<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number: 0-26090
COMPDENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-3185995
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CompDent Corporation
100 Mansell Court East, Suite 400
Roswell, Georgia 30076
(Address of principal executive offices)
(770) 998-8936
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 1999
----- -----------------------------
Common Stock, $.01 par value 10,115,189
<PAGE> 2
COMPDENT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
INDEX
Page #
<S> <C> <C>
Part I. Financial Information 3
Item 1. Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II. Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports Filed on Form 8-K 15
Signatures 16
Exhibit Index 17
</TABLE>
2
<PAGE> 3
PART I. - FINANCIAL INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference include, among others, risk
associated with the general competitive and pricing pressures in the
marketplace, the risks associated with the successful completion of new
acquisitions, the effective integration of new acquisitions and continued growth
in the dental coverage marketplace. Other risk factors are described in CompDent
Corporation's Form 10-K for the year ended December 31, 1998 as filed with the
Securities and Exchange Commission.
3
<PAGE> 4
ITEM 1. FINANCIAL STATEMENTS
COMPDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,323 $ 11,263
Premiums receivable from subscribers 4,394 4,146
Patient accounts receivable, net of allowance for
doubtful accounts of $982 in 1999 and
$965 in 1998 2,779 2,405
Income taxes receivable - 1,561
Deferred income taxes 2,067 2,161
Other current assets 4,899 3,788
--------- ---------
Total current assets 27,462 25,324
--------- ---------
Restricted funds 2,722 2,674
Property and equipment, net of accumulated depreciation 16,375 16,288
Intangible assets 96,955 97,572
Reinsurance receivable 5,407 5,539
Investment in DHDC 1,500 1,500
Other assets 3,782 2,870
--------- ---------
$ 154,203 $ 151,767
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Unearned revenue $ 9,914 $ 9,207
Accounts payable and accrued expenses 7,090 7,814
Accrued interest payable 85 90
Dental claims reserves 1,758 1,848
Notes payable 22,993 -
Income tax payable 50 -
--------- ---------
Total current liabilities 41,890 18,959
--------- ---------
Aggregate reserves for life policies and contracts 5,407 5,539
Notes payable 32,500 55,459
Deferred compensation expense 233 245
Deferred tax liability 393 360
Other liabilities 822 810
--------- ---------
Total liabilities 81,195 81,372
--------- ---------
Stockholders' equity:
Common stock 101 101
Additional paid-in capital 97,647 97,647
Retained deficit (24,790) (27,353)
--------- ---------
Total stockholders' equity 72,958 70,395
--------- ---------
$ 154,203 $ 151,767
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
COMPDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
-------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues:
Subscriber premiums $ 35,594 $ 35,422
Affiliated practice revenue 6,405 5,292
Other revenue 2,173 1,728
-------- --------
Total revenue 44,172 42,442
-------- --------
Expenses:
Dental care providers' fees and claim costs 19,801 19,428
Commissions 3,540 3,265
Premium taxes 256 261
DHMI operating expenses 5,947 4,605
General and administration 7,868 8,374
Depreciation and amortization 1,535 1,379
-------- --------
Total expenses 38,947 37,312
-------- --------
Operating income 5,225 5,130
-------- --------
Other (income) expense:
Interest income (233) (254)
Interest expense 1,004 1,013
Other, net 19 -
-------- --------
790 759
-------- --------
Income before provision for income taxes 4,435 4,371
Income tax provision 1,872 1,878
-------- --------
Net income $ 2,563 $ 2,493
======== ========
Net income per common share-basic $ 0.25 $ 0.25
======== ========
Net income per common share-fully diluted $ 0.25 $ 0.25
======== ========
Weighted average common shares outstanding-basic 10,115 10,113
======== ========
Weighted average common shares outstanding-fully diluted 10,176 10,175
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
COMPDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
-------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,563 $ 2,493
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,535 1,379
Loss on disposal of property and equipment 19 -
Deferred income tax expense 127 -
Changes in assets and liabilities:
Premiums receivable from subscribers (248) 998
Patient accounts receivable, net of allowance for
doubtful accounts (374) (374)
Income taxes receivable/payable 1,611 1,313
Other assets (1,891) (1,687)
Unearned revenue 707 (307)
Accounts payable and accrued expenses (724) (1,453)
Other liabilities (392) (854)
-------- --------
Net cash provided by operating activities 2,933 1,349
-------- --------
Cash flows from investing activities:
Additions to property and equipment (859) (2,838)
(Increase) decrease in restricted cash (48) 87
Purchase of businesses, net of cash acquired - (3,500)
-------- --------
Net cash used in investing activities (907) (6,251)
-------- --------
Cash flows from financing activities:
Borrowings (repayments) under credit agreement 34 (1,493)
-------- --------
Net cash provided by (used in) financing activities 34 (1,493)
-------- --------
Increase (decrease) in cash and cash equivalents 2,060 (6,395)
Cash and cash equivalents, beginning of period 11,263 21,963
-------- --------
Cash and cash equivalents, end of period $ 13,323 $ 15,568
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,009 $ 970
======== ========
Income taxes $ 323 $ 434
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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COMPDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 1999
1. BASIS OF PRESENTATION
The unaudited consolidated balance sheet as of March 31, 1999, the
unaudited consolidated statements of income for the three months ended March 31,
1999 and 1998, and the unaudited consolidated statements of cash flows for the
three months ended March 31, 1999 and 1998, in the opinion of management, have
been prepared on the same basis as the audited consolidated financial statements
and include all significant adjustments, consisting of normal recurring
adjustments, necessary for the fair presentation of the results of the interim
periods. The data disclosed in these notes to the financial statements for these
periods are also unaudited. The consolidated financial statements and notes
thereto should be read in conjunction with the consolidated financial statements
and notes thereto as of December 31, 1998 and 1997, and for the years ended
December 31, 1998, 1997, and 1996, included in the 1998 Form 10-K of CompDent
Corporation and Subsidiaries (the "Company", except as the context otherwise
requires). Operating results of the Company for the three months ended March 31,
1999, are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 1999.
2. BUSINESS COMBINATIONS
Effective January 2, 1998, the Company completed the acquisition of five
dental facilities from Michael H. Reznik, D.D.S., P.C. ("Reznik"). The dental
facilities are located in Atlanta, Georgia. The purchase price consisted of $3.5
million in cash less discharge of liabilities related to the purchased assets.
Funding for the acquisition was obtained from cash available from operations and
from the Company's revolving line of credit. Concurrent with the acquisition,
the Company entered into a 40-year agreement to manage the dental practices,
which are operating in the dental facilities. The acquisition of Reznik 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. In accordance with the transaction, the management agreement
resulted in fair value of an intangible asset of $5.1 million which had been
amortized over 40 years. Effective January 1, 1999, the Company has implemented
a change in estimate of the remaining useful life of the intangible assets
acquired from 40 to 25 years from the original purchase date. The value of the
intangible assets not amortized prior to January 1, 1999, is being amortized on
this basis.
Effective April 30, 1998, the Company completed the acquisition of two
dental facilities from R. Kendall Roberts, D.D.S., P.C., d/b/a Newhealth Dental
Group, ("Roberts"). The dental facilities are located in Fort Smith, Arkansas.
The purchase price consisted of $1.4 million in cash. 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 Roberts 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. There
were no liabilities, material assets acquired or material transaction costs
incurred. In accordance with the transaction, the management agreement resulted
in the fair value of an intangible asset of $1.4 million, which had been
amortized over 40 years. Effective January 1, 1999, the Company has implemented
a change in estimate of the remaining useful life of the intangible assets
acquired from 40 to 25 years from the original purchase date. The value of the
intangible assets not amortized prior to January 1, 1999, is being amortized on
this basis.
7
<PAGE> 8
Unaudited pro forma results of operations of the Company for the three
months ended March 31, 1999 and 1998, are included below. Such pro forma
presentation has been prepared assuming that the Roberts acquisition had
occurred as of January 1, 1998.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
(in thousands, except per share data) 1999 1998
------- -------
<S> <C> <C>
Revenues $44,172 $42,988
======= =======
Net income $ 2,563 $ 2,471
======= =======
Net income per common share $ 0.25 $ 0.25
======= =======
</TABLE>
The pro forma results include the historical accounts of the Company,
historical accounts of the acquired businesses, and pro forma adjustments
including the amortization of the intangible assets, calculation of interest
expense on amounts borrowed to fund these acquisitions and the applicable income
tax effects of these adjustments. The pro forma results of operations are not
necessarily indicative of actual results which may have occurred had the
operations of the acquired companies been combined in prior periods.
3. CONTINGENT LIABILITIES
Management does not believe 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.
4. PENDING RE-CAPITALIZATION TRANSACTION
On July 28, 1998, the Company entered into a merger agreement ("Merger
Agreement") with a newly formed company, TAGTCR Acquisition, Inc. (the
"Acquiror"), which was organized at the direction of Golder, Thoma, Cressey,
Rauner, Inc., TA Associates, Inc. and NMS Capital Partners (the "Equity
Investors"). Under the Merger Agreement, the Company will be re-capitalized and
each outstanding share of the Company's common stock, other than certain shares
held by management and other investors, was to be converted into the right to
receive $18.00 in cash, and the existing funded indebtedness of the Company will
be refinanced (the "Pending Re-capitalization Transaction").
Subsequently, the Acquiror informed the Company it is unlikely that the
Acquiror will be able to obtain financing for the merger at the transaction
price of $18.00 per share. As a result, and following a review and analysis of
relevant factors, the Merger Agreement was amended on January 18, 1999 (the
"Amendment") to, among other things, reduce the cash purchase price to be paid
to the Company's stockholders pursuant to the merger by $3.00 per share, from
$18.00 per share to $15.00 per share, and modify provisions of the Merger
Agreement relating to solicitation of other offers and termination fees.
Specifically, the Amendment eliminates the "no solicitation" covenant in
the Merger Agreement, thus permitting the Company to solicit, respond to and
otherwise engage in negotiations concerning alternative proposals to engage in
business combinations (each, an "Acquisition Proposal"). In this regard, the
Special Committee of the Board of Directors continues to recommend and support
the TAGTCR transaction but expects that it will review any alternative proposals
that may arise, although no assurance can be given that such proposals will be
forthcoming. The Amendment also reduces the termination fee which the Company is
obligated to pay the Acquiror in the event it enters into a transaction
resulting from an Acquisition Proposal to the amount of the out-of-pocket fees
and expenses
8
<PAGE> 9
incurred in connection with the transactions contemplated by the Merger
Agreement up to a maximum of $1,500. The Robinson-Humphrey Company, LLC,
financial advisor to the Special Committee, has advised that the merger
consideration, as amended, is fair from a financial point of view to the
Company's stockholders.
Prior to the signing of the Amendment, the Equity Investors received
revised commitment letters from NationsBank, N.A. and NationsBridge, L.L.C.
(collectively, "NationsBank") pursuant to which NationsBank agreed, subject to
customary terms and conditions, to provide a portion of the financing for the
proposed transaction, as amended, in the form of certain credit facilities. As a
result of the Amendment to the Merger Agreement, the total indebtedness now
required to finance the merger will be approximately $126,900; the financial
commitments of the Equity Investors would remain unchanged at $87,700.
Completion of the proposed transaction with the Acquiror remains subject to
availability of financing.
However, the Acquiror has agreed that if it is unable to close the merger
due to the failure to receive financing, the Acquiror will reimburse the Company
for its out-of-pocket fees and expenses incurred in connection with the
transactions contemplated by the Merger Agreement up to a maximum of $1,000. The
Company currently expects to consummate the transaction in the second quarter of
1999, with closing remaining subject to a number of conditions, including
shareholder and regulatory approval.
5. SEGMENT REPORTING
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information.
Segment data includes inter-segment revenues and expenses. The Company's
management evaluates the performance of its segments and allocates resources to
them based on earnings before interest, taxes, depreciation, and amortization
(EBITDA).
The Company is organized primarily on the basis of two business units:
dental benefits (the "Dental Benefits") and dental practice management ("Dental
Practice Mgmt"). The Dental Benefits offers primarily the following dental
benefits: managed care, reduced fee-for-service, network rental and ASO
services. Dental Practice Mgmt offers management services to dental facilities,
as well as rental of equipment and facilities.
The table below presents information about reported segments for the
years ending March 31:
<TABLE>
<CAPTION>
1999 DENTAL DENTAL TOTAL
BENEFITS PRACTICE
MGMT
<S> <C> <C> <C>
Revenues $37,062 $7,532 $44,594
EBITDA $ 5,942 $1,032 $ 6,974
1998 DENTAL DENTAL TOTAL
BENEFITS PRACTICE
MGMT
Revenues $36,856 $5,973 $42,829
EBITDA $ 6,169 $ 594 $ 6,763
</TABLE>
9
<PAGE> 10
A reconciliation of total segment revenue to total consolidated revenue and
of total segment EBITDA to total consolidated income before income taxes, for
the three months ended March 31, 1999 and 1999, is as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
REVENUE
Total segment revenue $ 44,594 $ 42,829
Elimination of inter-segment revenue (422) (387)
-------- --------
Consolidated revenue $ 44,172 $ 42,442
======== ========
EBITDA
Total segment EBITDA $ 6,974 $ 6,763
Depreciation and amortization, including goodwill (1,535) (1,379)
impairment
Interest expense (1,004) (1,013)
-------- --------
Consolidated income before taxes $ 4,435 $ 4,371
======== ========
</TABLE>
Dental Practice Mgmt's property and equipment (P&E) was 84% and 69% of
total consolidated P&E as of March 31, 1999 and 1998, respectively. A
reconciliation of total segment P&E to total consolidated P&E, for the three
months ended March 31, 1999 and 1998, is as follows:
<TABLE>
<CAPTION>
1999 1998
P&E
<S> <C> <C>
Dental benefits $ 2,671 $ 2,729
Dental practice management 13,704 5,962
-------- --------
Total P&E $ 16,375 $ 8,691
======== ========
1999 1998
CONSOLIDATED ASSETS
Dental benefits $129,221 $128,619
Dental practice management 24,982 22,835
-------- --------
Total Assets $154,203 $151,454
======== ========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached
consolidated financial statements and notes thereto, and with the Company's
audited financial statements and notes thereto for the year ended December 31,
1998.
Three months ended March 31, 1999 and 1998
Total revenue increased $1.8 million, or 4.1%, to $44.2 million in the
first quarter of 1999 as compared to $42.4 million for the same period in 1998.
This increase was attributable to $1.1 million of affiliated practice revenue,
$0.2 million of subscriber premiums and $0.5 million of other revenue.
10
<PAGE> 11
Dental care providers' fees and claim costs increased $0.4 million, or
1.9%, to $19.8 million in the first quarter of 1999 from $19.4 million for the
first quarter of 1998. Dental care providers' fees represent capitation payments
paid to dentists under the Company's managed dental care plans. Under managed
dental care plans, capitation payments to panel dentists are fixed under the
participating dental agreement regardless of the extent of services provided.
Dental claim costs represent amounts payable to dental care providers under
dental indemnity and specialty insurance plans. Dental care providers' fees and
claim costs were 55.6% of subscriber premiums in the first quarter of 1999
compared to 54.8% of subscriber premiums for the same period in 1998. This
increase is attributable to a shift of business with an increase to premiums
derived directly from managed dental care plans and a reduction in premiums
derived from network rental and discount plans. At this time, no significant
impact has been realized from the settlement of the Paladino lawsuit, as
discussed in the 1998 Form 10K filing.
Commission expense increased $0.2 million, or 8.4%, to $3.5 million in the
first quarter of 1999 from $3.3 million in the first quarter of 1998. As a
percentage of subscriber premiums, commissions increased to 9.9% in the first
quarter of 1999 from 9.2% in the first quarter of 1998. This increase reflects a
loss of network rental business which generated lower commissions.
General and administrative expenses ("G&A") and DHMI operating expenses
increased $0.8 million, or 6.4%, to $13.8 million in the first quarter of 1999
from $13.0 million in the first quarter of 1998. Of the increase, $1.3 million
was the result of expenses related to the generation of affiliated practice
revenue from DHMI. This was offset by a reduction in G&A of $0.5 million for the
Company's corporate operations which was a result of cost savings strategies
implemented during the fourth quarter of 1998. As a percentage of revenues, G&A
expenses increased to 31.3% in the first quarter of 1999 from 30.6% in the first
quarter of 1998. This was the result of increased expenses related to the
generation and growth of affiliated practice revenue from DHMI.
Depreciation and amortization expense increased $0.1, or 11.3%, to $1.5
million in the first quarter of 1999 from $1.4 million in the first quarter of
1998. The increase was primarily due to the generation of depreciation from the
purchases of leasehold improvements and dental equipment for the build out of
dental offices throughout 1998. The impact of the change in estimate for
intangible asset amortization, for the dental office management business, from
40 to 25 years was offset by the decrease in amortization from fully amortized
non-compete agreements as of March 31, 1999, as compared to the three months
ended March 31, 1998.
Net interest expense increased $31,000, or 4.1%, to $790,000 in the first
quarter of 1999 from $759,000 in the first quarter of 1998. This increase
related principally to interest on additional debt incurred to finance DHMI
acquisitions in the first quarter of 1998 offset by the implementation of a cash
management system, which reduced outstanding non-interest bearing cash balances.
In the first quarter of 1999, the Company's effective income tax rate
decreased to 42.2% compared to 43.0% in the first quarter of 1998. This decrease
resulted from the decrease in non-deductible goodwill due to the final
allocation of purchase price for certain acquisitions.
As a result of the above mentioned factors, the net income for the first
quarter of 1999 was $2.6 million, or $0.25, per share basic and diluted,
compared to net income of $2.5 million, or $0.25 per share - basic and diluted,
for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of cash during the three months ended
March 31, 1999, was $2.9 million of cash provided by operating activities. The
primary use of cash for the period were the capital expenditures related to the
expansion of the Company's dental practice management business.
11
<PAGE> 12
Cash flows from operating activities were $2.9 million for the three months
ended March 31, 1999, and $1.3 million for the three months ended March 31,
1998. Cash flows from operations consist primarily of subscriber premiums and
affiliated practice revenue net of capitation payments to panel dentists, claims
paid, broker and agent commissions, general and administrative expenses and
income tax payments. The Company receives premium payments in advance of
anticipated capitation payments and claims and invests cash balances in excess
of current needs in interest-bearing accounts.
Cash used in investing activities was $0.9 million and $6.3 million for the
three months ended March 31, 1999 and 1998, respectively. The decrease in cash
used during the three months ended March 31, 1999, related primarily to
decreased use of cash for acquisitions. Capital expenditures decreased $2.0
million during the three months ended March 31, 1999, compared to the three
months ended March 31, 1998, due primarily to the delay in further purchases of
leasehold improvements and dental equipment for the Company's dental office
management business which is a result of the pending re-capitalization
transaction. The Company has entered into a joint initiative with Golder, Thoma,
Cressey, Rauner Fund V, a leading private equity firm ("GTCR"), relating to the
development of 35 to 50 de novo dental offices within the next two years. Under
this arrangement, the Company has agreed to fund certain development costs
(including the purchase of dental equipment, supplies, and leasehold
improvements) in an amount equal to amounts funded by GTCR in connection with
the joint initiative, not to exceed $15 million. At March 31, 1999, the Company
had funded approximately $10.3 million of this $15.0 million commitment. The
Company anticipates capital expenditures will continue to increase as the
Company meets its funding obligations under this arrangement.
Cash flows provided by financing activities during the three months
ended March 31, 1999, were $34,000, representing borrowings under the Company's
revolving line of credit. For the three months ended March 31, 1998, financing
activities used $1.5 million of cash flow, consisting almost entirely of
repayments under the Company's revolving line of credit.
On June 30, 1995, the Company obtained a reducing revolving $35.0
million line of credit (the "Credit Facility") from banks. The Credit Facility
subsequently was amended to increase the available line of credit to $65.0
million. The Credit Facility 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 .25% of LIBOR plus up to 1.75%,
with the margin over the prime rate and LIBOR decreasing as the ratio of
consolidated debt to EBITDA decreases. Currently, borrowings under the Credit
Facility bear interest at the LIBOR-based rate. The Credit Facility prohibits
payment of dividends and other distributions and restricts or prohibits the
Company from making certain acquisitions, incurring indebtedness, incurring
liens, disposing of assets or making investments, and requires it to maintain
certain financial ratios on an ongoing basis. The Credit Facility is
collateralized by pledges of the stock of the Company's direct and indirect
subsidiaries. On August 10, 1998, the Company entered into the Fourth Amendment
which adjusted one of the financial ratios to acknowledge the increased capital
expenditures associated with the dental practice management business. On March
23, 1999, the Company entered into the Fifth Amendment which extended the
required 50% reduction of the Credit Facility to March 31, 2000. At March 31,
1999, the Company entered into a Sixth Amendment which adjusted two of the
financial ratios to more appropriately reflect the current business conditions.
The Company had $55.5 million of borrowings outstanding as of March 31, 1999,
under the Credit Facility.
At March 31, 1999, the Company had negative working capital due to the
current maturity of existing debt. During the second quarter of 1999, the
Company expects to replace its notes payable with long-term debt resulting from
the pending re-capitalization transaction or absent the consummation of the
re-capitalization transaction, will investigate alternative sources.
12
<PAGE> 13
Under applicable insurance laws of most states in which the Company
conducts business, the Company's subsidiaries operating in the particular states
are required to maintain a minimum level of net worth and reserves. The Company
may be required from time to time to invest funds in one or more of its
subsidiaries to meet regulatory capital requirements. Applicable laws generally
limit the ability of the Company's subsidiaries to pay dividends to the extent
that required regulatory capital would be impaired and dividend payments are
further restricted under the Credit Facility.
13
<PAGE> 14
YEAR 2000 COMPLIANCE
The Company recognizes the significance of the Year 2000 problem and is
executing a project to achieve Year 2000 readiness. The Company's goal is to
have its major internal systems ready for the year 2000 by September 30, 1999,
and to complete testing of the major application systems, supporting hardware
and operating systems by October 31, 1999. A dedicated machine has been put in
place to undertake the appropriate Year 2000 validation testing. All major
application systems, supporting hardware and operating systems appear to be Year
2000 capable. Secondary systems, such as desktop computers and phone systems, in
field offices were addressed in 1998 and are continuing to be addressed in early
1999. At October 31, 1999, if the testing indicates that the Company has not
achieved Year 2000 readiness, a contingency plan will be established.
The total cost associated with the required modifications or upgrades to
become Year 2000 compliant is not expected to be material to the Company's
financial position. Costs associated with the Year 2000 Project are being
expensed as incurred. Funding for the program is being provided through the
Company's normal budget with no additional funding allocated to the Company's
information technology (IT) department due to the Year 2000 issues. The total
estimated cost of the Year 2000 Project is approximately $300,000. The total
amount expended on the Project through March 31, 1999, was $119,000, which
includes costs of a project manager, programmers, upgrading of personal
computers and replacing or upgrading field office phone systems. As mentioned
above, the Company believes its crucial systems and software are Year 2000
compliant. If during testing it is determined that there are significant Year
2000 issues in these crucial systems and software, then costs could exceed
$300,000. Even though the costs of the Year 2000 Project can not be estimated
with absolute certainty, the Company does not believe that the amount to be
spent will be material to the Company's results of operations, liquidity or
financial condition.
The Company is reviewing, and has initiated formal communications with,
third parties which provide goods or services which are essential to the
Company's operations in order to: (1) determine the extent to which the Company
is vulnerable to any failure by such material third parties to remediate their
respective Year 2000 problems: and (2) resolve such problems to the extent
practicable. The failure to correct a material Year 2000 problem could result in
an interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers.
The Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. In response to the lack of
readiness on the part of certain third-party customers, the Company is utilizing
a rolling 100-year methodology in its interface programs for customer supplied
data. The Company believes that, with the implementation of upgrades of select
phone systems and completion of the Project as scheduled, the possibility of
significant interruptions of normal operations should be reduced.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various legal proceedings have arisen or may arise in the normal course of
business. Management does not believe 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.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K
(a) Exhibits.
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K.
The registrant filed a Form 8-K dated January 18, 1999, reporting the
amendment of Merger Agreement to reduce the cash purchase price to be paid
to the Company's stockholders pursuant to the merger by $3.00 per share, from
$18.00 per share to $15,00 per share, and modify provisions of the Merger
Agreement relating to solicitation of other offers and termination fees as
explained in Part 1, Item 1, Note 4 (Pending Re-Capitalization Transaction) of
this 10-Q filing.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMPDENT CORPORATION
Date: May 14, 1999 By: /s/ Keith J. Yoder
----------------------------------------
Keith J. Yoder
Chief Financial Officer and Treasurer
(Signing as duly authorized officer and
chief financial officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED FINANCIAL STATEMENTS OF COMPDENT CORP. FOR THE QUARTERS ENDED
MARCH 31, 1999 AND 1998, AND THE YEARS ENDED 1998, 1997, AND 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10K FOR DECEMBER 31,
1998 AND FORM 10Q FOR MARCH 31, 1998.
</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 13,323
<SECURITIES> 0
<RECEIVABLES> 7,173
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,462
<PP&E> 16,375
<DEPRECIATION> 0
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<CURRENT-LIABILITIES> 41,890
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0
0
<COMMON> 101
<OTHER-SE> 72,857
<TOTAL-LIABILITY-AND-EQUITY> 154,203
<SALES> 0
<TOTAL-REVENUES> 44,172
<CGS> 0
<TOTAL-COSTS> 38,947
<OTHER-EXPENSES> 19
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<INCOME-PRETAX> 4,435
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