-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, INRVcYIqn+wYcqlq7zf7hA8nD8ZTb9kFufqkR+9gPUSOs6EUeot1Jyig688aHo8/ 5h9sID1NAdSv5xXIf4baWg== 0000950144-97-009267.txt : 19970815 0000950144-97-009267.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950144-97-009267 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPDENT CORP CENTRAL INDEX KEY: 0000941553 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 043185995 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26090 FILM NUMBER: 97663363 BUSINESS ADDRESS: STREET 1: 8800 ROSWELL RD STREET 2: STE 244 CITY: ATLANTA STATE: GA ZIP: 30350 BUSINESS PHONE: 770998936 MAIL ADDRESS: STREET 1: 100 MANSELL CT E STREET 2: STE 400 CITY: ROSWELL STATE: GA ZIP: 30076 FORMER COMPANY: FORMER CONFORMED NAME: APPS DENTAL INC DATE OF NAME CHANGE: 19950315 10-Q 1 COMPDENT CORPORATION 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 June 30, 1997 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------- --------- Commission file number: 0-26090 COMPDENT CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 04-3185995 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) CompDent Corporation 100 Mansell Court East, Suite 400 Roswell, Georgia 30076 (Address of principal executive offices) (770) 998-8936 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at August 8, 1997 ----- ----------------------------- Common Stock, $.01 par value 10,106,039 2 COMPDENT CORPORATION AND SUBSIDIARIES INDEX
Page # Part I. Financial Information Item 1. Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 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
2 3 PART I. FINANCIAL INFORMATION This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference include, among others, risk associated with the successful completion of new acquisitions, the effective integration of new acquisitions, general competitive and pricing pressures in the marketplace, and continued growth in the dental coverage marketplace. Other risk factors are listed in the Company's Prospectus and in required filings with the U.S. Securities and Exchange Commission. 3 4 ITEM 1. FINANCIAL STATEMENTS COMPDENT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, DECEMBER 31, 1997 1996 ---- ---- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 43,730 $ 26,959 Premiums receivable from subscribers 4,299 3,121 Income taxes receivable 247 Deferred income taxes 2,121 3,106 Other current assets 2,661 650 -------- -------- Total current assets 52,811 34,083 -------- -------- Restricted funds 2,252 2,070 Property and equipment, net of accumulated depreciation 3,721 2,977 Excess of purchase price over net assets acquired 135,643 135,040 Noncompetition agreement 641 945 Unamortized loan fees 134 189 Reinsurance receivable 5,391 5,388 Cash surrender value of officers' life insurance 148 140 Deferred income taxes 1,928 2,026 Other assets 1,171 1,309 -------- -------- $203,840 $184,167 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Unearned revenue $ 9,453 $ 9,582 Accounts payable and accrued expenses 10,064 10,956 Accrued interest payable 582 390 Income taxes payable 909 Dental claims reserves 1,802 1,421 Other current liabilities 282 1,924 -------- -------- Total current liabilities 23,092 24,273 -------- -------- Aggregate reserves for life policies and contracts 5,351 5,338 Notes payable 55,000 41,663 Deferred compensation expense 318 338 Other liabilities 449 372 -------- -------- Total liabilities 84,210 71,984 -------- -------- Commitments and contingencies (Note 3) Stockholders' equity: Common stock 101 101 Additional paid-in capital 97,544 95,820 Retained earnings 21,985 16,262 -------- -------- Total stockholders' equity 119,630 112,183 -------- -------- $203,840 $184,167 ======== ========
The accompanying notes are an integral part of these financial statements. 4 5 COMPDENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATION (IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, 1997 1996 ---- ---- (UNAUDITED) (UNAUDITED) Revenues: Subscriber premiums $ 35,852 $ 33,384 Other revenue 2,348 1,377 -------- -------- Total revenue 38,200 34,761 -------- -------- Expenses: Dental care providers' fees and claim costs 19,906 17,967 Commissions 3,192 3,091 Premium taxes 256 264 General and administrative 7,967 7,831 Depreciation and amortization 1,355 1,287 -------- -------- Total expenses 32,676 30,440 -------- -------- Operating income 5,524 4,321 -------- -------- Other (income) expense: Interest income (254) (145) Interest expense 738 434 Other, net (16) (299) -------- -------- 468 (10) -------- -------- Income before provision for income taxes 5,056 4,331 Income tax provision 2,172 1,924 -------- -------- Net income $ 2,884 $ 2,407 ======== ======== Net Income per common share $ 0.28 $ 0.24 ======== ======== Weighted average common shares outstanding 10,179 10,185 ======== ========
The accompanying notes are an integral part of these financial statements. 5 6 COMPDENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, 1997 1996 ---- ----- (UNAUDITED) (UNAUDITED) Revenues: Subscriber premiums $ 71,488 $ 64,215 Other revenue 4,547 1,932 -------- -------- Total revenue 76,035 66,147 -------- -------- Expenses: Dental care providers' fees and claim costs 39,450 34,448 Commissions 6,364 6,104 Premium taxes 521 523 General and administrative 15,827 14,603 Depreciation and amortization 2,676 2,334 -------- -------- Total expenses 64,838 58,012 -------- -------- Operating income 11,197 8,135 -------- -------- Other (income) expense: Interest income (415) (298) Interest expense 1,446 480 Other, net (61) (309) -------- -------- 970 (127) -------- -------- Income before provision for income taxes 10,227 8,262 Income tax provision 4,504 3,618 -------- -------- Net income $ 5,723 $ 4,644 ======== ======== Net Income per common share $ 0.56 $ 0.46 ======== ======== Weighted average common shares outstanding 10,172 10,191 ======== ========
The accompanying notes are an integral part of these financial statements. 6 7 COMPDENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, 1997 1996 ---- ---- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net Income $ 5,723 $ 4,644 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,731 2,374 Gain on sale of property and equipment (10) (309) Deferred income tax expense 1,281 327 Changes in assets and liabilities: Premiums receivable from subscribers (1,178) 586 Income taxes receivable/payable 1,156 (1,126) Other assets (1,707) 382 Unearned revenue (144) 814 Accounts payable and accrued expenses (1,723) (538) Other liabilities (1,191) (2,584) -------- -------- Net cash provided by operating activities 4,938 4,570 -------- -------- Cash flows from investing activities: Additions to property and equipment (1,331) (609) Increase in restricted cash (107) (600) Proceeds from sale of property and equipment 18 911 Cash surrender value of life insurance (3) 35 Payments made in connection with proposed business acquisitions (191) Purchase of businesses, net of cash acquired (473) (62,468) -------- -------- Net cash used in investing activities (2,087) (62,731) -------- -------- Cash flows from financing activities: Proceeds under credit agreement 13,337 44,000 Tax benefit realized from exercise of nonqualified stock options 583 Loan fees paid (113) Payments made in connection with proposed public offering (87) Proceeds from exercise of stock options 55 -------- -------- Net cash provided by financing activities 13,920 43,855 -------- -------- Increase (decrease) in cash and cash equivalents 16,771 (14,306) Cash and cash equivalents, beginning of period 26,959 40,388 -------- -------- Cash and cash equivalents, end of period $ 43,730 $ 26,082 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1,198 $ 126 ======== ======== Income taxes $ 1,484 $ 4,412 ======== ======== Non-cash investing and financing activities: Stock issued in exchange for business acquired $ 1,141 $ 0 ======== ========
The accompanying notes are an integral part of these financial statements. 7 8 COMPDENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS JUNE 30, 1997 1. BASIS OF PRESENTATION The unaudited consolidated balance sheet as of June 30, 1997, the unaudited consolidated statements of operations for the three months and six months ended June 30, 1997 and 1996, and the consolidated statements of cash flows for the six months ended June 30, 1997 and 1996, in the opinion of management, have been prepared on the same basis as the audited consolidated financial statements and include all significant adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the results of the interim periods. The data disclosed in these notes to the financial statements for these periods are also unaudited. The consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto as of December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995, and 1994 included in the 1996 Annual Report of CompDent Corporation and its subsidiaries, (the "Company", except as the context otherwise requires) on Form 10-K. Operating results of the Company for the six months or three months ended June 30, 1997 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1997. 2. BUSINESS COMBINATIONS Effective January 8, 1996, the Company completed the acquisition of Texas Dental Plans, Inc., a Texas-based referral fee-for-service dental company, and affiliated entities ("Texas Dental"), for an aggregate cash purchase price of approximately $23.0 million. The acquisition was funded with net proceeds remaining from the Company's second stock offering. The Texas Dental acquisition was accounted for using the purchase method of accounting, with the results of operations of the businesses acquired included from the effective date of the acquisition. The acquisition resulted in excess of cost over fair value of net assets acquired of $26.0 million which is being amortized over 40 years. The following is a summary of assets acquired, liabilities assumed, and consideration paid in connection with the acquisition: Fair value of assets acquired $ 27,239,000 Cash paid for assets acquired, net of cash acquired (23,132,000) Acquisition costs paid (540,000) ------------ Liabilities assumed $ 3,567,000 ============
Effective May 8, 1996, the Company acquired all of the outstanding capital stock and options of Dental Care Plus Management, Corp. ("Dental Care"). The aggregate purchase price for Dental Care and its wholly-owned subsidiary, IHCS, Inc. ("IHCS") was $38 million, of which the Company paid approximately $27 million in cash and assumed approximately $11 million in accrued liabilities. Dental Care and its subsidiary IHCS are based in Chicago, Illinois and provide managed dental care services through a network of dental care providers. Dental Care also acts as a third party administrator and provides management services to Health Care Systems, Inc., a non-profit dental company. The Company financed the purchase of Dental Care as well as satisfaction of the assumed liabilities by drawing down the Company's revolving credit facility. The acquisition of Dental Care was accounted for using the purchase method of accounting with the results of operations of the businesses acquired included from the effective date of the acquisition. The acquisition resulted in excess cost over fair value of net assets acquired of $39.7 million which is being amortized over 40 years. In 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 $1.5 million to $41.2 million. 8 9 The following is a summary of assets acquired, liabilities assumed, and consideration paid in connection with the acquisition: Fair value of assets acquired $ 46,770,000 Cash paid for assets acquired, net of cash acquired (26,836,000) Acquisition costs paid (843,000) ------------ Liabilities assumed $ 19,091,000 ============
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 $519,030 in cash and $1,140,998 of Company common stock issued at fair market value. AMDP provides managed dental care services through a network of dental care providers, and DDV provides a vision plan and referral fee-for-service dental plan to the Arkansas market. The Company funded the cash portion of the purchase with cash available from operations. The acquisition of AMDP and DDV was accounted for using the purchase method of accounting with the results of operations of the businesses acquired included from the effective date of the acquisition. The acquisition resulted in excess of cost over fair value of net assets acquired of $2.9 million, which will be amortized over 40 years. During the 2nd quarter of 1997, the Company revised its allocation of the purchase price of AMDP and DDV which resulted in a decrease to the excess of purchase price over net assets acquired of $0.5 million to $2.4 million. The following is a summary of assets acquired, liabilities assumed, and consideration paid in connection with the acquisition: Fair value of assets acquired $ 2,236,000 Cash paid and fair value of stock issued for assets acquired, net of cash acquired (1,614,000) Acquisition costs paid (416,000) ----------- Liabilities assumed $ 206,000 ===========
Unaudited pro forma results of operations of the Company for the six months ended June 30, 1997 and 1996 are included below. Such pro forma presentation has been prepared assuming that the AMDP and DDV acquisitions had occurred as of January 1, 1997 and that the AMDP and DDV, Texas Dental, and Dental Care acquisitions had occurred as of January 1, 1996, respectively.
Six Months Ended Six Months Ended June 30, 1997 June 30, 1996 ---------------- ---------------- Revenues (in thousands) $ 76,345 $72,858 ========= ======= Net income (in thousands) $ 5,705 $ 3,472 ========= ======= Net income per common share $ 0.56 $ 0.34 ========= =======
The pro forma results include the historical accounts of the Company, and historical accounts of the acquired businesses and pro forma adjustments including the amortization of the excess purchase price over the fair value of the net assets acquired, the amortization for the 9 10 noncompete agreements, the reduction of revenues for an intercompany management fee charged by Dental Care to its subsidiary IHCS, the elimination of consulting costs incurred by Dental Care under various contractual arrangements with related entities of Dental Care which were terminated upon the Company's purchase of Dental Care, and the applicable income tax effects of these adjustments. The pro forma results of operations are not necessarily indicative of actual results which may have occurred had the operations of the acquired companies been combined in prior periods. 3. CONTINGENT LIABILITIES The Company's wholly-owned subsidiary, American Prepaid Professional Service, Inc. ("American Prepaid"), and its Florida subsidiary, American Dental Plan, Inc., are currently defendants to a civil complaint filed by three participating dentists (one of which has since withdrawn) who have entered into Participating Dentist Agreements with various subsidiaries of the Company ("Subsidiaries"). The complaint alleges a breach of contract and seeks damages based on the failure of each Subsidiary to make capitation payments to the participating dentist for the period of time between when affected subscribers enroll and the time at which the subscribers select a dentist. For almost three years, the parties have litigated the procedural issue of whether the suit may be maintained as a class action. In an order issued July 22, 1996, the trial court ruled that the case could not proceed as a class action. The plaintiffs appealed this order denying class certification. In an opinion dated July 11, 1997, the appellate court ruled that the cause is suitable for a class action. The Company has filed motions asking the appellate court either to reconsider its ruling or to certify a question that would qualify the case for review by Florida's highest court. If the appellate court denies the Company's request, litigation on the merits of the plaintiffs' claim will proceed in the trial court as a class action. The Company believes its interpretation and administration of the Participating Dentist Agreements are correct and, therefore, is vigorously defending the suit. While the ultimate outcome of this lawsuit cannot at this time be predicted with certainty, management does not expect that this matter will have a material adverse effect on the consolidated financial position, cash flows or results of operations of the Company. 4. SUBSEQUENT EVENTS On July 2, 1997 the Company completed the acquisition of twenty-one dental facilities from The Workman Management Group, LTD. The dental facilities are the located in central and southern Illinois. The purchase price consisted of $15.5 million in cash less aggregate outstanding indebtedness of approximately $1.2 million. 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 forty year agreement to manage the dental practices which are operating in the dental facilities. In addition to the acquisition of the dental facilities and the long-term management contracts, the Company has secured an option to acquire nine other dental facilities currently under management by the Workman Management Group, as well as additional dental centers opened or acquired by the Workman Management Group over the next four years in the states of Illinois, Indiana and Missouri. 5. RECENTLY ISSUED ACCOUNTING STANDARDS The Financial Accounting Standards Board ("the Board") has issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." This statement establishes standards for computing and presenting earnings per share ("EPS") and applies to entities with publicly held common stock or potential common stock. This Statement simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, "Earnings Per Share," and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. 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 then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion 15. This Statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. This Statement requires restatement of all prior-period EPS data presented. Implementing the requirements of SFAS No. 128 is not anticipated to have a material impact on the financial position, results of operations, earnings per share, or cash flows of the Company. The Board has issued SFAS No. 130, "Reporting Comprehensive Income" which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in the financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. This Statement does not require a specific format for the presentation of comprehensive income but requires an amount representing total comprehensive income for the period. This Statement is effective for fiscal years beginning after December 15, 1997 with reclassification of earlier periods required. Other than the additional presentation requirements of this Statement, the Company does not anticipate a material impact on the financial position, results of operations, earnings per share or cash flows. The Board has issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports. This Statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. The financial information required includes a measure of segment profit or loss, certain specific revenue and expense items, segment assets and a reconciliation of each category to the general financial statements. The descriptive information required includes the way that the operating segments were determined, the products and services provided by the operating segments, differences between the measurements used in reporting segment information and those used in the general purpose financial statements, and changes in the measurement of segment amounts from period to period. This Statement is effective for financial statements for periods beginning after December 15, 1997 with restatement of earlier periods required in the initial year of application. This Statement need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. The Company is currently determining if these disclosure requirements will be applicable and, therefore, required in future periods. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following discussion should be read in conjunction with the attached consolidated financial statements and notes thereto, and with the Company's audited financial statements and notes thereto for the fiscal year ended December 31, 1996. Three months ended June 30, 1997 and 1996 Revenues increased by $3.4 million, or 9.9%, to $38.2 million in the second quarter of 1997 from $34.8 million in the second quarter of 1996. This increase was primarily attributable to a net increase of $2.5 million, or 7.4%, in subscriber premiums to $35.9 million in the second quarter of 1997 from $33.4 million in the second quarter of 1996. The acquisition of Dental Care in May 1996 provided $1.4 million of the increase in subscriber premiums as a result of three months of its revenues being included in the second quarter of 1997 compared to only two months of its revenues after the acquisition being included in the second quarter of 1996. The acquisitions of AMPD and DDV in March 1997 accounted for $0.3 million of the increase in subscriber premiums. Internal growth of the Company's existing subscriber base accounted for the remaining $0.8 million increase. Other revenue increased by $1.0 million, or 70.5%, to $2.3 million in the second quarter of 1997 from $1.4 million in the second quarter of 1996. Dental Care third party administrator fees and management fees recorded for three months in the current quarter compared to two months after the acquisition in the second quarter of 1996 accounted for $0.5 million of the increase. The balance of the increase in other revenue was mainly due to revenues associated with dental practice management following commencement of operations. It is anticipated that dental practice management revenues will increase in future quarters to the extent that the Company's newly organized dental practice management company ("Dental Health Management, Inc.") is successful. Dental care providers' fees and claims costs increased $2.0 million, or 10.8%, to $19.9 million in the second quarter of 1997 from $18.0 million in the second quarter of 1996. Dental care providers' fees represent capitation payments paid to panel dentists under the Company's managed dental care plans. Under managed dental care plans, capitation payments to panel dentists are fixed under the participating dental agreement regardless of the extent of services provided. Dental claim costs represent amounts payable to dental care providers under the dental indemnity insurance plans. Dental care providers' fees and claims costs increased to 55.5% of subscriber premiums in the second quarter of 1997 compared to 53.8% in the second quarter of 1996. This small increase as a percentage of subscriber premiums was due to a change in product mix toward more inclusive dental plans which incur higher claims costs, and toward plans which pay a capitation fee based on the number of family members who have selected a dentist, rather than a per-subscriber capitation fee. The product mix has also experienced a decline in referral-fee-for-service plans which incur no capitation fees. Commission expense increased $101,000, or 3.3%, to $3.2 million in the second quarter of 1997 from $3.1 million in the second quarter of 1996. As a percentage of subscriber premiums, commissions decreased to 8.9% of subscriber premiums in the second quarter of 1997 from 9.3% in the second quarter of 1996. This decrease was caused primarily by the acquisition of Dental Care, which had commission expense equal to 1.0% of subscriber premiums. Historically, Dental Care has relied more heavily on its direct sales forces than on independent agents, resulting in lower commissions as a percentage of revenues compared to the Company's other subsidiaries. General and administrative expenses increased $136,000, or 1.7%, to $8.0 million in the 11 12 second quarter of 1997 from $7.8 million in the second quarter of 1996. As a percentage of revenues, this expense decreased to 20.9% in the second quarter of 1997 from 22.5% in the second quarter of 1996. This decrease as a percentage of revenues was due to cost savings realized from the consolidation of acquired operations. Redundant personnel and overhead costs have been reduced relating to both the Texas Dental acquisition, which took place in January 1996, and the Dental Care acquisition, which took place in May 1996. Depreciation and amortization expense increased $68,000, or 5.3%, to $1.4 million in the second quarter of 1997 from $1.3 million in the second quarter of 1996. Amortization of goodwill increased $106,000 principally due to the additional goodwill amortization recorded following the Dental Care acquisition in May 1996 and the AMDP and DDV acquisition in March 1997. Interest expense increased $304,000 to $738,000 in the second quarter of 1997 from $434,000 in the second quarter of 1996. Interest expense in the second quarter of 1997 consists mainly of two months of interest on the $38 million of borrowings which arose in May 1996 with the acquisition of Dental Care. These borrowings were outstanding for all three months of second quarter 1997 and the interest rate was higher in 1997 than in 1996. Any future acquisitions may cause the Company to incur additional indebtedness under its revolving credit facility or otherwise. In the second quarter of 1997, the Company's effective income tax rate decreased to 43.0% compared to 44.4% in the second quarter of 1996. The decrease was achieved, in spite of an increase in nondeductible goodwill amortization, by improved tax planning resulting in the utilization of net operating loss carry forwards in certain subsidiaries. Six months ended June 30, 1997 and 1996 Revenues increased by $9.9 million, or 14.9%, to $76.0 million in six months ended June 30, 1997 from $66.1 million in the six months ended June 30, 1996. This increase was primarily attributable to a net increase of $7.3 million, or 11.3%, in subscriber premiums to $71.5 million in the six months ended June 30, 1997 from $64.2 million in the six months ended June 30, 1996. The acquisition of Dental Care in May 1996 provided $5.1 million of the increase in subscriber premiums as a result of six months of its revenues being included in the six months ended June 30, 1997 compared to only two months of its revenues after the acquisition being included in the six months ended June 30, 1996. The acquisitions of AMPD and DDV in March 1997 accounted for $0.3 million of the increase in subscriber premiums. Internal growth of the Company's existing subscriber base accounted for the remaining $1.9 million increase. Other revenue increased by $2.6 million, or 135.4%, to $4.5 million in the six months ended June 30, 1997 from $1.9 million in the six months ended June 30, 1996. Dental Care third party administrator fees and management fees recorded for six months in the six months ended June 30, 1997 compared to two months after the acquisition in the six months ended June 30, 1996 accounted for $1.9 million of the increase. The balance of the increase in other revenue was mainly due to revenues associated with dental practice management. It is anticipated that dental practice management revenues will increase in future quarters to the extent that the Company's newly organized dental practice management company ("Dental Health Management, Inc.") is successful. Dental care providers' fees and claims costs increased $5.0 million, or 14.5%, to $39.5 million in the six months ended June 30, 1997 from $34.4 million in the six months ended June 30, 1996. Dental care providers' fees represent capitation payments paid to panel dentists under the Company's managed dental care plans. Under managed dental care plans, capitation payments to panel dentists are fixed under the participating dental agreement regardless of the extent of services provided. Dental claim costs represent amounts payable to dental care 12 13 providers under the dental indemnity insurance plans. Dental care providers' fees and claims costs increased to 55.2% of subscriber premiums in the six months ended June 30, 1997 compared to 53.6% in the six months ended June 30, 1996. This increase as a percentage of subscriber premiums was due to a change in product mix toward more inclusive dental plans which incur higher claims costs, and toward plans which pay a capitation fee based on the number of family members who have selected a dentist, rather than simply a per-subscriber capitation fee. The product mix has also experienced a decline in referral-fee-for-service plans which incur no capitation fees. The increase in dental care providers' fees and claims costs as a percentage of subscriber premiums was also due in part to the acquisition of Dental Care in May 1996, which historically incurred capitation expense at 62.4% of subscriber premiums (which is a higher percentage than the Company's other subsidiaries). Commission expense increased $260,000, or 4.3%, to $6.4 million in the six months ended June 30, 1997 from $6.1 million in the six months ended June 30, 1996. As a percentage of subscriber premiums, commissions decreased to 8.9% of subscriber premiums in the six months ended June 30, 1997 from 9.5% in the six months ended June 30, 1996. This decrease was caused primarily by the acquisition of Dental Care, which had commission expense equal to 1.0% of subscriber premiums. Historically, Dental Care has relied more heavily on its direct sales forces than on independent agents, resulting in lower commissions as a percentage of revenues compared to the Company's other subsidiaries. General and administrative expenses increased $1.2 million, or 8.4%, to $15.8 million in the six months ended June 30, 1997 from $14.6 million in the six months ended June 30, 1996. As a percentage of revenues, this expense decreased to 20.8% in the six months ended June 30, 1997 from 22.1% in the six months ended June 30, 1996. This decrease as a percentage of revenues was due to cost savings realized from the consolidation of acquired operations. Redundant personnel and overhead costs have been reduced relating to both the Texas Dental acquisition, which took place in January 1996, and the Dental Care acquisition, which took place in May 1996. Depreciation and amortization expense increased $342,000, or 14.7%, to $2.7 million in the six months ended June 30, 1997 from $2.3 million in the six months ended June 30, 1996. Amortization of goodwill increased $366,000 principally due to the additional goodwill amortization recorded following the Dental Care acquisition in May 1996 and the AMDP and DDV acquisitions in March 1997. Interest expense increased $966,000 to $1.4 million in the six months ended June 30, 1997 from $480,000 in the six months ended June 30, 1996. Interest expense in the six months ended June 30, 1997 consisted mainly of two months of interest on the $38 million of borrowings which arose in May 1996 with the acquisition of Dental Care. These borrowings were outstanding for all of the six months ended June 30, 1997 and the interest rate was higher in 1997 than in 1996. Any future acquisitions may cause the Company to incur additional indebtedness under its revolving credit facility or otherwise. In the six months ended June 30, 1997, the Company's effective income tax rate was 44.0% compared to 43.8% in the six months ending June 30, 1996. This change resulted from an increase in nondeductible goodwill amortization mostly offset by improved tax planning resulting in the utilization of net operating loss carry forwards in certain subsidiaries. 13 14 LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of cash in the six months ended June 30, 1997 were $13.3 million of proceeds under the Company's revolving credit agreement and $4.9 million of cash provided by operating activities. The primary uses of cash for the period were purchases of property and equipment, and the acquisitions of AMDP and DDV. Cash flows from operating activities were $4.9 million and $4.6 million for the six months ended June 30, 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 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 $2.1 million and $62.7 million for the six months ended June 30, 1997 and 1996, respectively. The decrease in cash used during the six months ended June 30, 1997 relates primarily to decreased use of cash for acquisitions. In the six months ended June 30, 1997, $0.5 million was used for the acquisition of AMDP and DDV, compared to $62.5 million used to acquire Texas Dental and Dental Care in the six months ended June 30, 1996. Capital expenditures increased $0.7 million during the six months ended June 30, 1997 compared to the six months ended June 30, 1996 due primarily to purchases of leasehold improvements and dental equipment for the Company's dental office management business, and telephone and computer purchases. It is anticipated that capital expenditures will continue an upward trend to the extent that the Company's dental office management business is successful, resulting in the opening of new dental offices. Cash flows used in financing activities in the six months ended June 30, 1997 were $13.9 million, representing $13.3 million of net proceeds under the Company's revolving line of credit and a $0.6 million income tax benefit realized from the exercise of nonqualified stock options. In the six months ended June 30, 1996, financing activities provided $43.9 million of cash flow, consisting almost entirely of borrowings under the Company's revolving line of credit. On June 30, 1995, the Company obtained a reducing revolving $35 million line of credit (the "Credit Facility") from banks. The Credit Facility was subsequently amended to increase the available line of credit to $65 million. The Credit Facility as amended requires, beginning at the end of three and one-half years from the date of closing, a 33% reduction per year in available and outstanding borrowings. Outstanding indebtedness under the Credit Facility bears interest, at the Company's option, at a rate equal to the prime rate plus up to 1/4% or LIBOR plus up to 1 3/4%, with the margin over the prime rate and LIBOR decreasing as the ratio of consolidated debt to EBITDA decreases. Currently, borrowings under the Credit Facility bear interest at the LIBOR-based rate. The Credit Facility prohibits payment of dividends and other distributions and restricts or prohibits the Company from making certain acquisitions, incurring indebtedness, incurring liens, disposing of assets or making investments, and requires it to maintain certain financial ratios on an ongoing basis. The Credit Facility is collateralized by pledges of the stock of the Company's direct and indirect subsidiaries. The Company had $55.0 million of borrowings outstanding as of June 30, 1997 under the Credit Facility. The Company believes that cash flow generated by operations will be sufficient to fund its normal working capital needs and capital expenditures for at least the next twenty-four months because cash receipts are principally premium revenue received prior to expected capitation payments and claims for dental services. Historically, the Company's operations have not been capital intensive; however, the Company's recent initiative in the establishment of dental offices through its subsidiary operation, Dental Health Management, Inc., will present capital needs, the extent of which is indeterminate. Additional financing, under the Credit Facility or otherwise, would be required in connection with any 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 subsidiaries operating in the particular states are required to maintain a minimum level of net worth and reserves. The Company may be required from time to time to invest funds in one or more of its subsidiaries to meet regulatory capital requirements. Applicable laws generally limit the ability of the Company's subsidiaries to pay dividends to the extent that required regulatory capital would be impaired, and dividend payments are further restricted under the Credit Facility. RECENTLY ISSUED ACCOUNTING STANDARDS The Financial Accounting Standards Board ("the Board") has issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." This statement establishes standards for computing and presenting earnings per share ("EPS") and applies to entities with publicly held common stock or potential common stock. This Statement simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, "Earnings Per Share," and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. 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 then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion 15. This Statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. This Statement requires restatement of all prior-period EPS data presented. Implementing the requirements of SFAS No. 128 is not anticipated to have a material impact on the financial position, results of operations, earnings per share, or cash flows of the Company. The Board has issued SFAS No. 130, "Reporting Comprehensive Income" which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in the financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. This Statement does not require a specific format for the presentation of comprehensive income but requires an amount representing total comprehensive income for the period. This Statement is effective for fiscal years beginning after December 15, 1997 with reclassification of earlier periods required. Other than the additional presentation requirements of this Statement, the Company does not anticipate a material impact on the financial position, results of operations, earnings per share or cash flows. The Board has issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports. This Statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. The financial information required includes a measure of segment profit or loss, certain specific revenue and expense items, segment assets and a reconciliation of each category to the general financial statements. The descriptive information required includes the way that the operating segments were determined, the products and services provided by the operating segments, differences between the measurements used in reporting segment information and those used in the general purpose financial statements, and changes in the measurement of segment amounts from period to period. This Statement is effective for financial statements for periods beginning after December 15, 1997 with restatement of earlier periods required in the initial year of application. This Statement need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. The Company is currently determining if these disclosure requirements will be applicable and, therefore, required in future periods. 14 15 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company's wholly-owned subsidiary, American Prepaid professional Service, Inc. ("American Prepaid"), and its Florida subsidiary, American Dental Plan, Inc., are currently defendants to a civil complaint filed by three participating dentists (one of which has since withdrawn) who have entered into Participating Dentist Agreements with various subsidiaries of the Company ("Subsidiaries"). The complaint alleges a breach of contract and seeks damages based on the failure of each Subsidiary to make capitation payments to the participating dentist for the period of time between when affected subscribers enroll and the time at which the subscribers select a dentist. For almost three years, the parties have litigated the procedural issue of whether the suit may be maintained as a class action. In an order issued July 22, 1996, the trial court ruled that the case could not proceed as a class action. The plaintiffs appealed this order denying class certification. In an opinion dated July 11, 1997 the appellate court ruled that the cause is suitable for a class action. The Company has filed motions asking the Appellate court either to reconsider its ruling or to certify a question that would qualify the case for review by Florida's highest court. If the appellate court denies the Company's request, litigation on the merits of the Plaintiffs' claim will proceed in the trial court as a class action. The Company believes its interpretation and administration of the Participating Dentist Agreements are correct and, therefore, is vigorously defending the suit. While the ultimate outcome of this lawsuit cannot at this time be predicted with certainty, management does not expect that this matter will have a material adverse effect on the consolidated financial position, cash flows or results of operations of the Company. The Company is not a party to any other material legal proceeding. ITEM 2. CHANGES IN SECURITIES On April 30, 1997, the Board adopted a 1997 Stock Option Plan (the "1997 Plan"). A total of 500,000 shares of Common Stock have been reserved for issuance under the 1997 Plan. Following the adoption of the 1997 Plan, the Option Committee granted an aggregate of 320,000 non-qualified stock options to senior officers of the Company. Of these grants, 80,000 were issued at an exercise price of $16.12 (the closing price reported on April 30, 1997, on the Nasdaq National Market System), 80,000 at an exercise price of $19.35, 80,000 at the exercise price of $23.27, and 80,000 at an exercise price of $27.86. These options were granted in reliance upon the exemption from registration under the Securities Act stated in the interpretive position of the staff of the Division of Corporate Finance of the Securities and Exchange Commission (the "Staff") contained in the January 1997 edition of the Staff's Manual of Publicly-Available Telephone Interpretations to the effect that shares underlying options are permitted to be registered on Form S-8 at any time before the option is exercised, without regard to when the option became exercisable. See Exhibits 10.1, 10.3 and 10.4 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting of Shareholders was held on April 30, 1997. A total of 6,651,132 shares were represented by proxy at the meeting, representing 66.1% of the 10,064,393 shares eligible to vote. Philip Hertik and David F. Scott were re-elected to the Board of Directors as Class II Directors. With respect to Mr. Hertik, 6,649,632 shares of Common Stock were voted for his election and votes with respect to 1,500 shares were withheld. With respect to Mr. Scott, 6,649,632 shares of Common Stock were voted for his elected and votes with respect to 1,500 shares were withheld. Also at the meeting, the Company's 1996 Stock Option Plan was not approved, with 2,273,185 shares of Common Stock voting in favor of the Plan, 4,005,253 shares of Common Stock voting against approval of the Plan, and 6,187 shares of Common Stock abstaining. ITEM 5. OTHER INFORMATION The Company has entered into a five-year Employment Agreement with Phil Hertik, President of Dental Health Management, Inc., a wholly-owned subsidiary of the Company. The Agreement generally provides for a continuation of base salary and continuation of certain benefits for two years following termination of employment without cause, in the event of a breach by the Company, or upon a material change in the duties, title, compensation, and/or location of Mr. Hertik within one year following a change of control of the Company (as defined). Mr. Hertik is subject to a two-year restriction on competition with the Company following termination of employment for any reason. See Exhibit 10.2 ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K (a) Exhibits. 10.1 97 Stock Option Plan. 10.2 Employment Agreement between CompDent Corporation and Mr. Phil Hertik 10.3 Form of Non-Qualified Stock Option Agreement - immediate vesting 10.4 Form of Non-Qualified Stock Option Agreement - gradual vesting 27 Financial Data Schedule (for SEC use only). (b) Reports on Form 8-K. None. 15 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: August 14, 1997 By: /s/ Bruce Mitchell --------------------------------------- Bruce Mitchell Treasurer and Chief Financial Officer (Signing as duly authorized officer and chief financial officer) 16 17 EXHIBIT INDEX 10.1 1997 Stock Option Plan. 18 10.2 Employment Agreement between CompDent Corporation and Mr. Phil Hertik 26 10.3 Form of Non-Qualified Stock Option Agreement - immediate vesting 33 10.4 Form of Non-Qualified Stock Option Agreement - gradual vesting 40 EX-27 Financial Data Schedule (for SEC use only). 51 17 EX-10.1 2 97 STOCK OPTION PLAN 1 EXHIBIT 10.1 COMPDENT CORPORATION 1997 STOCK OPTION PLAN SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS The name of the plan is the CompDent Corporation 1997 Stock Option Plan (the "Plan"). The purpose of the Plan is to encourage and enable the officers, employees, directors, consultants, advisors and other key persons of CompDent Corporation (the "Company") and its Subsidiaries (as defined below) upon whose judgment, initiative and efforts the Company largely depends for the successful conduct of its business to acquire a proprietary interest in the Company. It is anticipated that providing such persons with a direct stake in the Company's welfare will assure a closer identification of their interests with those of the Company, thereby stimulating their efforts on the Company's behalf and strengthening their desire to remain with the Company. The following terms shall be defined as set forth below: "Act" means the Securities Exchange Act of 1934, as amended. "Award" or "Awards," except where referring to a particular category of grant under the Plan, shall include Incentive Stock Options and Non-Qualified Stock Options. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended, and any successor Code, and related rules, regulations and interpretations. "Committee" has the meanings specified in Section 2. "Fair Market Value" of the Stock on any given date means (i) if the Stock is admitted to quotation on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), the Fair Market Value on any given date shall not be less than the average of the highest bid and lowest asked prices of the Stock reported for such date or, if no bid and asked prices were reported for such date, for the last day preceding such date for which such prices were reported; or (ii) if the Stock is admitted to trading on a national securities exchange or the NASDAQ National Market System, the Fair Market Value on any date shall not be less than the closing price reported for the Stock on such exchange or system for such date or, if no sales were reported for such date, for the last date preceding such date for which a sale was reported; or (iii) if the Stock is not publicly traded on a securities exchange or traded in the over-the-counter market or, if traded or quoted, there are no transactions or quotations within the last ten trading days or trading has been halted for extraordinary reasons, the Fair Market Value on any given date shall be determined in good faith by the Committee with reference to the rules and principles of valuation set forth in Section 20.2031-2 of the Treasury Regulations. 18 2 "Incentive Stock Option" means any Stock Option designated and qualified as an "incentive stock option" as defined in Section 422 of the Code. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. "Option" or "Stock Option" means any option to purchase shares of Stock granted pursuant to Section 5. "Stock" means the Common Stock, par value $.01 per share, of the Company, subject to adjustments pursuant to Section 3. "Subsidiary" means any corporation or other entity (other than the Company) in any unbroken chain of corporations or other entities, beginning with the Company, if each of the corporations or entities (other than the last corporation or entity in the unbroken chain) owns stock or other interests possessing 50% or more of the economic interest or the total combined voting power of all classes of stock or other interests in one of the other corporations or entities in the chain. SECTION 2. ADMINISTRATION OF PLAN; COMMITTEE AUTHORITY TO SELECT PARTICIPANTS AND DETERMINE AWARDS (a) Committee. The Plan shall be administered by the Board of Directors of the Company, or at the discretion of the Board by a committee of the Board of not less than two "Non-Employee Directors" within the meaning of Rule 16b-3(b)(3)(i) under the Act. Each member of the Committee shall be an "Outside Director" within the meaning of Section 162(m) of the Code and the regulations promulgated thereunder. All references herein to the Committee shall be deemed to refer to the entity then responsible for administration of this Plan at the relevant time (i.e., either the Board of Directors or a committee of the Board, as applicable). (b) Powers of Committee. The Committee shall have the power and authority to grant Awards consistent with the terms of the Plan, including the power and authority: (i) to select the officers, employees, directors, consultants, advisors and key persons of the Company and its Subsidiaries to whom Awards may from time to time be granted; (ii) to determine the time or times of grant, and the extent, if any, of Incentive Stock Options and Non-Qualified Stock Options, or any combination of the foregoing, granted to any one or more participants; (iii) to determine the number of shares of Stock to be covered by any Award; 19 3 (iv) to determine and modify from time to time the terms and conditions, including restrictions, not inconsistent with the terms of the Plan, of any Award, which terms and conditions may differ among individual Awards and participants, and to approve the form of written instruments evidencing the Awards; (v) to impose any limitations on Awards granted under the Plan, including limitations on transfers, repurchase provisions and the like and to exercise repurchase rights or obligations; (vi) to determine at any time whether, to what extent, and under what circumstances Stock and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the participant and whether and to what extent the Company shall pay or credit amounts constituting interest (at rates determined by the Committee) or dividends or deemed dividends on such deferrals; and (vii) at any time to adopt, alter and repeal such rules, guidelines and practices for administration of the Plan and for its own acts and proceedings as it shall deem advisable; to interpret the terms and provisions of the Plan and any Award (including related written instruments); to make all determinations it deems advisable for the administration of the Plan; to decide all disputes arising in connection with the Plan; and to otherwise supervise the administration of the Plan. All decisions and interpretations of the Committee shall be binding on all persons, including the Company and Plan participants. (c) Delegation of Authority to Grant Awards. The Committee, in its discretion, may delegate to the Chief Executive Officer of the Company all or part of the Committee's authority and duties with respect to Awards, including the granting thereof, to individuals who are not subject to the reporting and other provisions of Section 16 of the Act or "covered employees" within the meaning of Section 162(m) of the Code. The Committee may revoke or amend the terms of a delegation at any time but such action shall not invalidate any prior actions of the Committee's delegate or delegates that were consistent with the terms of the Plan. 20 4 SECTION 3. STOCK ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION (a) Stock Issuable. The maximum number of shares of Stock reserved and available for issuance under the Plan shall be 500,000 shares of Stock. For purposes of the foregoing limitations, the shares of Stock underlying any Awards which are forfeited, canceled, reacquired by the Company, satisfied without the issuance of Stock or otherwise terminated (other than by exercise) shall be added back to the shares of Stock available for issuance under the Plan. Stock Options with respect to no more than 150,000 shares of Stock may be granted to any one individual participant during any one calendar year period. The shares available for issuance under the Plan may be authorized but unissued shares of Stock or shares of Stock reacquired by the Company. (b) Recapitalizations. Subject to Section 3(c), if, through or as a result of any merger, consolidation, sale of all or substantially all of the assets of the Company, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, the outstanding shares of Stock are increased or decreased or are exchanged for a different number or kind of shares or other securities of the Company or any successor company, or additional shares or new or different shares or other securities of the Company or any successor Company or other non-cash assets are distributed with respect to such shares of Stock or other securities, the Committee shall make an appropriate or proportionate adjustment in (i) the maximum number of shares reserved for issuance under the Plan, (ii) the number of Stock Options that can be granted to any one individual participant, (iii) the number and kind of shares or other securities subject to any then outstanding Awards under the Plan, and (iv) the price for each share subject to any then outstanding Stock Options under the Plan, without changing the aggregate exercise price (i.e., the exercise price multiplied by the number of shares) as to which such Stock Options remain exercisable. The adjustment by the Committee shall be final, binding and conclusive. No fractional shares of Stock shall be issued under the Plan resulting from any such adjustment, but the Committee in its discretion may make a cash payment in lieu of fractional shares. (c) Mergers and Other Transactions. In the case of (i) the dissolution or liquidation of the Company, (ii) a merger, reorganization or consolidation in which a majority of the outstanding voting power of the Company is acquired by another person or entity (other than a holding company formed by the Company), (iii) the sale of all or substantially all of the assets of the Company to an unrelated person or entity, or (iv) the sale of all of the Stock of the Company to an unrelated person or entity (in each case, a "Transaction"), all outstanding Options held by participants, to the extent not fully vested and exercisable, shall not become fully vested and exercisable except as the Committee may otherwise determine either in connection with the granting of an Award as reflected in the terms of the relevant Award or in its discretion thereafter. Upon the effectiveness of the Transaction, the Plan and all Awards granted hereunder shall terminate, unless provision is made in connection with the Transaction for the assumption of Awards heretofore granted, or the substitution of such Awards with new Awards of the successor entity or parent thereof, with appropriate adjustment as to the 21 5 number and kind of shares and, if appropriate, the per share exercise prices, as provided in Section 3(b) above. In the event of such termination, each optionee shall be permitted to exercise for a period of at least 15 days prior to the date of such termination all outstanding Options held by such optionee which are then exercisable. (d) Substitute Awards. The Committee may grant Awards under the Plan in substitution for stock and stock based awards held by employees of another corporation who become employees of the Company or a Subsidiary as the result of a merger or consolidation of the employing corporation with the Company or a Subsidiary or the acquisition by the Company or a Subsidiary of property or stock of the employing corporation. The Committee may direct that the substitute awards be granted on such terms and conditions as the Committee considers appropriate in the circumstances. SECTION 4. ELIGIBILITY Participants in the Plan will be such officers and other employees, directors, consultants, advisors and other key persons of the Company and its Subsidiaries who are responsible for or contribute to the management, growth or profitability of the Company and its Subsidiaries as are selected from time to time by the Committee, in its sole discretion. SECTION 5. STOCK OPTIONS Any Stock Option granted under the Plan shall be pursuant to a stock option agreement which shall be in such form as the Committee may from time to time approve. Option agreements need not be identical. Stock Options granted under the Plan may be either Incentive Stock Options or Non-Qualified Stock Options. Incentive Stock Options may be granted only to employees of the Company or any Subsidiary that is a "subsidiary corporation" within the meaning of Section 424(f) of the Code. Non-Qualified Stock Options may be granted to officers, employees, directors, consultants, advisors and other key persons of the Company and its Subsidiaries. To the extent that any Option does not qualify as an Incentive Stock Option, it shall be deemed a Non-Qualified Stock Option. No Incentive Stock Option shall be granted under the Plan after April 30, 2007. (a) Terms of Stock Options. Stock Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: (i) Exercise Price. The exercise price per share for the Stock covered by a Stock Option shall be determined by the Committee at the time of grant but shall not be less than 100% of the Fair Market Value on the date of grant. If an employee owns or is deemed to own (by reason of the attribution 22 6 rules applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any parent or subsidiary corporation and an Incentive Stock Option is granted to such employee, the option price of such Incentive Stock Option shall be not less than 110% of the Fair Market Value on the grant date. (ii) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years after the date the option is granted. If an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any parent or subsidiary corporation and an Incentive Stock Option is granted to such employee, the term of such option shall be no more than five years from the date of grant. (iii) Exercisability; Rights of a Stockholder. Stock Options shall become vested and exercisable at such time or times, whether or not in installments, as shall be determined by the Committee at or after the grant date. The Committee may at any time accelerate the exercisability of all or any portion of any Stock Option. An optionee shall have the rights of a stockholder only as to shares acquired upon the exercise of a Stock Option and not as to unexercised Stock Options. (iv) Method of Exercise. Stock 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 Committee; (B) In the form of shares of Stock that are not then subject to restrictions under any Company plan and that have been held by the optionee free of such restrictions for at least six months, if permitted by the Committee in its discretion. Such surrendered shares shall be valued at Fair Market Value on the exercise date; (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 Committee shall prescribe as a condition of such payment procedure; or 23 7 (D) By the optionee delivering to the Company a promissory note if the Board has authorized the loan of funds to the optionee for the purpose of enabling or assisting the optionee to effect the exercise of his or her Stock Option; provided that at least so much of the exercise price as represents the par value of the Stock shall be paid other than with a promissory note. Payment instruments will be received subject to collection. The delivery of certificates representing the shares of Stock to be purchased pursuant to the exercise of a Stock Option will be contingent upon receipt from the optionee (or a purchaser acting in his or her stead in accordance with the provisions of the Stock Option) by the Company of the full purchase price for such shares and the fulfillment of any other requirements contained in the Stock Option or applicable provisions of law. (v) Termination. Stock Options shall terminate at such times as are specified in the relevant Award. (vi) Annual Limit on Incentive Stock Options. To the extent required for "incentive stock option" treatment under Section 422 of the Code, the aggregate Fair Market Value (determined as of the time of grant) of the shares of Stock with respect to which Incentive Stock Options granted under this Plan and any other plan of the Company or its parent and subsidiary corporations become exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. To the extent that any Stock Option exceeds this limit, it shall constitute a Non-Qualified Stock Option. (b) Non-transferability of Options. No Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. Notwithstanding the foregoing, the Committee may provide in an option agreement that the optionee may transfer, without consideration for the transfer, his or her Non-Qualified Stock Options to members of his or her immediate family, to trusts for the benefit of such family members, or to partnerships in which such family members are the only partners; provided, however, that the transferee agrees in writing to be bound by the terms and conditions of this Plan and the applicable Option Agreement. 24 8 SECTION 6. TAX WITHHOLDING (a) Payment by Participant. Each participant shall, no later than the date as of which the value of an Award or of any Stock or other amounts received thereunder first becomes includable in the gross income of the participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any federal, state, or local taxes of any kind required by law to be withheld with respect to such income. The Company and its Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. (b) Payment in Stock. Subject to approval by the Committee, a participant may elect to have such tax withholding obligation satisfied, in whole or in part, by (i) authorizing the Company to withhold from shares of Stock to be issued pursuant to any Award a number of shares with an aggregate Fair Market Value (as of the date the withholding is effected) that would satisfy the withholding amount due, or (ii) transferring to the Company shares of Stock owned by the participant with an aggregate Fair Market Value (as of the date the withholding is effected) that would satisfy the withholding amount due. SECTION 7. TRANSFER, LEAVE OF ABSENCE, ETC. For purposes of the Plan, the following events shall not be deemed a termination of employment: (a) a transfer to the employment of the Company from a Subsidiary or from the Company to a Subsidiary, or from one Subsidiary to another; or (b) an approved leave of absence for military service or sickness, or for any other purpose approved by the Company, if the employee's right to re-employment is guaranteed either by a statute or by contract or under the policy pursuant to which the leave of absence was granted or if the Committee otherwise so provides in writing. SECTION 8. AMENDMENTS AND TERMINATION The Board may, at any time, amend or discontinue the Plan and the Committee may, at any time, amend or cancel any outstanding Award, but no such action shall adversely affect rights under any outstanding Award without the holder's consent. Notwithstanding the foregoing, in no event shall the Board or the Committee reduce the exercise price of an outstanding Award unless pursuant to the provisions of Section 3(b) or 3(c). If and to the extent determined by the Committee to be required by the Act to ensure that Incentive Stock Options granted under the Plan are qualified under Section 422 of the Code, Plan amendments shall be subject to approval by the Company stockholders who are eligible to vote at a meeting of stockholders. SECTION 9. STATUS OF PLAN With respect to the portion of any Award which has not been exercised and any payments in cash, Stock or other consideration not received by a participant, a participant shall have no rights greater than those of a general creditor of the Company unless the Committee shall otherwise expressly determine in connection with any Award or Awards. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the Company's obligations to deliver Stock or make payments with respect to Awards hereunder, provided that the existence of such trusts or other arrangements is consistent with the foregoing sentence. SECTION 10. GENERAL PROVISIONS (a) No Distribution; Compliance with Legal Requirements. The Committee may require each person acquiring Stock pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the shares without a view to distribution thereof. No shares of Stock shall be issued pursuant to an Award until all applicable securities law and other legal and stock exchange or similar requirements have been satisfied. The Committee may require the placing of such stop-orders and restrictive legends on certificates for Stock and Awards as it deems appropriate. (b) Other Compensation Arrangements; No Employment Rights. Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, including trusts, and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of this Plan and the grant of Awards do not confer upon any employee any right to continued employment with the Company or any Subsidiary. SECTION 11. GOVERNING LAW This Plan shall be governed by Delaware law except to the extent such law is preempted by federal law. Adopted and Effective: April 30, 1997 25 EX-10.2 3 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.2 EMPLOYMENT AGREEMENT Employment Agreement, dated this 1st day of April, 1997, between CompDent Corporation ("CompDent"), and Philip Hertik (the "Executive"). W I T N E S S E T H WHEREAS, CompDent seeks the services of Executive to undertake certain tasks and/or responsibilities associated with its recent initiative in the dental practice management area and Executive is desirous of providing same to CompDent on the conditions and for the consideration as set forth below: 1. Employment. Subject to the provisions of Section 6, CompDent hereby employs the Executive and the Executive accepts such employment upon the terms and conditions hereinafter set forth. 2. Term of Employment. The term of the Executive's employment pursuant to this Agreement shall be effective as of the 1st day of January, 1997, and shall remain in effect for a period of five years from said date or until terminated in accordance with Section 6. The period during which the Executive serves as an employee of CompDent in accordance with and subject to the provisions of this Agreement is referred to in this Agreement as the "Term of Employment." Without the consent of the Executive, the Company may not transfer the Executive during the Term of Employment to a principal place of employment more than thirty miles from the city limits of the principal city where Executive is located on the date of this Agreement ("Location"). 3. Duties. During the Term of Employment, the Executive shall report directly to the Chief Executive Officer of CompDent, and (a) shall serve as President of Dental Health Management, Inc., a wholly-owned subsidiary of CompDent ("DHM"), (b) shall perform such duties and responsibilities as may be reasonably determined by the Chairman of the Board of Directors of CompDent consistent with the Executive's position as an executive officer of DHM, provided that such duties and responsibilities shall be within the general area of the Executive's experience and skills, (c) upon the request of the Chairman of the Board of Directors of CompDent, shall serve as an officer and/or director of CompDent and any of its subsidiaries; and (d) shall render all services incident to the foregoing. The Executive agrees to use his best efforts in, and shall devote his full working time, attention, skill and energies to, the advancement of the interests of CompDent and its subsidiaries and Affiliates and the performance of his duties and responsibilities hereunder. 4. Compensation. (a) During the Term of Employment, CompDent shall pay the Executive a salary (the "Base Salary") at an annual rate as shall be determined from time to time by the Board of directors of CompDent, provided, however, that such rate per annum shall not be less than $200,000.00. Such salary shall be subject to withholding under applicable law and shall be payable in periodic installments in accordance with CompDent's usual practice for its senior executives, as in effect from time to time. 26 2 (b) Upon the completion of each calendar year, the Executive shall be eligible to receive a bonus ("Bonus") provided he is employed by CompDent at the end of such calendar year to the extent payable pursuant to a bonus plan then in effect from time to time for executives of CompDent of equivalent position and title. 5. Benefits. (a) During the Term of Employment, the Executive shall be entitled to participate in any and all bonus plans, medical, pension and dental insurance plans and disability income plans as in effect from time to time for senior executives of CompDent. Such participation shall be subject to (i) the terms of the applicable plan documents, (ii) generally applicable policies of CompDent, and (iii) the discretion of the Board of Directors of CompDent or administrative or other committee provided for in or contemplated by such plan. (b) CompDent shall promptly reimburse the Executive for all reasonable business expenses incurred by the Executive during the Term of Employment in accordance with CompDent's practices for senior executives of CompDent, as in effect from time to time. (c) During the Term of Employment, the Executive shall receive paid vacation annually in accordance with CompDent's practices for senior executives of CompDent, as in effect from time to time. (d) During the Term of Employment, the Executive shall receive a car allowance of at least $800 per month. (e) Except as contemplated by Sections 5 (b), 5 (c), and 5 (d), compliance with provisions of this Section 5 shall in no way create or be deemed to create any obligation, express or implied, on the part of CompDent or any parent, subsidiary or affiliate of CompDent with respect to the continuation of any benefit or other plan or arrangement maintained as of or prior to the date hereof or the creation and maintenance of any particular benefit or other plan or arrangement at any time after the date hereof. Notwithstanding the foregoing, the benefits provided to the Executive during the Term of Employment will not be materially less favorable in the aggregate than the benefits in effect for the executives of CompDent as of January 1, 1997. 6. Termination of Employment of the Executive. This Agreement and the Executive's employment with CompDent and its subsidiaries may be terminated as follows: (a) At any time by the mutual consent of the Executive and CompDent. (b) At any time for "cause" by CompDent upon written notice to the Executive. For purposes of this agreement, a termination shall be for "cause" if: (i) the Executive shall commit an act of fraud, embezzlement, misappropriation or breach of fiduciary duty against CompDent or any of its subsidiaries or 27 3 affiliates or shall be convicted by a court of competent jurisdiction or shall plead guilty or nolo contendere to any felony or crime involving moral turpitude; (ii) the Executive shall commit a material breach of any of the covenants, terms or provisions of Section 8 hereof; (iii) the Executive shall commit a material breach of any of the covenants, terms or provisions hereof (other than pursuant to Section 8 hereof) which breach has not been remedied within thirty (30) days after delivery to the Executive by CompDent of written notice thereof; or (iv) the Executive shall have disobeyed reasonable written instructions from CompDent's Chairman consistent with the terms of this Agreement and Executive's duties, title, and general area of expertise, or shall have substantially failed to perform the Executive's duties hereunder, after written notice and under circumstances effectively constituting a resignation of the Executive's position with CompDent. Upon termination for cause as provided in this Section 6 (b): (a) all obligations of CompDent under this Agreement shall thereupon immediately terminate other than any obligations with respect to earned but unpaid Base Salary; provided, however, that the Executive shall not be entitled to receive any bonus from CompDent with respect to the year during which such termination occurred, and (b) CompDent shall have any and all rights and remedies under this Agreement and applicable law. (c) Upon the earlier death or permanent disability (as defined below) of Executive continuing for a period of ninety (90) days. Upon any such termination of the Executive's employment, all obligations of CompDent under this Agreement shall thereupon immediately terminate other than any obligations with respect to (i) earned but unpaid salary through the date of termination, (ii) bonus payments with respect to the calendar year which such termination occurred on the basis of and to the extent contemplated in any bonus plan then in effect with respect to executive officers of CompDent, pro-rated on the basis of number of days of the Executive's actual employment hereunder during such calendar year through such termination, and (iii) in the case of permanent disability continuation of health insurance benefits until the first anniversary of the date of termination to the extent permitted under Executive's group health insurance policy. As used herein, the term "permanent disability" or "permanently disabled" is hereby defined as the inability of the Executive, by reason of injury, illness or other similar cause, to perform a major part of his duties and responsibilities in connection with the conduct of the business and affairs of CompDent. (d) At any time by the Executive upon sixty (60) days' prior written notice to CompDent. Upon termination by the Executive as provided in this Section 6 (d), all obligations of CompDent under this Agreement shall thereupon immediately terminate other than any obligations with respect to earned but unpaid Base Salary, it being understood that the Executive shall not be entitled to receive any bonus from CompDent with respect to the year during which such termination occurred. 28 4 (e) At any time during the Term of Employment without "cause" (as defined in Section 6 (b)) by CompDent upon written notice to the Executive. (f) The Executive shall have the right to terminate his employment hereunder in the event of a material default by CompDent in the performance of its obligations hereunder after the Executive has given written notice to CompDent specifying such default by CompDent and giving CompDent a reasonable time, not less than 30 days, to conform its performance to its obligations hereunder. (g) Upon termination of the Executive's employment with CompDent at any time, under this Agreement or otherwise, regardless of the circumstances thereof, the Executive's obligations under Section 8 hereof shall survive such termination. 7. Severance Payments. In the event the employment of the Executive is terminated pursuant to (A) Section 6 (e), (B) by Executive pursuant to 6 (f), or (C) following a material change in the duties, title, compensation, and/or Location of the Executive, within one year following any "Change of Control" (as hereinafter defined) involving CompDent or any entity controlling CompDent ("Parent"), then CompDent shall in lieu of the payments and arrangements specified above (including without limitation participation in any bonus plan), (i) pay the Executive severance pay in an amount equal to two times the sum of Executive's Base Salary on the termination date ("Severance Pay"), and (ii) continue the Executive's health (i.e., medical and dental) insurance as provided in Section 5 (a) for one year following the date of such termination to the extent permitted under applicable law and CompDent's group health insurance policy. Such Severance Pay shall be payable over 24 months in equal monthly installments and shall be subject to withholding to the extent required under applicable law. In the event that Executive's participation in any medical and/or dental plan or program is barred, CompDent shall arrange to provide Executive with benefits substantially similar to those which Executive would otherwise had been entitled to receive under such plans and programs from which his continued participation is barred. The Severance Pay and continuation of health benefits contemplated by this Section 7 are agreed by the parties hereto to be in full satisfaction and compromise of any claim arising out of any such termination of the Executive's employment pursuant to Section 6 (e) or 6 (f) or the event described above. Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise. For purposes of this Agreement, a "Change in Control" shall mean any of the following events occurring after the date hereof: (A) the direct or indirect beneficial ownership (within the meaning of Section 13 (d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Regulation 13D-G thereunder) of a majority of the outstanding Common Stock of CompDent is acquired or becomes held by any person or group of persons (within the meaning of Section 13 (d) (3) of the Exchange Act) (a "Group"), (B) the sale, mortgage, lease or other 29 5 transfer to any person or Group in one or more transactions not in the ordinary course of business of all or substantially all of the assets on a consolidated basis of Parent, CompDent and CompDent' subsidiaries (taken as a whole), (C) a change of stock ownership of CompDent of a nature that would be required to be reported in response to Item 6 (e) of Schedule 14A promulgated under the Securities Exchange Act of 1994, as amended (the "Exchange Act") and any successor Item of a similar nature; or (D) the acquisition of beneficial ownership, directly or indirectly, by any person (as such term is used in Sections 13 (d) and 14 (d) (a) of the Exchange Act) of securities of CompDent representing 25% or more of the combined voting power of CompDent's then outstanding securities; or (E) a change during any period of two consecutive years of a majority of the members of the Board of Directors of CompDent for any reason. 8. Non-Competition. (a) During any period in which the Executive serves as an employee of CompDent and for a period of two (2) years after the date of termination of the Executive's employment at any time, regardless of the circumstances thereof, the Executive shall not, without the express written consent of CompDent, directly or indirectly, engage, participate, invest in, be employed by or assist, whether as owner, part-owner, shareholder, partner, director, officer, trustee, employee, agent or consultant, or in any other capacity, any Person other than CompDent and its Affiliates whose activities, products, and/or services are in the Designated Industry. Without limiting the foregoing, the foregoing covenant shall prohibit the Executive during the period set forth above from (i) hiring or attempting to hire for or on behalf of any Person in the Designated Industry any officer, Employee, or Affiliated Person of CompDent or any of its Affiliates, (ii) encouraging for or on behalf of any such Person in the Designated Industry any officer, Employee, or Affiliated Person to terminate his or her relationship or employment with CompDent or any of its Affiliates, (iii) soliciting for or on behalf of any such Person in the Designated Industry any customer of CompDent or any of its Affiliates and (iv) diverting to any such Person in the Designated Industry any customer of CompDent or any of its Affiliates; provided, however, that nothing herein shall be construed as preventing the Executive from making passive investments in a Person in the Designated Industry if the securities of such Person are publicly traded and such investment constitutes less than five percent of the outstanding shares of capital stock or comparable equity interests of such Person. As of the date of this Agreement, the Executive is not performing any other duties for, and is not a party to any similar agreement with, any Person competing with CompDent or any of its affiliates. (b) In the course of performing services hereunder and otherwise, the Executive has had, and it is anticipated that the Executive will from time to time have, access to confidential records, data, customer lists, trade secrets and similar confidential information owned or used in the course of business by CompDent and its subsidiaries and affiliates (the "Confidential Information"). The Executive agrees (i) to hold the Confidential Information in strict confidence, (ii) not to disclose the Confidential Information to any Person (other than in the regular business of CompDent), and (iii) not to use, directly or indirectly, any of the Confidential Information for any competitive or commercial purpose; provided, however, that the limitations set forth above shall not apply to any Confidential Information which (A) is then generally 30 6 known to the public; (B) became or becomes generally known to the public through no fault of the Executive; or (C) is disclosed in accordance with an order of a court of competent jurisdiction or applicable law. Upon the termination of the Executive's employment with CompDent, all data, memoranda, customer lists, notes, programs and other papers and items, and reproductions thereof relating to the foregoing matters in the Executive's possession or control, shall be returned to CompDent and remain in its possession. (c) For purposes of this Section 8, the following terms shall have the meanings specified unless defined otherwise herein: (i) "Affiliates" shall mean any subsidiary company of CompDent or American Prepaid Professional Services, Inc. (subsidiary company to CompDent), whether wholly or partially owned, including but not by way of limitation, Dental Health Management, Inc. (ii) "Affiliated Person" shall mean any individual, professional, or otherwise, who is providing, or has provided, during a one-year period immediately prior to the date of any hiring or solicitation for hire of such individual, services to any dental office or facility under management by Dental Health Management, Inc.; (iii) "Employee" shall mean any individual employed currently or during a one-year period immediately prior to the date of any hiring or solicitation for hire of such individual by CompDent or its Affiliates; (iv) "Designated Industry" shall mean (A) the business of providing dental health care services and any and all activities relating thereto, including, without limitation, the provision and administration of discount fee-for-service dental plans, prepaid dental plans, PPO dental plans and indemnity dental plans and operation and/or ownership of dental health care practices, (B) the business of providing dental practice management, and (C) any other business conducted by CompDent or its Affiliates; (v) "Person" shall mean an individual, a corporation, an association, a partnership, an estate, a trust, and any other entity or organization. 9. Specific Performance: Severability. It is specifically understood and agreed that any breach of the provisions of this Agreement including, without limitation, Section 8 hereof by the Executive is likely to result in irreparable injury to CompDent and its subsidiaries and affiliates, that the remedy at law alone will be inadequate remedy for such breach and that, in addition to any other remedy it may have, CompDent shall be entitled to enforce the specific performance of this Agreement by the Executive and to seek both temporary and permanent injunctive relief (to the extent permitted by law), without the necessity of proving actual damages. In case any of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, any such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this unenforceable 31 7 provision had been limited or modified (consistent with its general intent) to the extent necessary to make it valid, legal and enforceable, or if it shall not be possible to so limit or modify such invalid, illegal or unenforceable provision or part of a provision, this Agreement shall be construed as if such invalid, illegal or unenforceable provision or part of a provision had never been contained in this Agreement. 10. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or mailed by certified or registered mail (return receipt requested) as follows: To CompDent: 100 Mansell Court East Suite 400 Roswell, Georgia 30076 Attention: Chief Executive Officer To the Executive: 805 N. Curtiswood Lane Nashville, Tennessee 37204 or to such other address of which any party may notify the other parties as provided above. Notices shall be effective as of the date of such delivery or mailing. 11. Miscellaneous. This Agreement shall be governed by and construed under the laws of the State of Florida, and shall not be amended, modified or discharged in whole or in part except by an Agreement in writing signed by both of the parties hereto. The failure of either of the parties to require the performance of a term or obligation or to exercise any right under this Agreement or the waiver of any breach hereunder shall not prevent subsequent enforcement of such term or obligation or exercise of such right or the enforcement at any time of any other right hereunder or be deemed a waiver of any subsequent breach of the provision so breached, or of any other breach hereunder. This Agreement shall inure to the benefit of successors of CompDent by way of merger, consolidation or transfer of all or substantially all of the assets of CompDent, and may not be assigned by the Executive. This Agreement supersedes all prior understandings and agreements between the parties relating to the subject matter hereof. IN WITNESS WHEREOF, the parties have executed this Agreement under seal as of the date first set forth above. COMPDENT CORPORATION By: /s/ David R. Klock --------------------------- Name: David R. Klock Title: Chairman and CEO EXECUTIVE: /s/ Philip Hertik --------------------------- Philip Hertik 32 EX-10.3 4 STOCK OPTION AGREEMENT (IMMEDIATE VESTING) 1 EXHIBIT 10.3 FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT UNDER THE COMPDENT CORPORATION 1997 STOCK OPTION PLAN NAME OF OPTIONEE: NO. OF OPTION SHARES: GRANT DATE: OPTION EXERCISE PRICE: EXPIRATION DATE: Pursuant to the CompDent Corporation 1997 Stock Option Plan (the "Plan"), CompDent Corporation, a Delaware corporation (the "Company"), hereby grants to the person named above (the "Optionee"), who is an officer or full-time employee of the Company or any of its Subsidiaries, an option (the "Stock Option") to purchase on or prior to the expiration date specified above (subject to the further provisions hereof, the "Expiration Date") all or any part of the number of shares of Common Stock, par value $0.01 per share ("Common Stock"), of the Company indicated above (the "Option Shares"), at the per share option exercise price specified above, subject to the terms and conditions set forth herein and in the Plan. All capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Plan. 1. VESTING AND EXERCISABILITY. This Stock Option shall be fully vested as of the date hereof and may be exercised in whole or in part at any time prior to the Expiration Date, subject to the terms of this Section and Section 6. In the event that the Optionee's Service Relationship (as hereinafter defined) with the Company and its Subsidiaries terminates as a result of the Optionee's resignation, retirement, or termination by the Company, upon the Optionee's death or disability, or for any other reason, regardless of the circumstances thereof, this Stock Option may thereafter be exercised by the Optionee until the earlier of (i) twelve months from the effective date of such termination or (ii) the Expiration Date, subject to extension in the discretion of the Committee, whereupon it shall terminate to the extent not exercised. For purposes hereof, a "Service Relationship" shall mean any relationship as an employee, part-time employee or consultant of the Company or any Subsidiary of the Company such that, for example, a Service Relationship shall be deemed to continue without interruption in the event the Optionee's status changes from full-time employee to part-time employee or consultant. 2. EXERCISE OF STOCK OPTION. (a) The Optionee may exercise only this Stock Option in the following manner: Prior to the Expiration Date (subject to Sections 1 and 6), the Optionee may deliver a Stock Option Exercise Notice (an "Exercise Notice") in the form of Appendix A hereto indicating his or her election to purchase some or all of the Option Shares. Such notice shall specify the number of shares to be purchased. Payment of the purchase price for the Option Shares may be made by one or more (if applicable) of the following methods: (a) in cash, by certified or bank check or other instrument acceptable to the Committee; (b) in the form of shares of Common Stock that are not then subject to restrictions under any Company plan and that have been held by the Optionee for at least six months; (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 option purchase price, provided that in the event the Optionee chooses to pay the option 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 Committee shall prescribe as a condition of such payment procedure; or (d) a combination of (a), (b) and (c) above. Payment instruments will be received subject to collection. (b) Certificates for the Option Shares so purchased will be issued and delivered to the Optionee upon compliance to the satisfaction of the Committee with all requirements under applicable laws or regulations in connection with such issuance. Until the Optionee shall have complied with the requirements hereof and of the Plan, the Company shall be under no obligation to issue the Option Shares subject to this Stock Option, and the determination of the Committee as to such compliance shall be final and binding on the Optionee. The Optionee shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of stock subject to this Stock Option unless and until this Stock Option shall have been exercised pursuant to the terms hereof, the Company shall have issued and delivered the Option Shares to the Optionee, and the Optionee's name shall have been entered as a stockholder of record on the books of the Company. Thereupon, the Optionee shall have full dividend and other ownership rights with respect to such Option Shares, subject to the terms of this Agreement. 33 2 (c) Notwithstanding any other provision hereof or of the Plan, no portion of this Stock Option shall be exercisable after the Expiration Date hereof or such earlier expiration date as is specified in Section 1 or 6 hereof. 3. INCORPORATION OF PLAN. Notwithstanding anything herein to the contrary, this Stock Option shall be subject to and governed by all the terms and conditions of the Plan. 4. TRANSFERABILITY. This Stock Option or any portion thereof 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 this Agreement including without limitation termination of the Stock Option on the date which is twelve months following termination of the Optionee's Service Relationship as provided in Section 1. Further this Stock Option shall be transferable by the laws of descent and distribution. This Agreement is personal to the Optionee and is not otherwise transferable by the Optionee in any manner other than by will or by the laws of descent and distribution and may be exercised during the Optionee's lifetime only by the Optionee. The Optionee may elect to designate a beneficiary by providing written notice of the name of such beneficiary to the Company, and may revoke or change such designation at any time by filing written notice of revocation or change with the Company; such beneficiary may exercise the Optionee's Stock Option in the event of the Optionee's death to the extent provided herein. If the Optionee does not designate a beneficiary, or if the designated beneficiary predeceases the Optionee, the Optionee's personal representative, heirs or legatees to whom ownership has passed may exercise this Stock Option to the extent provided herein in the event of the Optionee's death. 5. ADJUSTMENT UPON CHANGES IN CAPITALIZATION. Subject to Section 6 hereof, if the shares of Common Stock as a whole are increased, decreased, changed or converted into or exchanged for a different number or kind of shares or securities of the Company, whether through merger, consolidation, reorganization, recapitalization, reclassification, stock dividend, stock split, combination of shares, exchange of shares, change in corporate structure or the like, an appropriate and proportionate adjustment shall be made in the number and kind of shares and in the per share exercise price of shares subject to any unexercised portion of this Stock Option. Subject to Section 6 hereof, in the event of any such adjustment in this Stock Option, the Optionee thereafter shall have the right to purchase the number of shares under this Stock Option at the per share price, as so adjusted, which the Optionee could purchase at the total purchase price applicable to this Stock Option immediately prior to such adjustment. Adjustments under this Section 5 shall be determined by the Option Committee of the Company and such determination shall be final, binding and conclusive. 6. 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 entity (other than a holding company formed by the Company), (c) the sale of all or substantially all of the assets of the Company to another person or entity, or (d) the sale of all of the stock of the Company to an unrelated person or entity, this Stock Option shall terminate on the effective date of such transaction or event, unless provision is made in such transaction in the sole discretion of the parties thereto for the assumption of this Stock Option or the substitution for this Stock Option of a new stock option of the successor person or entity or a parent or subsidiary thereof, with such adjustment as to the number and kind of shares and the per share exercise price as such parties 34 3 shall agree to. In the event of any transaction which will result in such termination, the Company shall give to the Optionee written notice thereof at least thirty (30) days prior to the closing or anticipated consummation date, or the record date for such transaction, if earlier. Until the earlier to occur of such effective date or record date, the Optionee may exercise all or any portion of this Stock Option, but after such effective date or record date, as the case may be, the Optionee may not exercise this Stock Option unless it is assumed or substituted by the successor as provided above. 7. WITHHOLDING TAXES. (a) The Optionee shall, not later than the date as of which the exercise of this Stock Option becomes a taxable event for federal income tax purposes, pay to the Company or make arrangements satisfactory to the Committee for payment of any federal, state, and local taxes required by law to be withheld on account of such taxable event. The Optionee may elect to have such tax withholding obligation satisfied, in whole or in part, by authorizing the Company to withhold from shares of Common Stock to be issued or transferring to the Company, a number of shares of Common Stock with an aggregate Fair Market Value that would satisfy the withholding amount due. For purposes of this Section 7 "Fair Market Value" on any given date means the last reported sale price at which Common Stock is traded on such date or, if no Common Stock is traded on such date, the next preceding date on which Common Stock was traded, as reflected on the principal stock exchange or, if applicable, any other national stock exchange on which the Common Stock is traded or admitted to trading. The Optionee acknowledges and agrees that the Company or any subsidiary of the Company has the right to deduct from payments of any kind otherwise due to the Optionee, or from the Option Shares to be issued in respect of an exercise of this Stock Option, any federal, state or local taxes of any kind required by law to be withheld with respect to the issuance of Option Shares to the Optionee. 8. RESTRICTIVE AGREEMENTS. In consideration of the relationship established by the employment of Optionee by the Company and the benefits being provided pursuant said employment including, but not by way of limitation, the grant of the Stock Option to the Optionee pursuant to this Agreement, the Optionee hereby agrees with that: (a) Covenant Not to Solicit/Hire. 1. For a period of twenty four (24) consecutive calendar months following the Termination of Relationship, Optionee shall not, for himself/herself or on behalf of any other person, persons, firm, partnership, corporation, or company call upon any Customer(s), and/or Agents of the Company for the purpose of soliciting, selling, renting, or other business promotion to any of said Customer(s) and/or Agents, products and/or services similar to products and/or services sold and/or delivered by the Company; nor will he/she in any way, directly or indirectly, for himself/herself or on behalf of, or in conjunction with any other person, persons, firm, partnership, corporation or company divert, or take away any Customer(s) and/or Agents of the Company during the twenty four (24) month term following Termination of Relationship; nor will he/she, directly or indirectly, for himself/herself or on behalf of, or in conjunction with any other person, persons, firm, partnership, corporation, or company, induce or attempt to induce any Customer, Agent, Provider, employee, and/or representative of the Company to sever or otherwise alter their relationship with the Company for twenty four (24) consecutive calendar months following Termination of Relationship. 35 4 (2) For a period of twenty four (24) consecutive calendar months following the Termination of Relationship, Executive shall not, for himself/herself or on behalf of any other person, persons, firm, partnership, corporation, or company, whether or not Executive has any part or involvement with the foregoing, hire or retain the services of any Employee of the Company for any purpose. (b) Non-Disclosure of Trade Secrets and Other Proprietary Information. (1) Optionee acknowledges and understands that, during his/her association with the Company, he/she may have access to and become familiar with the various trade secrets, technological expertise and know-how which are owned by and are the property of the Company, including but not limited to the Confidential Information (as defined herein). (2) In perpetuity hereafter, Optionee expressly agrees that until such time as said Confidential Information lawfully becomes part of the public domain (including generally known information with the industry), other than as a result of Optionee's acts or omissions to act, not to disclose any of the aforesaid trade secrets, technological expertise, know-how or Confidential Information, directly or indirectly, nor to use same in any way, except in connection with his/her employment duties hereunder or as expressly authorized by the Company in writing. (3) Optionee shall deliver to the Company at the Termination of the Relationship, or at any other time the Company may request, all memoranda, notes, plans, records, reports, computer tapes and software and other documents and data (and all copies thereof) relating to the Confidential Information, work product or the business of the Company which he/she may then possess or have under his/her control. (c) No Adverse Action. Executive further agrees not to knowingly participate in, directly or indirectly, the dissemination, verbal or otherwise, advertisement or publication of any statement which unfavorably comments on, unfavorably compares the services or products of the Company to that of another, or generally holds out in an unfavorable manner the personnel or management of the Company or the services or products designed, manufactured, handled, managed or provided by the Company, either along or in cooperation with others, during the Term of Employment and for a period of twenty four (24) consecutive calendar months following the Termination of Relationship. (d) The parties acknowledge that the time, scope and other provisions of this Section 8 are reasonable under the circumstances. In the event that any covenant contained in this Section 8 shall be determined by any court of competent jurisdiction to be unenforceable by reason of its extending for too great a period of time or by reason of its being too extensive in any other respect, it shall be interpreted to extend only over the maximum period of time for which it may be enforceable and/or to the maximum extent in all other respects as to which it may be enforceable, all as determined by such court in such action. The existence of any claim or cause of action which the Optionee may have against the Company shall not constitute a defense or bar to the enforcement of any of the provisions of this Agreement and shall be pursued through separate court action by the Optionee. (e) Definitions. For purposes of this paragraph 8 the following terms shall have the meanings as indicated. (1) "Affiliates" shall mean all persons or entities who, at any time during the period of twenty four (24) months beginning on the date of the Termination of Relationship, are (i) entities or persons controlling, controlled by or under common control 36 5 with the party in question, directly or indirectly, (ii) executive officers or directors of that party, (iii) 50% beneficial owners of that party's stock, or (iv) entities or persons for which that party manages or oversees business operations pursuant to a contract, Agreement or arrangement of any nature. (2) "Agent" shall mean a person or entity authorized to act on behalf of the Company or its Affiliates in matters concerning the business of the Company and its Affiliates, including, but not limited to, individuals or entities which have contracted with the Company or its Affiliates as an "Agent", "General Agent", "Regional General Agent", or "Master General Agreement" as those terms are defined by the custom and usage within the industry. (3) "Company" shall mean the American Prepaid Professional Services, Inc., its subsidiaries, whether wholly or partially owned, and its affiliates, and CompDent Corporation, parent company of American Prepaid. (4) "Confidential Information" shall mean, to the extent not in the public domain or known generally within the industry; names, addresses, telephone numbers, contact persons and other identifying information relating to the Company's operation, Providers, Agents, employees and/or Customers; information with respect to the needs and requirements of various Customers of the Company for services, including the dates on which any contracts held by the Company with such Customers will terminate or be subject to renewal; all business records and personnel data relating to the Company's employees, independent contractors, advisors, and consultants, including compensation arrangements of such persons or entities with the Company. (5) "Customer" shall mean a natural person or business entity with which the Company has solicited or established an advantageous business relationship, either through oral or written contract or other recognized commitment, to obtain or receive the products or services (including, but not limited to, the delivery of prepaid dental plans) of the Company. (6) "Provider" shall mean any dental facility, dental/medical facility, dentist, professional association, partnership, corporation or other entity or professional with which the Company has established a contractual or other business relationship for the rendering of service. (7) "Termination of Relationship" shall mean the cessation of the provision of services to the Company by Optionee, for any reason, with or without cause, voluntary or involuntary, and whether in the capacity as employee, independent contractor, advisor, consultant or other such similar paid position. Optionee recognizes that the foregoing provisions in this Section 8 are reasonable and necessary for the protection of the Company, and that the Company will be irrevocably harmed if same are not specifically enforced, and that the remedy at law alone would be an inadequate remedy for such breach. Accordingly, the parties agree that the foregoing restrictive covenants may be enforced by the Company by means of a preliminary or permanent injunction, without the necessity of proving actual damages and without prejudice to such damage rights as may exist. Therefore, if the Company should institute an action or proceeding to specifically enforce the provisions hereof, Optionee hereby waives the claim or defense therein that the Company has an adequate remedy at law, and shall not urge in such action or proceeding the claim or defense that such remedy at law exists. If the Company is required to post a bond in connection with obtaining any temporary or permanent injunctive relief, the parties hereto agree that such bond shall be limited in amount to $10,000 and that such amount is reasonable and adequate for such bond. 37 6 9. CONSENT TO JURISDICTION. The Optionee hereby irrevocably submits to the non-exclusive jurisdiction to enforce the covenants contained in Section 8 of this Agreement of the courts of any state within the geographic scope of such covenants. In the event that the courts of one or more of such states shall hold such covenants unenforceable (in whole or in part) by reason of the breadth of such scope or otherwise, it is the intention of the parties hereto that such determination shall not bar or in any way affect the right of the Company to the relief provided for herein in the courts of any other states within the geographic scope of such covenants, as to breaches of such covenants in such other respective states, the above covenants as they relate to each state being, for this purpose, severable into diverse and independent covenants. 10. MISCELLANEOUS PROVISIONS. (a) Equitable Relief. The parties hereto agree and declare that legal remedies may be inadequate to enforce the provisions of this Agreement and that equitable relief, including specific performance and injunctive relief, may be used to enforce the provisions of this Agreement. (b) Change and Modifications. This Agreement may not be orally changed, modified or terminated, nor shall any oral waiver of any of its terms be effective. This Agreement may be changed, modified or terminated only by an agreement in writing signed by the Company and the Optionee. (c) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. (d) Headings. The headings are intended only for convenience in finding the subject matter and do not constitute part of the text of this Agreement and shall not be considered in the interpretation of this Agreement. (e) Saving Clause. If any provision(s) of this Agreement shall be determined to be illegal or unenforceable, such determination shall in no manner affect the legality or enforceability of any other provision hereof. (f) Notices. All notices, requests, consents and other communications shall be in writing and be deemed given when delivered personally, by telex or facsimile transmission or when received if mailed by first class registered or certified mail, postage prepaid. Notices to the Company or the Optionee shall be addressed as set forth underneath their signatures below, or to such other address or addresses as may have been furnished by such party in writing to the other. (g) Benefit and Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto, their respective successors, permitted assigns, and legal representatives. The Company has the right to assign this Agreement, and such assignee shall become entitled to all the rights of the Company hereunder to the extent of such assignment. (h) Counterparts. For the convenience of the parties and to facilitate execution, this Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same document. COMPDENT CORPORATION By: ---------------------------------------------- David R. Klock Chairman of the Board of Directors and Title: Chief Executive Officer ------------------------------------------- 38 7 The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned. Dated as of _______________, 19___ OPTIONEE: -------------------------- Optionee's Address: -------------------------- -------------------------- -------------------------- Designated Beneficiary: -------------------------- Beneficiary's Address: -------------------------- -------------------------- 39 8 APPENDIX A STOCK OPTION EXERCISE NOTICE CompDent Corporation Attention: Chief Financial Officer - ---------------- - ---------------- Dear Sirs: Pursuant to the terms of my stock option agreement dated ____________ (the "Agreement") under the CompDent Corporation 1997 Stock Option Plan, I, [INSERT NAME] ___________________, hereby [CIRCLE ONE] partially/fully exercise such option by including herein payment in the amount of $_______ representing the purchase price for [FILL IN NUMBER OF OPTION SHARES] __________ option shares. I have chosen the following form(s) of payment: [ ] 1. Cash [ ] 2. [CERTIFIED OR BANK] Check payable to CompDent Corporation [ ] 3. Other (as described in the Agreement (please describe) _______. Sincerely yours, Please Print Name: 40 EX-10.4 5 STOCK OPTION AGREEMENT (GRADUAL VESTING) 1 EXHIBIT 10.4 FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT UNDER THE COMPDENT CORPORATION 1997 STOCK OPTION PLAN NAME OF OPTIONEE: NO. OF OPTION SHARES: GRANT DATE: OPTION EXERCISE PRICE: EXPIRATION DATE: Pursuant to the CompDent Corporation 1997 Stock Option Plan (the "Plan"), CompDent Corporation, a Delaware corporation (the "Company"), hereby grants to the person named above (together with his or her successors or assigns as contemplated hereby, the "Optionee"), an option (the "Stock Option") to purchase on or prior to the expiration date specified herein, all or any part of the number of shares of Common Stock, par value $0.01 per share ("Common Stock"), of the Company indicated above (the "Option Shares"), at the per share option exercise price specified above, subject to the terms and conditions set forth herein and in the Plan. All capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Plan. 1. VESTING AND EXERCISABILITY. (a) No portion of this Stock Option may be exercised until such portion shall have vested. (b) Except as set forth below and in Section 6, and subject to the determination of the Compensation Committee of the Board of Directors of the Company or the Board of Directors of the Company, as applicable (the "Committee"), in its sole discretion to accelerate the vesting schedule hereunder, this Stock Option shall be vested and exercisable with respect to the following number of Option Shares on the dates indicated: Incremental (Aggregate) Number of Option Shares Exercisable* Vesting Date ----------------------------- ------------ 1. 2. 3. 4. Further, and notwithstanding anything herein to the contrary and without limitation of Section 6, this Stock Option shall be deemed vested and exercisable in full upon the date on which the Optionee's employment with the Company and its Subsidiaries terminates if such termination occurs in the year following a Change of Control (as hereinafter defined) of the Company or any entity controlling the Company (a "Parent") and either (i) such termination occurs pursuant to or under the circumstances contemplated by Section 6(e) or Section 6(f) of the Employment Agreement dated_____________, between the Company and the Optionee (the "Employment Agreement") (i.e., without cause termination by the Company or termination by the Optionee following a material and uncured default by the Company) or (ii) without limitation of clause (i), such termination is preceded during such year by any material elimination or adverse modification in the duties, title, principal employment location or compensation of the Optionee without his or her written consent, subject, however to the - -------- * Subject to Section 5 41 2 following sentence. Notwithstanding the foregoing, in the event that the Company receives written advice from its independent public accountants in connection with any transaction constituting a Change of Control (as hereinafter defined) to the effect that vesting of this Stock Option under the circumstances contemplated by the preceding sentence would preclude or otherwise adversely affect the ability of the Company or any other party to such transaction to account for the same as a "pooling of interests" within the meaning of APB No. 16 (or any successor provision), which transaction would otherwise qualify for such accounting treatment, then vesting of this Stock Option shall not accelerate on a subsequent termination of employment within the year following a Change of Control as contemplated by the preceding sentence, and in such circumstance this Stock Option shall continue to vest in accordance with the annual schedule set forth above. For purposes hereof, a "Change of Control" shall mean any of the following events occurring after the date hereof: (i) the direct or indirect beneficial ownership (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Regulation 13D-G thereunder) of a majority of the outstanding Common Stock of the Company or Parent is acquired or becomes held by any person or group of persons (within the meaning of Section 13(d)(3) of the Exchange Act) (a "Group"), (ii) the sale, mortgage, lease or other transfer to any person or Group in one or more transactions not in the ordinary course of business of all or substantially all of the assets on a consolidated basis of Parent, the Company and the Company's Subsidiaries (taken as a whole), (iii) a change of stock ownership of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A promulgated under the Exchange Act and any successor Item of a similar nature; or (iv) the acquisition of beneficial ownership, directly or indirectly, by any person (as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act) of securities of the Company or Parent representing 25% or more of the combined voting power of the Company or Parent's then outstanding securities; or (v) a change during any period of two consecutive years of a majority of the members of the Board of Directors of the Company or Parent for any reason. (c) In the event that the Optionee's Service Relationship (as hereinafter defined) with the Company and its Subsidiaries terminates for any reason or under any circumstances other than those described in Section 1(b) above, including the Optionee's resignation, retirement or termination by the Company, upon the Optionee's death or disability, or for any other reason, regardless of the circumstances thereof, this Stock Option shall no longer vest or become exercisable with respect to any Option Shares not vested as of the date of such termination from and after the date of such termination, and this Stock Option may thereafter be exercised, to the extent it was vested and exercisable on such date of such termination, until the Expiration Date contemplated by Section 1(d), except as the Committee may otherwise determine. Upon a termination of employment following a Change of Control under the circumstances contemplated by Section 1(b), vesting shall occur or continue, as applicable, as contemplated by such Section. For purposes hereof, a "Service Relationship" shall mean any relationship as an employee, part-time employee or consultant of the Company or any Subsidiary of the Company such that, for example, a Service Relationship shall be deemed to continue without interruption in the event the Optionee's status changes from full-time employee to part-time employee or consultant. 42 3 (d) Once any portion of this Stock Option becomes vested and exercisable, it shall continue to be exercisable by the Optionee or his or her transferees or successors as contemplated herein at any time or times prior to the earlier of (i) the date which is 12 months following the date on which the Optionee's Service Relationship with the Company terminates for any reason or (ii) ____________, _____, subject to the provisions hereof, including, without limitation, Section 6 hereof which provides for the termination of unexercised options upon completion of certain transactions as described therein (the "Expiration Date"). 2. EXERCISE OF STOCK OPTION. (a) The Optionee may exercise only vested portions of this Stock Option and only in the following manner: Prior to the Expiration Date (subject to Section 6), the Optionee may deliver a Stock Option Exercise Notice (an "Exercise Notice") in the form of Appendix A hereto indicating his or her election to purchase some or all of the Option Shares with respect to which this Stock Option has vested at the time of such notice. Such notice shall specify the number of shares to be purchased. Payment of the purchase price for the Option Shares may be made by one or more (if applicable) of the following methods: (a) in cash, by certified or bank check or other instrument acceptable to the Committee; (b) in the form of shares of Common Stock that are not then subject to restrictions under any Company plan and that have been held by the Optionee for at least six months; (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 option purchase price, provided that in the event the Optionee chooses to pay the option 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 Committee shall prescribe as a condition of such payment procedure; or (d) a combination of (a), (b) and (c) above. Payment instruments will be received subject to collection. (b) Certificates for the Option Shares so purchased will be issued and delivered to the Optionee upon compliance to the satisfaction of the Committee with all requirements under applicable laws or regulations in connection with such issuance. Until the Optionee shall have complied with the requirements hereof and of the Plan, the Company shall be under no obligation to issue the Option Shares subject to this Stock Option, and the determination of the Committee as to such compliance shall be final and binding on the Optionee. The Optionee shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of stock subject to this Stock Option unless and until this Stock Option shall have been exercised pursuant to the terms hereof, the Company shall have issued and delivered the Option Shares to the Optionee, and the Optionee's name shall have been entered as a stockholder of record on the books of the Company. Thereupon, the Optionee shall have full dividend and other ownership rights with respect to such Option Shares, subject to the terms of this Agreement. (c) Notwithstanding any other provision hereof or of the Plan, no portion of this Stock Option shall be exercisable by the Optionee or his or her transferees and successors after the Expiration Date hereof or such earlier expiration date as is specified in Section 1 hereof. 3. INCORPORATION OF PLAN. Notwithstanding anything herein to the contrary, this Stock Option shall be subject to and governed by all the terms and conditions of the Plan. 43 4 4. TRANSFERABILITY. Any portion of this Stock Option which is vested 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 this Agreement including without limitation termination of the Stock Option on the date which is twelve months following termination of the Optionee's Service Relationship as provided in Section 1(d). Further, this Stock Option shall be transferable by the laws of descent and distribution. This Agreement is personal to the Optionee and is not otherwise transferable by the Optionee in any manner and may be exercised during the Optionee's lifetime only by the Optionee. The Optionee may elect to designate a beneficiary by providing written notice of the name of such beneficiary to the Company, and may revoke or change such designation at any time by filing written notice of revocation or change with the Company; such beneficiary may exercise the Optionee's Stock Option in the event of the Optionee's death to the extent provided herein. If the Optionee does not designate a beneficiary, or if the designated beneficiary predeceases the Optionee, the Optionee's personal representative, heirs or legatees to whom ownership has passed may exercise this Stock Option to the extent provided herein in the event of the Optionee's death. 5. ADJUSTMENT UPON CHANGES IN CAPITALIZATION. Subject to Section 6 hereof, if the shares of Common Stock as a whole are increased, decreased, changed or converted into or exchanged for a different number or kind of shares or securities of the Company, whether through merger, consolidation, reorganization, recapitalization, reclassification, stock dividend, stock split, combination of shares, exchange of shares, change in corporate structure or the like, an appropriate and proportionate adjustment shall be made in the number and kind of shares and in the per share exercise price of shares subject to any unexercised portion of this Stock Option. Subject to Section 6 hereof, in the event of any such adjustment in this Stock Option, the Optionee thereafter shall have the right to purchase the number of shares under this Stock Option at the per share price, as so adjusted, which the Optionee could purchase at the total purchase price applicable to this Stock Option immediately prior to such adjustment. Adjustments under this Section 5 shall be determined by the Committee of the Company and such determination shall be final, binding and conclusive. 6. EFFECT OF CERTAIN TRANSACTIONS. In the case of (a) the dissolution or liquidation of the Company, (b) a merger, reorganization or consolidation in which a majority of the outstanding voting power of the Company is acquired by another person or entity (other than a holding company formed by the Company), (c) the sale of all or substantially all of the assets of the Company to another person or entity, or (d) the sale of all of the stock of the Company to an unrelated person or entity, other than a merger transaction to be accounted for as a Apooling of interests' under APB No. 16 in which the surviving entity assumes this Stock Option (a "Pooling Transaction"), this Stock Option shall be deemed fully vested and exercisable as of the closing or consummation of such transaction, provided that such acceleration and any notice of exercise of options that become vested as of such closing or consummation shall in all cases be subject to and contingent upon such closing or consummation. From and after the closing or consummation of any such transaction, other than a Pooling Transaction, this Stock Option shall terminate and no longer be exercisable as to any Option Shares unexercised on or prior to the closing or 44 5 consummation date of such transaction or event, unless provision is made in such transaction in the sole discretion of the parties thereto for the assumption of this Stock Option or the substitution for this Stock Option of a new stock option of the successor person or entity or a parent or subsidiary thereof, if any, with such adjustment as to the number and kind of shares and the per share exercise price as such parties shall agree to. In the event of a Pooling Transaction, this Stock Option shall remain in effect in accordance with its terms as provided herein and shall become an obligation of the surviving entity, with appropriate adjustments to the number and kind of shares an the per share exercise price as contemplated by Section 5. In the event of any transaction subject to this Section 6, the Company shall give to the Optionee written notice thereof at least thirty (30) days prior to the closing or anticipated consummation date, or the record date for such transaction, if earlier. 7. WITHHOLDING TAXES. The Optionee shall, not later than the date as of which the exercise of this Stock Option becomes a taxable event for federal income tax purposes, pay to the Company or make arrangements satisfactory to the Committee for payment of any federal, state, and local taxes required by law to be withheld on account of such taxable event. Subject to approval by the Committee, the Optionee may elect to have such tax withholding obligation satisfied, in whole or in part, by authorizing the Company to withhold from shares of Common Stock to be issued or transferring to the Company, a number of shares of Common Stock with an aggregate Fair Market Value that would satisfy the withholding amount due. For purposes of this Section 7 "Fair Market Value" on any given date means the last reported sale price at which Common Stock is traded on such date or, if no Common Stock is traded on such date, the next preceding date on which Common Stock was traded, as reflected on the principal stock exchange or, if applicable, any other national stock exchange on which the Common Stock is traded or admitted to trading. The Optionee acknowledges and agrees that the Company or any subsidiary of the Company has the right to deduct from payments of any kind otherwise due to the Optionee, or from the Option Shares to be issued in respect of an exercise of this Stock Option, any federal, state or local taxes of any kind required by law to be withheld with respect to the issuance of Option Shares to the Optionee. 8. RESTRICTIVE AGREEMENTS. In consideration of the relationship established by the employment of Optionee by the Company and the benefits being provided pursuant said employment including, but not by way of limitation, the grant of the Stock Option to the Optionee pursuant to this Agreement, the Optionee hereby agrees with that: (a) Covenant Not to Solicit/Hire. 1. For a period of twenty four (24) consecutive calendar months following the Termination of Relationship, Optionee shall not, for himself/herself or on behalf of any other person, persons, firm, partnership, corporation, or company call upon any Customer(s), and/or Agents of the Company for the purpose of soliciting, selling, renting, or other business promotion to any of said Customer(s) and/or Agents, products and/or services similar to products and/or services sold and/or delivered by the Company; nor will he/she in any way, directly or indirectly, for himself/herself or on behalf of, or in conjunction with any other person, persons, firm, partnership, corporation or company divert, or take away any Customer(s) and/or Agents of the Company during the twenty four (24) month term following 45 6 Termination of Relationship; nor will he/she, directly or indirectly, for himself/herself or on behalf of, or in conjunction with any other person, persons, firm, partnership, corporation, or company, induce or attempt to induce any Customer, Agent, Provider, employee, and/or representative of the Company to sever or otherwise alter their relationship with the Company for twenty four (24) consecutive calendar months following Termination of Relationship. (2) For a period of twenty four (24) consecutive calendar months following the Termination of Relationship, Executive shall not, for himself/herself or on behalf of any other person, persons, firm, partnership, corporation, or company, whether or not Executive has any part or involvement with the foregoing, hire or retain the services of any Employee of the Company for any purpose. (b) Non-Disclosure of Trade Secrets and Other Proprietary Information. (1) Optionee acknowledges and understands that, during his/her association with the Company, he/she may have access to and become familiar with the various trade secrets, technological expertise and know-how which are owned by and are the property of the Company, including but not limited to the Confidential Information (as defined herein). (2) In perpetuity hereafter, Optionee expressly agrees that until such time as said Confidential Information lawfully becomes part of the public domain (including generally known information with the industry), other than as a result of Optionee's acts or omissions to act, not to disclose any of the aforesaid trade secrets, technological expertise, know-how or Confidential Information, directly or indirectly, nor to use same in any way, except in connection with his/her employment duties hereunder or as expressly authorized by the Company in writing. (3) Optionee shall deliver to the Company at the Termination of the Relationship, or at any other time the Company may request, all memoranda, notes, plans, records, reports, computer tapes and software and other documents and data (and all copies thereof) relating to the Confidential Information, work product or the business of the Company which he/she may then possess or have under his/her control. (c) No Adverse Action. Executive further agrees not to knowingly participate in, directly or indirectly, the dissemination, verbal or otherwise, advertisement or publication of any statement which unfavorably comments on, unfavorably compares the services or products of the Company to that of another, or generally holds out in an unfavorable manner the personnel or management of the Company or the services or products designed, manufactured, handled, managed or provided by the Company, either along or in cooperation with others, during the Term of Employment and for a period of twenty four (24) consecutive calendar months following the Termination of Relationship. (d) The parties acknowledge that the time, scope and other provisions of this Section 8 are reasonable under the circumstances. In the event that any covenant contained in this Section 8 shall be determined by any court of competent jurisdiction to be unenforceable by reason of its extending for too great a period of time or by reason of its being too extensive in any other respect, it shall be interpreted to extend only over the maximum period of time for which it may be enforceable and/or to the maximum extent in all other respects as to which it may be enforceable, all as determined by such court in such action. The existence of any claim or cause of action which the Optionee may have against the Company shall not constitute a 46 7 defense or bar to the enforcement of any of the provisions of this Agreement and shall be pursued through separate court action by the Optionee. (e) Definitions. For purposes of this paragraph 8 the following terms shall have the meanings as indicated. (1) "Affiliates" shall mean all persons or entities who, at any time during the period of twenty four (24) months beginning on the date of the Termination of Relationship, are (i) entities or persons controlling, controlled by or under common control with the party in question, directly or indirectly, (ii) executive officers or directors of that party, (iii) 50% beneficial owners of that party's stock, or (iv) entities or persons for which that party manages or oversees business operations pursuant to a contract, Agreement or arrangement of any nature. (2) "Agent" shall mean a person or entity authorized to act on behalf of the Company or its Affiliates in matters concerning the business of the Company and its Affiliates, including, but not limited to, individuals or entities which have contracted with the Company or its Affiliates as an "Agent", "General Agent", "Regional General Agent", or "Master General Agreement" as those terms are defined by the custom and usage within the industry. (3) "Company" shall mean the American Prepaid Professional Services, Inc., its subsidiaries, whether wholly or partially owned, and its affiliates, and CompDent Corporation, parent company of American Prepaid. (4) "Confidential Information" shall mean, to the extent not in the public domain or known generally within the industry; names, addresses, telephone numbers, contact persons and other identifying information relating to the Company's operation, Providers, Agents, employees and/or Customers; information with respect to the needs and requirements of various Customers of the Company for services, including the dates on which any contracts held by the Company with such Customers will terminate or be subject to renewal; all business records and personnel data relating to the Company's employees, independent contractors, advisors, and consultants, including compensation arrangements of such persons or entities with the Company. (5) "Customer" shall mean a natural person or business entity with which the Company has solicited or established an advantageous business relationship, either through oral or written contract or other recognized commitment, to obtain or receive the products or services (including, but not limited to, the delivery of prepaid dental plans) of the Company. (6) "Provider" shall mean any dental facility, dental/medical facility, dentist, professional association, partnership, corporation or other entity or professional with which the Company has established a contractual or other business relationship for the rendering of service. (7) "Termination of Relationship" shall mean the cessation of the provision of services to the Company by Optionee, for any reason, with or without cause, voluntary or involuntary, and whether in the capacity as employee, independent contractor, advisor, consultant or other such similar paid position. Optionee recognizes that the foregoing provisions in this Section 8 are reasonable and necessary for the protection of the Company, and that the Company will be irrevocably harmed if same are not specifically enforced, and that the remedy at law alone would be an inadequate remedy for such breach. Accordingly, the parties agree that the foregoing restrictive covenants may be enforced by the Company by means of a preliminary or permanent injunction, without 47 8 the necessity of proving actual damages and without prejudice to such damage rights as may exist. Therefore, if the Company should institute an action or proceeding to specifically enforce the provisions hereof, Optionee hereby waives the claim or defense therein that the Company has an adequate remedy at law, and shall not urge in such action or proceeding the claim or defense that such remedy at law exists. If the Company is required to post a bond in connection with obtaining any temporary or permanent injunctive relief, the parties hereto agree that such bond shall be limited in amount to $10,000 and that such amount is reasonable and adequate for such bond. 9. CONSENT TO JURISDICTION. The Optionee hereby irrevocably submits to the non-exclusive jurisdiction to enforce the covenants contained in Sections 8 and 9 of this Agreement of the courts of any state within the geographic scope of such covenants. In the event that the courts of one or more of such states shall hold such covenants unenforceable (in whole or in part) by reason of the breadth of such scope or otherwise, it is the intention of the parties hereto that such determination shall not bar or in any way affect the right of the Company to the relief provided for herein in the courts of any other states within the geographic scope of such covenants, as to breaches of such covenants in such other respective states, the above covenants as they relate to each state being, for this purpose, severable into diverse and independent covenants. 10. MISCELLANEOUS PROVISIONS. (a) Equitable Relief. The parties hereto agree and declare that legal remedies may be inadequate to enforce the provisions of this Agreement and that equitable relief, including specific performance and injunctive relief, may be used to enforce the provisions of this Agreement. (b) Change and Modifications. This Agreement may not be orally changed, modified or terminated, nor shall any oral waiver of any of its terms be effective. This Agreement may be changed, modified or terminated only by an agreement in writing signed by the Company and the Optionee. (c) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. (d) Headings. The headings are intended only for convenience in finding the subject matter and do not constitute part of the text of this Agreement and shall not be considered in the interpretation of this Agreement. (e) Saving Clause. If any provision(s) of this Agreement shall be determined to be illegal or unenforceable, such determination shall in no manner affect the legality or enforceability of any other provision hereof. (f) Notices. All notices, requests, consents and other communications shall be in writing and be deemed given when delivered personally, by telex or facsimile transmission or when received if mailed by first class registered or certified mail, postage prepaid. Notices to the Company or the Optionee shall be addressed as set forth underneath their signatures below, or to such other address or addresses as may have been furnished by such party in writing to the other. (g) Benefit and Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto, their respective successors, permitted assigns, and legal representatives. The Company has the right to assign this Agreement, and such assignee shall become entitled to all the rights of the Company hereunder to the extent of such assignment. (h) Counterparts. For the convenience of the parties and to facilitate execution, this Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same document. COMPDENT CORPORATION By: --------------------------------------- David R. Klock Chairman of the Board of Directors and Title: Chief Executive Officer --------------------------------- 48 9 The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned. Dated as of ______________ OPTIONEE: ----------------------- Optionee's Address: ----------------------- ----------------------- Designated Beneficiary: ----------------------- Beneficiary's Address: ----------------------- ----------------------- 49 10 APPENDIX A STOCK OPTION EXERCISE NOTICE CompDent Corporation Attention: Chief Financial Officer - --------------------------- - --------------------------- Dear Sirs: Pursuant to the terms of my stock option agreement dated ____________ (the "Agreement") [under the CompDent Corporation 1997 Stock Option Plan], I, [INSERT NAME] ___________________, hereby [CIRCLE ONE] partially/fully exercise such option by including herein payment in the amount of $_______ representing the purchase price for [FILL IN NUMBER OF OPTION SHARES] __________ option shares. I have chosen the following form(s) of payment: [ ] 1. Cash [ ] 2. [CERTIFIED OR BANK] Check payable to CompDent Corporation [ ] 3. Other (as described in the Agreement (please describe)___. Sincerely yours, Please Print Name: 50 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1 45,982 0 4,299 0 0 52,811 3,721 0 203,840 23,092 0 101 0 0 119,529 203,840 0 76,035 0 64,838 (61) 0 1,446 10,227 4,504 5,723 0 0 0 5,723 .56 .56
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