1997 1996
ASSETS
Current assets:
Receivable from subsidiary* $ 252 $ 114
------- --------
Total current assets 252 114
Investment in subsidiaries* 60,024 112,069
------- --------
$60,276 $112,183
------- --------
STOCKHOLDERS' EQUITY
Stockholders' equity:
Preferred stock, .01 par value,
2,000,000 shares authorized at
December 31, 1997 and 1996,
none issued at December 31, 1997
and 1996
Common stock, $.01 par value 50,000,000
shares authorized at December 31, 1997
and 1996; 10,112,629 and 10,066,004
shares issued and outstanding at
December 31, 1997 and 1996,
respectively $ 101 $ 101
Additional paid-in capital 97,618 95,820
Retained (deficit) earnings (37,443) 16,262
------- --------
$60,276 $112,183
======= ========
*Eliminated in consolidation.
<PAGE>
CompDent Corporation (Parent Company)
Schedule I - Condensed Financial Information of Registrant
Statements of Operations
for the years ended December 31, 1997, 1996, and 1995
(Dollars in Thousands)
1997 1996 1995
Equity in net (loss) income
of subsidiaries* $(53,705) $9,892 $4,706
-------- ------ ------
Net (loss) income $(53,705) $9,892 $4,706
======== ====== ======
* Eliminated in consolidation.
<PAGE>
<TABLE>
CompDent Corporation (Parent Company)
Schedule I - Condensed Financial Information of Registrant
Statements of Cash Flows
for the years ended December 31, 1997, 1996, and 1995
(Dollars in Thousands)
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $(53,705) $ 9,892 $ 4,706
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Equity in net loss (income) of subsidiaries* 53,705 (9,892) (4,706)
Changes in assets and liabilities:
Receivable from subsidiary (138) 88,025 (88,122)
-------- -------- --------
Net cash (used in) provided by operating activities (138) 88,025 (88,122)
-------- -------- --------
Cash flows from investing activities:
Capital contributions to subsidiaries* (519) (88,139)
-------- -------- --------
Net cash used in investing activities (519) (88,139)
-------- -------- --------
Cash flows from financing activities:
Retirement of preferred stock (5,377)
Proceeds from initial public offering, net of issuance costs 51,442
Proceeds from second public offering, net of issuance costs 42,047
Proceeds from exercise of stock options 21 66
Proceeds from employee stock purchase plan 53 48
Tax benefit from exercise of nonqualified options 583
-------- -------- --------
Net cash provided by financing activities 657 114 88,112
-------- -------- --------
Decrease in cash and cash equivalents 0 0 (10)
Cash and cash equivalents, beginning of year 0 0 10
-------- -------- --------
Cash and cash equivalents, end of year $ 0 $ 0 $ 0
======== ======== ========
Cash paid during the period for:
Income taxes $ 1,839 $ 7,474 $ 2,619
======== ======== ========
Noncash investing and financing activities:
Stock issued in business combination $ 1,141
========
</TABLE>
* Elimination in consolidation.
<PAGE>
CompDent Corporation (Parent Company)
Schedule I - Condensed Financial Information of Registrant
Note to Condensed Financial Statements
The Company publishes consolidated financial statements that are its
primary financial statements. Therefore, these parent company
condensed financial statements are not intended to be the primary
financial statements of the Company and should be read in conjunction
with the consolidated financial statements and notes thereto of
CompDent Corporation.
<PAGE>
<TABLE>
CompDent Corporation
Schedule II - Consolidated Financial Information of Registrant
Valuation and Qualifying Accounts
December 31, 1997, 1996, and 1995
(Dollars in Thousands)
Additions - Deductions-
Balance Charged To Write-Offs/ Balance At
Beginning Costs And Claims End Of
Account Of Period* Expense Paid Period
<S> <C> <C> <C> <C>
1997:
Allowance for doubtful accounts $1,005 $ 183 $1,188
Dental claims reserves $1,421 $ 8,427 $ 8,346 $1,502
1996:
Dental claims reserves $2,437 $ 5,368 $ 6,384 $1,421
1995:
Life and dental claims reserves $2,346 $13,748 $13,620 $2,474
</TABLE>
*Allowance for doubtful accounts initially recorded in relation with
the Workman, Old Cutler, and Stratman dental practice acquisitions.
<PAGE>
EXHIBIT 18.1
CompDent Corporation
100 Mansell Court East, Suite 400
Roswell, Georgia 30076
We are providing this letter to you for inclusion as an exhibit to
your Form 10-K filing pursuant to Item 601 of Regulation S-K.
We have read management's justification for the change in accounting
for assessing the recoverability of excess of purchase price over net
assets acquired from an undiscounted cash flow method (excluding
excess cost amortization and interest expense) over the remaining
useful life to a fair value method using cash flows discounted at an
economic rate of return commensurate with the risk involved contained
in the Company's Form 10-K for the year ended December 31, 1997.
Based on our reading of the data and discussions with Company
officials about the business judgment and business planning factors
relating to the change, we believe management's justification to be
reasonable. Accordingly, in reliance on management's determination as
regards elements of business judgment and business planning, we concur
that the newly adopted accounting principle described above is
preferable in the Company's circumstances to the method previously
applied.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
February 9, 1998
<PAGE>
COMPDENT CORPORATION
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
The purpose of this Non-Employee Directors' Stock Option Plan
(the "Plan") is to promote the interests of CompDent Corporation
(the "Company") by providing an incentive to obtain and retain
the services of highly qualified persons who are not employees of
the Company to serve as members of the Board of Directors of the
Company through the granting of options, as herein provided, to
acquire shares of its Common Stock, $.01 par value (the "Common
Stock"). The effective date of the Plan shall be February 1,
1996 (the "Effective Date"). Options granted under the Plan are
not intended to qualify and shall not be treated as "incentive
stock options" under Internal Revenue Code Section 422.
1. Shares of Stock Subject to the Plan
The stock that may be issued and sold pursuant to options granted
under the Plan shall not exceed, in the aggregate, 100,000 shares
of the Common Stock of the Company, which may be (i) authorized
but unissued shares, (ii) treasury shares or (iii) shares
previously reserved for issuance upon the exercise of options
under the Plan, which options have expired or been terminated;
provided, however, that the number of shares subject to the Plan
shall be subject to adjustment as provided in Section 6.
2. Eligibility
Options will be granted only to persons who are Directors of the
Company on the date of grant of options hereunder and who are not
also employees of the Company or any subsidiary of the Company
("non-employee Directors").
3. Grant of Options - Purchase Price
a. Grant of Options. Each non-employee Director shall
automatically be granted an option to purchase 20,000 shares of
Common Stock on the date such non-employee Director is initially
elected or appointed to the Board of Directors of the Company.
In addition, the Board, in its sole discretion, may make
additional option grants to non-employee Directors. Subject to
Section 4(a), the exercisability of the options granted under the
Plan shall be determined in the sole discretion of the Board.
b. Purchase Price. The purchase price of shares which may
be purchased under each option shall be equal to the Fair Market
Value of the Common Stock on the date the option is granted.
Fair Market Value shall mean the last reported sale price of the
Common Stock on the Nasdaq Stock Market on any given day, or if
no sales of Common Stock were made on that day, the last reported
sale price of the Common Stock on the next preceding day on which
sales were made.
c. Limitations. All grants of options hereunder shall be
subject to the availability of shares hereunder, and no option
shall be granted under this Plan except as provided in this
Section 3.
4. Period of Option and Certain Limitations on Right to Exercise
a. Period. Each option shall become exercisable as
provided in Section 3 hereof, but in no event shall any such
option be exercisable after the earlier of (a) the date ten years
after the date such option is granted or (b) with respect to
unvested options, the date on which the Director to whom such
option was granted ceases for any reason to serve as a Director
of the Company and with respect to vested options, the date three
months after the date on which the Director ceases for any reason
to serve as a Director of the Company; provided, however, that in
the event of termination as a result of disability or death, the
Director or the Director's personal representative may exercise
any outstanding options not theretofore exercised, to the extent
exercisable on the date of such disability or death, during the
six month period following such disability or death.
b. Exercise. The delivery of certificates representing
shares under any option will be contingent upon receipt by the
Company from the optionee (or a purchaser acting in the
optionee's stead in accordance with the provisions of the option)
of the full purchase price for such shares by one or more of the
methods specified below and the fulfillment of any other
requirements provided in the option or under applicable
provisions of law; and until such receipt of the purchase price
and fulfillment of such other requirements no optionee or person
entitled to exercise the option shall be, or shall be deemed to
be, a holder of any shares subject to the option for any purpose.
Options may be exercised in whole or in part, by giving written
notice of exercise to the Company, specifying the number of
shares to be purchased. Payment of the purchase price may be
made by one or more of the following methods:
(A) In cash, by certified or bank check or other instrument
acceptable to the Board of Directors or its authorized committee;
(B) In the form of shares of Common Stock that are not then
subject to restrictions under any Company plan, if such shares
have been held for at least six months prior to the exercise date
and permitted by the Board or its authorized committee, in its
discretion. Such surrendered shares shall be valued at Fair
Market Value on the exercise date; or
(C) By the optionee delivering to the Company a properly
executed exercise notice together with irrevocable instructions
to a broker to promptly deliver to the Company cash or a check
payable and acceptable to the Company to pay the purchase price,
provided that in the event the optionee chooses to pay the
purchase price as so provided, the optionee and the broker shall
comply with such procedures and enter into such agreements of
indemnity and other agreements as the Company shall prescribe as
a condition of such payment procedure. Payment instruments will
be received subject to collection.
5. Transferability of Option
Each option granted under the Plan shall provide that may be
transferred, without consideration for such transfer, to members
of the optionee's immediate family, to trusts for the benefit of
such family members, to partnerships in which such family members
are the only partners, or to charitable organizations, provided
that the transferee agrees in writing with the Company to be
bound by all of the terms and conditions of the Plan and the
applicable option agreement; but that otherwise the option is
personal to the optionee, is not transferable by the optionee in
any manner otherwise than by will or the laws of descent and
distribution and is exercisable, during the optionee's lifetime,
only by the optionee. However, the rights and obligations of the
Company under the Plan and any option may be assigned by the
Company to a successor to the whole or any substantial part of
its business provided that such successor assumes in writing all
of such rights and obligations.
6. Dilution or Other Adjustment
The terms of the options and the number of shares subject to this
Plan shall be equitably adjusted in such manner as to prevent
dilution or enlargement of option rights in the following
instances:
a. The declaration of a dividend payable to the holders of
Common Stock in stock of the same class;
b. A split-up of the Common Stock or a reverse split
thereof; or
c. A recapitalization of the Company under which shares
of one or more different classes of stock are distributed in
exchange for or upon the Common Stock without payment of any
valuable consideration by the holders thereof.
The terms of any such adjustment shall be conclusively determined
by the Board. No fractional shares of Common Stock shall be
issued under the Plan resulting from any such adjustment.
7. Effect of Certain Transactions
In the case of (a) the dissolution or liquidation of the Company,
(b) a merger, reorganization or consolidation in which the
Company is acquired by another person or in which the Company is
not the surviving corporation, or (c) the sale of all or
substantially all of the assets of the Company to another
corporation, the Plan and options issued thereunder shall
terminate on the effective date of such dissolution, liquidation,
merger, reorganization, consolidation or sale, unless provision
is made in such transaction for the assumption of options
theretofore granted under the Plan or the substitution for such
options of a new stock option of the successor corporation or a
parent or subsidiary thereof, with appropriate adjustment as to
the number and kind of shares and the per share exercise price,
as provided in Section 6 of the Plan. In the event of any
transaction which will trigger such termination, the Company
shall give written notice thereof to the Optionee at least twenty
days prior to the effective date of such transaction or the
record date on which shareholders of the Company entitled to
participate in such transaction shall be determined, whichever
comes first. In the event of such termination, any unexercised
portion of outstanding options, whether or not vested and
exercisable at that time, shall be exercisable not later than the
date of such termination; provided, however, that in no event
shall options be exercisable after the applicable expiration date
for an option.
8. Administration and Amendment of the Plan
The Plan shall be administered by the Board or an authorized
committee thereof (in which case all reference to the Board shall
refer to such committee while such committee administers this
Plan), which shall make any determination under or interpretation
of any provision of the Plan and any option. Any of the
foregoing actions taken by the Board shall be final and
conclusive. The Board may amend and make such changes in and
additions to the Plan (and, with the consent of the applicable
optionee, any outstanding option) as it may deem proper and in
the bests interests of the Company; provided, however, that no
such action shall adversely affect or impair any options
theretofore granted under the Plan without the consent of the
applicable optionee.
9. Effective Date of Plan
The Plan shall become effective upon approval of the holders of a
majority of the shares of Common Stock of the Company present or
represented and entitled to vote at a meeting of stockholders.
Subject to such approval by the stockholders and to the
requirement that no Common Stock may be issued hereunder prior to
such approval, options may be granted hereunder on and after the
Effective Date.
10. Expiration and Termination of the Plan
Options shall be granted under the Plan as provided herein during
the ten years from the date the Plan is adopted by the Board, as
long as the total number of shares purchased under the Plan and
subject to outstanding options under the Plan does not exceed
100,000 shares of the Common Stock of the Company, subject to
adjustment as provided in Section 6. The Plan may be abandoned
or terminated at any time by the Board, except with respect to
any options then outstanding under the Plan.
<PAGE>
Consent of Independent Accountants
We consent to the incorporation by reference in the registration
statement of CompDent Corporation, on Form S-8 (File
Numbers 33-97372 and 33-12227) of our report dated February 9, 1998,
except as to the information presented in Note 8
for which the date is March 16, 1998, on our audits of the
consolidated financial statements and financial statement
schedules of CompDent Corporation as of December 31, 1997 and 1996,
and for each of the three years in the period ended
December 31, 1997, which report is included in the Annual Report on
Form 10-K.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
WE HAVE CALCULATED EARNINGS PER SHARE AMOUNTS IN ACCORDANCE WITH HAS 128
"EARNINGS PER SHARE." WE HAVE ENTERED BASIC AND DILUTED AMOUNTS IN PLACE OF
PRIMARY AND FULLY DILUTED, RESPECTIVELY.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 40,388
<SECURITIES> 0
<RECEIVABLES> 3,374
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 46,274
<PP&E> 4,179
<DEPRECIATION> 2,242
<TOTAL-ASSETS> 129,396
<CURRENT-LIABILITIES> 21,041
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 102,077
<TOTAL-LIABILITY-AND-EQUITY> 129,396
<SALES> 106,661
<TOTAL-REVENUES> 106,661
<CGS> 74,373
<TOTAL-COSTS> 96,525
<OTHER-EXPENSES> (68)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,235
<INCOME-PRETAX> 8,969
<INCOME-TAX> 3,765
<INCOME-CONTINUING> 5,204
<DISCONTINUED> 0
<EXTRAORDINARY> (498)
<CHANGES> 0
<NET-INCOME> 4,706
<EPS-PRIMARY> .62
<EPS-DILUTED> .61
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
*****RESTATED FINANCIAL DATA SCHEDULE****
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 25,030 28,145 27,751 26,959
<SECURITIES> 0 0 0 0
<RECEIVABLES> 5,068 4,348 5,315 3,121
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 31,662 36,001 35,861 34,083
<PP&E> 2,059 2,056 2,861 6,199
<DEPRECIATION> 0 0 0 3,222
<TOTAL-ASSETS> 139,689 184,072 187,129 184,167
<CURRENT-LIABILITIES> 25,248 27,038 27,703 24,273
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 100 101 101 101
<OTHER-SE> 104,324 106,775 109,392 112,082
<TOTAL-LIABILITY-AND-EQUITY> 139,689 184,072 187,129 184,167
<SALES> 0 0 0 141,069
<TOTAL-REVENUES> 31,386 66,147 103,293 141,069
<CGS> 0 0 0 86,633
<TOTAL-COSTS> 27,572 58,012 89,773 122,180
<OTHER-EXPENSES> (10) (309) (213) (219)
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 46 480 1,177 1,350
<INCOME-PRETAX> 3,931 8,262 12,971 17,758
<INCOME-TAX> 1,694 3,618 5,721 7,866
<INCOME-CONTINUING> 2,237 4,644 7,250 9,892
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 2,237 4,644 7,250 9,892
<EPS-PRIMARY> .22 .46 .72 .98
<EPS-DILUTED> .22 .46 .71 .97
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1997, SIX MONTHS ENDED JUNE 30, 1997, NINE MONTHS
ENDED SEPTEMBER 30, 1997, AND YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997
<CASH> 25,911 45,982 26,624 21,963
<SECURITIES> 0 0 0 0
<RECEIVABLES> 4,154 4,299 5,716 7,222
<ALLOWANCES> 0 0 0 1,188
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 32,307 52,811 36,272 37,283
<PP&E> 3,561 3,721 6,416 9,804
<DEPRECIATION> 0 0 0 3,512
<TOTAL-ASSETS> 185,014 203,840 209,655 150,871
<CURRENT-LIABILITIES> 24,131 23,092 22,266 26,067
<BONDS> 0 0 0 0
0 101 0 0
0 0 0 0
<COMMON> 101 0 101 101
<OTHER-SE> 116,645 119,529 122,583 60,175
<TOTAL-LIABILITY-AND-EQUITY> 185,014 203,840 209,655 150,871
<SALES> 0 0 0 158,726
<TOTAL-REVENUES> 37,835 76,035 117,169 158,726
<CGS> 0 0 0 96,009
<TOTAL-COSTS> 32,162 64,838 100,286 205,015
<OTHER-EXPENSES> (45) (61) (66) 2
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 708 1,446 2,229 2,514
<INCOME-PRETAX> 5,171 10,227 15,214 (48,805)
<INCOME-TAX> 2,332 4,504 6,559 4,900
<INCOME-CONTINUING> 2,839 5,723 8,655 (53,705)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 2,839 5,723 8,655 (53,705)
<EPS-PRIMARY> .28 .57 .86 (5.32)
<EPS-DILUTED> .28 .57 .85 (5.32)
</TABLE>
