-----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, EBjORO+8wUUWdIz9+JM/KSTmcyGJj1KBaEiyICmheYsvWol3CIie9ccTsjqPL+am 80bsT5tuD6VdIS6VTwnnlw== 0000950144-96-005637.txt : 19960816 0000950144-96-005637.hdr.sgml : 19960816 ACCESSION NUMBER: 0000950144-96-005637 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 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: 96614901 BUSINESS ADDRESS: STREET 1: 8800 ROSWELL RD STREET 2: STE 244 CITY: ATLANTA STATE: GA ZIP: 30350 BUSINESS PHONE: 770998936 MAIL ADDRESS: STREET 1: 8800 ROSWELL RD STE 244 CITY: ATLANTA STATE: GA ZIP: 30350 FORMER COMPANY: FORMER CONFORMED NAME: APPS DENTAL INC DATE OF NAME CHANGE: 19950315 10-Q 1 COMPDENT CORPORATION FORM 10-Q 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q --------------------- (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION FILE NUMBER 0-26090 COMPDENT CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 04-3185995 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) COMPDENT CORPORATION 8800 ROSWELL ROAD, SUITE 244 ATLANTA, GEORGIA 30350 (Address of principal executive offices) (770) 998-8936 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. /X/ Yes / / No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 10, 1996 - --------------------------------------------- --------------------------------------------- Common Stock, $.01 par value 10,064,393
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PAGE ---- Part I. Financial Information Item 1. Financial Statements................................................. 2 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ 9 Part II. Other Information Item 1. Legal Proceedings.................................................... 14 Item 6. Exhibits and Reports Filed on Form 8-K............................... 14 Signatures............................................................................... 15 Exhibit Index............................................................................ 16
3 PART I. FINANCIAL INFORMATION This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference include, among others, risk associated with the successful completion of new acquisitions, the effective integration of new acquisitions, general competitive and pricing pressures in the marketplace, and continued growth in the dental coverage marketplace. Other risk factors are listed in the Company's Prospectus and in required filings with the U.S. Securities and Exchange Commission. 1 4 ITEM 1. FINANCIAL STATEMENTS COMPDENT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, 1995 JUNE 30, -------- 1996 -------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents......................................... $ 26,082 $ 40,388 Premiums receivable from subscribers.............................. 4,022 3,374 Dental indemnity premiums due and unpaid.......................... 326 263 Income taxes receivable........................................... 239 0 Assets held for sale.............................................. 0 532 Deferred income taxes............................................. 4,838 1,416 Other current assets.............................................. 494 281 -------- -------- Total current assets...................................... 36,001 46,254 -------- -------- Restricted funds.................................................... 2,063 1,463 Property and equipment, net of accumulated depreciation............. 2,056 1,937 Excess of purchase price over net assets acquired................... 135,330 71,063 Noncompetition agreement............................................ 1,259 1,521 Unamortized loan fees............................................... 245 172 Reinsurance receivable.............................................. 5,423 6,332 Cash surrender value of officers' life insurance.................... 120 155 Deferred income taxes............................................... 597 243 Other assets........................................................ 978 256 -------- -------- $ 184,072 $129,396 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Unearned revenue.................................................. $ 11,842 $ 10,300 Accounts payable and accrued expenses............................. 12,904 7,372 Accrued interest payable.......................................... 354 0 Income taxes payable.............................................. 0 883 Life policy and contract claims reserves.......................... 68 37 Dental claims reserves............................................ 1,172 2,437 Other current liabilities......................................... 698 12 -------- -------- Total current liabilities................................. 27,038 21,041 -------- -------- Aggregate reserves for life policies and contracts.................. 5,339 5,323 Aggregate reserves for dental contracts............................. 0 172 Notes payable....................................................... 44,115 0 Deferred compensation expense....................................... 360 384 Other liabilities................................................... 344 299 -------- -------- Total liabilities......................................... 77,196 27,219 -------- -------- Commitments and contingencies (Note 3) Stockholders' equity: Common stock...................................................... 101 100 Additional paid-in capital........................................ 95,761 95,707 Retained earnings................................................. 11,014 6,370 -------- -------- Total stockholders' equity................................ 106,876 102,177 -------- -------- $ 184,072 $129,396 ======== ========
The accompanying notes are an integral part of these financial statements. 2 5 COMPDENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, ------------------------ 1996 1995 ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues: Subscriber premiums................................................. $33,384 $23,238 Other revenue....................................................... 1,377 238 ------- ------- Total revenue............................................... 34,761 23,476 ------- ------- Expenses: Dental care providers' fees and claim costs......................... 17,967 13,832 Commissions......................................................... 3,091 2,674 Premium taxes....................................................... 264 353 General and administrative.......................................... 7,831 3,896 Depreciation and amortization....................................... 1,287 533 ------- ------- Total expenses.............................................. 30,440 21,288 ------- ------- Operating income............................................ 4,321 2,188 ------- ------- Other (income) expense: Interest income..................................................... (145) (96) Interest expense.................................................... 434 630 Other, net.......................................................... (299) (7) ------- ------- (10) 527 ------- ------- Income before provision for income taxes and extraordinary item...................................................... 4,331 1,661 Income tax provision.................................................. 1,924 709 ------- ------- Net income before extraordinary item........................ 2,407 952 Extraordinary loss, net of applicable tax benefit of $305............. 0 (498) ------- ------- Net income.................................................. $ 2,407 $ 454 ======= ======= Income per common share: Income before extraordinary item.................................... $ 0.24 $ 0.15 Extraordinary loss.................................................. $ 0.00 $ (0.09) ------- ------- Net income per common share................................. $ 0.24 $ 0.06 ======= ======= Weighted average common shares outstanding............................ 10,185 5,903 ======= =======
The accompanying notes are an integral part of these financial statements. 3 6 COMPDENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, -------------------------- 1996 1995 ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues: Subscriber premiums............................................... $64,215 $46,028 Other revenue..................................................... 1,932 479 ------- ------- Total revenue............................................. 66,147 46,507 ------- ------- Expenses: Dental care providers' fees and claim costs....................... 34,448 27,532 Commissions....................................................... 6,104 5,266 Premium taxes..................................................... 523 677 General and administrative........................................ 14,603 7,636 Depreciation and amortization..................................... 2,334 1,099 ------- ------- Total expenses............................................ 58,012 42,210 ------- ------- Operating income.......................................... 8,135 4,297 ------- ------- Other (income) expense: Interest income................................................... (298) (127) Interest expense.................................................. 480 1,579 Other, net........................................................ (309) 4 ------- ------- (127) 1,456 ------- ------- Income before provision for income taxes and extraordinary item.................................................... 8,262 2,841 Income tax provision................................................ 3,618 1,232 ------- ------- Net income before extraordinary item...................... 4,644 1,609 Extraordinary loss, net of applicable tax benefit of $305........... 0 (498) ------- ------- Net income................................................ $ 4,644 $ 1,111 ======= ======= Income per common share: Income before extraordinary item.................................. $ 0.46 $ 0.27 Extraordinary loss................................................ $ 0.00 $ (0.10) ------- ------- Net income per common share............................... $ 0.46 $ 0.17 ======= ======= Weighted average common shares outstanding.......................... 10,191 5,084 ======= =======
The accompanying notes are an integral part of these financial statements. 4 7 COMPDENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ---------------------------- 1996 1995 ----------- ----------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net Income....................................................... $ 4,644 $ 1,111 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.............................. 2,374 1,196 (Gain) loss on sale of assets held for sale................ (309) 14 Extraordinary loss......................................... 0 803 Deferred income tax expense (benefit)...................... 327 (288) Changes in assets and liabilities: Premiums receivable from subscribers..................... 586 (391) Income taxes receivable/payable.......................... (1,126) 133 Other assets............................................. 382 (245) Unearned revenue......................................... 814 981 Accounts payable and accrued expenses.................... (538) (542) Other liabilities........................................ (2,584) (343) -------- ------- Net cash provided by operating activities............ 4,570 2,429 -------- ------- Cash flows from investing activities: Additions to property and equipment.............................. (609) (585) Increase in restricted cash...................................... (600) Proceeds from sales of assets held for sale...................... 911 656 Payments made in connection with proposed business acquisition... 0 (820) Acquisition of businesses, net of cash acquired.................. (62,468) 0 Cash surrender value of life insurance........................... 35 (27) -------- ------- Net cash used in investing activities................ (62,731) (776) -------- ------- Cash flows from financing activities: Proceeds from (repayment of) notes payable....................... 44,000 (26,600) Repayment of subordinated notes.................................. 0 (7,947) Retirement of preferred stock.................................... 0 (5,377) Loan fees paid................................................... (113) 0 Proceeds from issuance of common stock........................... 0 51,442 Proceeds from exercise of stock options.......................... 55 0 Payments made in connection with proposed public offering........ (87) 0 Other............................................................ 0 (34) -------- ------- Net cash provided by financing activities............ 43,855 11,484 -------- ------- (Decrease) increase in cash and cash equivalents................... (14,306) 13,137 Cash and cash equivalents, beginning of period..................... 40,388 9,680 -------- ------- Cash and cash equivalents, end of period........................... $ 26,082 $ 22,817 ======== ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest................................................... $ 126 $ 1,708 ======== ======= Income taxes............................................... $ 4,412 $ 793 ======== =======
The accompanying notes are an integral part of these financial statements. 5 8 COMPDENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS JUNE 30, 1996 1. BASIS OF PRESENTATION The unaudited consolidated balance sheet as of June 30, 1996 and the unaudited consolidated statements of operations and cash flows for the three and six months ended June 30, 1995 and 1996, in the opinion of management, have been prepared on the same basis as the audited consolidated financial statements and include all significant adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the results of the interim periods. The data disclosed in these notes to the financial statements for these periods are also unaudited. The consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto for the years ended December 31, 1995, 1994, and the periods July 1, 1993 to December 31, 1993, and January 1, 1993 to June 30, 1993 included in the 1995 Annual Report of CompDent Corporation and its subsidiaries, (the "Company", except as the context otherwise requires) on Form 10-K. Operating results of the Company for the six months or the three months ended June 30, 1996 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1996. 2. BUSINESS COMBINATIONS Effective May 8, 1996, the Company acquired all of the outstanding capital stock and options of Dental Care Plus Management, Corp. ("Dental Care"). The aggregate purchase price for Dental Care and its wholly-owned subsidiary, IHCS, was $38 million, of which the Company paid approximately $27 million in cash and assumed approximately $11 million in accrued liabilities. Dental Care and its subsidiary IHCS are based in Chicago, Illinois and provide managed dental care services through a network of dental care providers. Dental Care also acts as a third party administrator and provides management services to Health Care Systems, a non-profit dental company. The Company financed the purchase of Dental Care as well as satisfaction of the assumed liabilities by drawing down the Company's revolving credit facility. The acquisition of Dental Care was accounted for using the purchase method of accounting with the results of operations of the businesses acquired included from the effective date of the acquisition. The acquisition resulted in excess cost over fair value of net assets acquired of $39.7 million which is being amortized over 40 years. The following is a summary of assets acquired, liabilities assumed, and consideration paid in connection with the acquisition: Fair value of assets acquired........................................... $44,412,858 Cash paid for assets acquired, net of cash acquired..................... (26,836,356) Acquisition costs paid.................................................. (842,535) ----------- Liabilities assumed..................................................... $16,733,967 ===========
Effective January 8, 1996, the Company completed the acquisition of Texas Dental Plans, Inc., a Texas-based referral fee-for-service dental company, and affiliated entities ("Texas Dental"), for an aggregate cash purchase price of approximately $23.0 million. The acquisition was funded with net proceeds remaining from the Company's second stock offering. The Texas Dental acquisition was accounted for using the purchase method of accounting, with the results of operations of the businesses acquired included from the effective date of the acquisition. The acquisition resulted in excess of cost over fair value of net assets acquired of $26.0 million which is being amortized over 40 years. 6 9 COMPDENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of assets acquired, liabilities assumed, and consideration paid in connection with the acquisition: Fair value of assets acquired.......................................... $ 27,778,929 Cash paid for assets acquired, net of cash acquired.................... (23,132,042) Acquisition costs paid................................................. (540,000) ----------- Liabilities assumed.................................................... $ 4,106,887 ===========
Effective July 5, 1995, the Company completed the acquisition of CompDent Corporation ("CompDent"), a Kentucky-based provider of managed dental care plans, and affiliated entities for an aggregate purchase price (including transaction costs) of $33.6 million. The acquisition was financed partially through borrowings of $25 million under the Company's revolving credit facility and partially with proceeds remaining from the Company's initial public offering. The acquisition of CompDent was accounted for using the purchase method of accounting with the results of operations of the businesses acquired included from the effective date of the acquisition. The acquisition resulted in excess of cost over fair value of net assets acquired of $34.3 million which is being amortized over 40 years. The following is a summary of assets acquired, liabilities assumed, and consideration paid in connection with the acquisition: Fair value of assets acquired.......................................... $ 37,278,991 Cash paid for assets acquired, net of cash acquired.................... (29,823,133) Acquisition costs paid................................................. (1,060,156) ----------- Liabilities assumed.................................................... $ 6,395,702 ===========
Unaudited pro forma results of operations of the Company for the six months ended June 30, 1996 and 1995 are included below. Such pro forma presentation has been prepared assuming that the Dental Care and Texas Dental acquisitions had occurred as of January 1, 1996 and the Dental Care, Texas Dental, and CompDent acquisitions and the initial public offering and second offering had occurred as of January 1, 1995, respectively.
SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1996 1995 ---------------- ---------------- Revenues (in thousands)....................................... $ 72,322 $ 55,102 ======= ======= Income before extraordinary item (in thousands)............... $ 3,491 $ 1,284 ======= ======= Net income (in thousands)..................................... $ 3,491 $ 786 ======= ======= Net income per common share before extraordinary item......... $ 0.34 $ 0.13 ======= ======= Net income per common share................................... $ 0.34 $ 0.08 ======= =======
The pro forma results include the historical accounts of the Company, and historical accounts of the acquired businesses and pro forma adjustments including the amortization of the excess purchase price over the fair value of the net assets acquired, the amortization for the noncompete agreements entered into by the former owners of Texas Dental, the reduction of revenues for an intercompany management fee charged by Dental Care to its subsidiary IHCS, the elimination of consulting costs incurred by Dental Care under various contractual arrangements with related entities of Dental Care which were terminated upon the Company's purchase of Dental Care, the elimination of salaries and benefits paid to the former employee owners of CompDent and Texas Dental who will not be replaced, the reduction in depreciation expense to reflect the sale of certain non-operating assets to the former 7 10 COMPDENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED) employee owners of CompDent, the elimination of interest expense assuming the repayment of debt with offering proceeds, and the applicable income tax effects of these adjustments. The pro forma results of operations are not necessarily indicative of actual results which may have occurred had the operations of the acquired companies been combined in prior periods. 3. CONTINGENT LIABILITIES American Prepaid Professional Services, Inc. ("American Prepaid") and its Florida subsidiary, American Dental Plan, Inc., are currently defendants to a civil complaint filed by three participating dentists (one of which has since withdrawn) who have entered into Participating Dentist Agreements with various subsidiaries of the Company ("Subsidiaries"). The complaint alleges a breach of contract and seeks damages based on the failure of each Subsidiary to make capitation payments to the participating dentists for the period of time between when affected subscribers enroll and the time at which the subscribers select a dentist. The plaintiffs are attempting to bring the suit as a class action. The plaintiffs have filed a motion for reconsideration, which is set for hearing on August 19, 1996. The Company believes that they are likely to appeal the order denying class certification if they are unsuccessful on their motion for reconsideration. During the pendency of an appeal, it is up to the trial judge to decide whether to allow the case to proceed as to the two plaintiffs. The Company believes its interpretation and administration of the Participating Dentist Agreements are correct and, therefore, is vigorously defending the suit. While the ultimate outcome of this lawsuit cannot at this time be predicted with certainty, management does not expect that this matter will have a material adverse effect on the consolidated financial position, cash flows or results of operations of the Company. 8 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following discussion should be read in conjunction with the attached consolidated financial statements and notes thereto, and with the Company's audited financial statements and notes thereto for the fiscal year ended December 31, 1995. Three months ended June 30, 1996 and 1995 Revenues increased by $11.3 million, or 48.1%, to $34.8 million in the second quarter of 1996 from $23.5 million in the second quarter of 1995. This increase was primarily attributable to a net increase of $10.2 million, or 43.7%, in subscriber premiums to $33.4 million in the second quarter of 1996 from $23.2 million in the second quarter of 1995. The addition of CompDent subscriber premiums following the acquisition of this company in July 1995 accounted for $8.9 million of the overall increase in subscriber premiums. Texas Dental Plans, acquired in January 1996, and Dental Care, acquired in May 1996, subscriber premiums provided an additional $2.1 million and $2.4 million, respectively. An increase in the Company's existing subscriber base accounted for an additional $1.6 million increase in subscriber premiums. These increases in subscriber premiums were partially offset by a decrease of $4.8 million, or 100.0%, in UniLife Insurance Company ("UniLife") premiums which were recorded in the second quarter of 1995. Effective October 1, 1995, UniLife reinsured all of its dental indemnity and life insurance with its dual choice partner. This completed the Company's strategy upon acquiring UniLife to wind down over time the stand-alone dental indemnity insurance business and/or to convert such business to dual choice arrangements whereby subscribers enrolled in UniLife's indemnity plans were offered the option of enrolling in a managed dental care plan sponsored by the Company. Other revenue increased by $1.1 million, or 479.0%, to $1.4 million in the second quarter of 1996 from $238,000 in the second quarter of 1995. The increase is primarily attributable to $823,000 of Dental Care third party administrator fees and management fees recorded in the second quarter of 1996 following the May 1996 Dental Care acquisition. Also contributing to the overall increase were UniLife reinsurance fees and CompDent Administrative Services Only revenue. Administrative Services Only revenue represents fees collected from self-funded groups in exchange for claims processing. Dental care providers' fees and claims costs increased $4.2 million, or 29.9%, to $18.0 million in the second quarter of 1996 from $13.8 million in the second quarter of 1995. Dental care providers' fees represent capitation payments paid to panel dentists under the Company's managed dental care plans. Dental claim costs represent amounts payable to dental care providers under the dental indemnity insurance plans offered by CompDent. Dental care providers' fees decreased to 53.2% from 54.8% of managed dental care subscriber premiums in the second quarter of 1996 and 1995, respectively, due to the addition of Texas Dental premiums with no corresponding capitation. As a referral fee-for-service dental company, Texas Dental has no capitation payments associated with its subscriber revenues. The addition of CompDent and Dental Care dental care providers' fees at 60.4% and 62.4%, respectively, of subscriber premiums in the second quarter of 1996 partially offset this decrease. Under managed dental care plans, capitation payments to panel dentists from premiums paid by subscribers are fixed under the participating dental agreement regardless of the extent of services provided. Dental claims decreased $2.8 million, or 75.9%, to $877,000 in the second quarter of 1996 from $3.7 million in the second quarter of 1995. As discussed above, effective October 1, 1995 UniLife entered into a reinsurance agreement and, thus, incurred no claims cost after this date. Dental claims remaining relate to CompDent business of approximately $4.6 million in annual revenues whereby dentists are reimbursed for services rendered through claim payments. Commissions increased $417,000, or 15.6%, to $3.1 million in the second quarter of 1996 from $2.7 million in the second quarter of 1995. The addition of CompDent, Texas Dental, and Dental Care commissions in 1996 accounted for $489,000, $493,000, and $25,000, respectively, of this increase while the elimination of UniLife 9 12 commissions in the second quarter of 1996 resulted in a $608,000 decrease. As a percentage of revenues, commissions decreased to 8.9% of revenues in the second quarter of 1996 from 11.4% in the second quarter of 1995. This decrease related primarily to the addition of CompDent and Dental Care commissions at 5.4% and .8%, respectively, of revenues and the elimination of UniLife commissions at 12.6% of revenues, partially offset by the addition of Texas Dental commissions at 23.2% of revenues during the second quarter of 1996. Commissions on the Company's existing revenues were 10.2% in the second quarter of 1996 compared to 11.4% in the second quarter of 1995. This decrease as a percentage of revenue was attributable to the elimination of UniLife commissions which represented a higher percentage of revenue than commissions of the Company's other subsidiaries and an increase in the number of large employer groups sold. The Company's direct sales force typically plays an active role in sales and servicing large employer groups which results in a lower commission rate or no commissions being paid to independent agents with respect to these accounts. The costs associated with the increased number of sales representatives employed by the Company were reflected in general and administrative expense, rather than commissions. Historically CompDent and Dental Care have relied more heavily on their direct sales forces than on independent agents, resulting in lower commissions as a percentage of revenues for CompDent and Dental Care compared to the Company's other subsidiaries. Texas Dental has a higher overall commission rate due to the fact that their independent agents are generally paid a higher commission rate than independent agents for the Company's other subsidiaries. Premium taxes decreased as a percentage of revenues to .8% in the second quarter of 1996 compared to 1.5% in the second quarter of 1995. This decrease was a result of the addition of Texas Dental and Dental Care revenues and the elimination of UniLife premium revenue in the second quarter of 1996. Texas Dental is a referral fee-for-service dental company, and, accordingly, its revenues are not subject to premium tax in the state of Texas. Dental Care revenues are not subject to a premium tax in the state of Illinois. UniLife premiums in 1995 were subject to the Texas premium tax rate of approximately 2.5%. General and administrative expenses increased $3.9 million, or 101.1%, to $7.8 million in the second quarter of 1996 from $3.9 million in the second quarter of 1995. As a percentage of revenues, this expense increased to 22.5% in the second quarter of 1996 from 16.6% in the second quarter of 1995. This increase as a percentage of revenues is due to a higher general and administrative level added following the July 1995 acquisition of CompDent, the January 1996 acquisition of Texas Dental, and the May 1996 acquisition of Dental Care. Depreciation and amortization expense increased $754,000, or 141.5%, to $1.3 million in the second quarter of 1996 from $533,000 in the second quarter of 1995. This increase is primarily attributable to the additional goodwill amortization recorded following the CompDent, Texas Dental, and Dental Care acquisitions. Interest income increased $49,000, or 51.0%, to $145,000 in the second quarter of 1996 from $96,000 in the second quarter of 1995 as a result of the Company investing excess cash balances remaining from the second stock offering in August 1995. Interest expense decreased $196,000 or 31.1%, to $434,000 in the second quarter of 1996 from $630,000 in the second quarter of 1995. During the second quarter of 1995, the Company had approximately $34.5 million in outstanding borrowings from the beginning of the quarter until June 1, 1995 when all indebtedness was repaid with proceeds from the initial public offering. During the second quarter of 1996, the Company had no outstanding indebtedness until May 7, 1996 when the Company borrowed $38.0 million on its revolving line of credit to finance its acquisition of Dental Care Plus. Interest expense decreased, however, from the second quarter of 1995 to the second quarter of 1996 as the Company's borrowing rate decreased from 10% to 6.7%, respectively. Amortization of loan fees also decreased from the second quarter of 1995 to the second quarter of 1996 due to lower loan fees paid for the existing credit facility than were paid for the credit facility outstanding in the second quarter of 1995. Any future acquisitions may cause the Company to incur additional indebtedness under its revolving credit facility or otherwise. In the second quarter of 1996, the Company's effective income tax rate increased to 44.4% compared to 42.7% in the second quarter of 1995. The increase is primarily attributable to additional nondeductible goodwill 10 13 amortization recorded in the second quarter of 1996 following the recent acquisitions. In June 1, 1995, in conjunction with the repayment of existing indebtedness, the Company wrote off unamortized loan fees of $498,000, net of a tax benefit of $305,000. This write-off is presented as an extraordinary item for the three months ended June 30, 1995. Six months ended June 30, 1996 and 1995 Revenues increased by $19.6 million, or 42.2%, to $66.1 million in the six months ended June 30, 1996 from $46.5 million in the six months ended June 30, 1995. This increase was primarily attributable to a net increase of $18.2 million, or 39.5%, in subscriber premiums to $64.2 million in the six months ended June 30, 1996 from $46.0 million in the six months ended June 30, 1995. Subscriber premiums from CompDent, Texas Dental, and Dental Care accounted for $17.7 million, $4.5 million, and $2.4 million, respectively, of the overall increase in subscriber premiums. An additional $3.2 million of the increase was a result of increases in the Company's existing subscriber base over the same period in 1995. These increases in subscriber premiums were partially offset by a decrease of $9.6 million, or 100.0%, in UniLife premiums as a result of the Company entering into a reinsurance agreement for these premiums which was effective October 1995. Other revenue increased by $1.5 million, or 303.5%, to $1.9 million in the six months ended June 30, 1996 from $479,000 in the six months ended June 30, 1995. Dental Care third party administrator fees and management fees recorded in the six months ended June 30, 1996 accounted for $823,000 of this increase, while UniLife reinsurance fees and CompDent administrative services only revenue accounted for most of the remaining increase. Dental care providers' fees and claims costs increased $6.9 million, or 25.1%, to $34.4 million in the six months ended June 30, 1996 from $27.5 million in the six months ended June 30, 1995. Dental care providers' fees decreased to 52.7% from 55.3% of managed dental care subscriber premiums in the six months ended June 30, 1996 and 1995, respectively, due to the addition of Texas Dental premiums with no corresponding capitation. Partially offsetting this decrease was the addition of CompDent and Dental Care dental care providers' fees at 59.6% and 62.4%, respectively, of subscriber premiums in the six months ended June 30, 1996. Dental claims decreased $5.5 million, or 75.1%, to $1.8 million in the six months ended June 30, 1996 from $7.3 million in the six months ended June 30, 1995 due to the reinsurance of the UniLife book of business effective October 1995. Commissions had a net increase of $838,000, or 15.9%, to $6.1 million in the six months ended June 30, 1996 from $5.3 million in the six months ended June 30, 1995. The additional CompDent, Texas Dental, and Dental Care commissions accounted for $959,000, $990,000, and $25,000, respectively, of the overall increase in commissions, while the elimination of UniLife commissions in the six months ended June 30, 1996 resulted in a $1.3 million decrease. As a percentage of revenues, commissions decreased to 9.3% of revenues in the six months ended June 30, 1996 from 11.3% in the six months ended June 30, 1995. This decrease related primarily to the addition of CompDent and Dental Care commissions at 5.3% and .8%, respectively, of revenues and the elimination of UniLife commissions at 12.9% of revenues, partially offset by the addition of Texas Dental commissions at 22.1% of revenues during the six months ended June 30, 1996. Commissions on the Company's existing revenues were 10.3% in the six months ended June 30, 1996 compared to 11.3% in the six months ended June 30, 1995. The elimination of UniLife commissions and an increase in the number of large employer groups sold both contributed to this decrease. Premium taxes decreased as a percentage of revenues to .8% in the six months ended June 30, 1996 compared to 1.5% in the six months ended June 30, 1995. This decrease was a result of the addition of Texas Dental and Dental Care revenues which are not subject to premium tax and the elimination of UniLife premium revenues which were subject to a higher premium tax rate. General and administrative expenses increased $7.0 million, or 91.3%, to $14.6 million in the six months ended June 30, 1996 from $7.6 million in the six months ended June 30, 1995. As a percentage of revenues, this expense increased to 22.1% in the six months ended June 30, 1996 from 16.4% in the six months ended June 30, 1995. This increase as a percentage of revenues is due to a higher general and administrative level added following the 11 14 CompDent, Texas Dental, and Dental Care acquisitions. Depreciation and amortization expense increased $1.2 million, or 112.4%, to $2.3 million in the six months ended June 30, 1996 from $1.1 in the six months ended June 30, 1995. This increase was primarily attributable to the additional goodwill amortization recorded following the CompDent, Texas Dental, and Dental Care acquisitions. Interest income increased $171,000, or 134.6%, to $298,000 in the six months ended June 30, 1996 from $127,000 in the six months ended June 30, 1995 as a result of the Company investing excess cash balances remaining from the second stock offering in August 1995. Interest expense decreased $1.1 million, or 69.6%, to $480,000 in the six months ended June 30, 1996 from $1.6 million in the six months ended June 30, 1995. The Company had outstanding borrowings during most of the first six months of 1995 until proceeds from the initial public offering were used to repay the existing indebtedness on June 1, 1995. The Company had no outstanding borrowings during the six months ended June 30, 1996 until May 7, 1996 when the Company borrowed $38.0 million on its revolving line of credit to finance its acquisition of Dental Care. Therefore, interest expense decreased significantly from the six months ended June 30, 1995 to the same period in 1996. Any future acquisitions may cause the Company to again incur indebtedness under its revolving credit facility or otherwise. In the six months ended June 30, 1996, the Company's effective income tax rate increased slightly to 43.8% compared to 43.4% in the six months ended June 30, 1995. Additional nondeductible goodwill amortization recorded in the six months ended June 30, 1996 contributed to an increase in the Company's effective tax rate, while tax free interest income recorded during this period partially offset this increase. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of cash in the six months ended June 30, 1996 have been operating activities and borrowings under its revolving line of credit. The primary uses of cash for the period were the acquisitions of Texas Dental and Dental Care. Cash flows from operating activities were $4.6 million and $2.4 million for the six months ended June 30, 1996 and 1995, respectively. Cash flows from operations consist primarily of subscriber premiums and investment income net of capitation payments to panel dentists, claims paid, brokers' and agents' commissions, general and administrative expenses, and income tax payments. The Company receives premium payments in advance of anticipated capitation payments and claims and invests cash balances in excess of current needs in interest-bearing accounts. Cash used in investing activities was $62.7 million and $776,000 for the six months ended June 30, 1996 and 1995, respectively. The increase in cash used during the six months ended June 30, 1996 relates primarily to $62.5 million used to acquire Texas Dental and Dental Care in January and May 1996, respectively. The Company expects to make additional capital expenditures in excess of $2.5 million during the remainder of 1996 for further enhancements to its computer and telephone equipment and purchases of furniture and equipment for new office space to be occupied in late 1996. Cash flows from financing activities in the six months ended June 30, 1996 were $44.0 million, representing borrowings under the Company's revolving line of credit to finance the acquisition of Dental Care and to payoff intercompany borrowings to its regulated subsidiary companies at quarter-end. Cash provided by financing activities was $11.5 in the six months ended June 30, 1995, which primarily represents the net of initial public offering proceeds of $51.4 million and the use of $39.9 million of these proceeds to payoff outstanding indebtedness and retire preferred stock. On June 30, 1995, the Company obtained a reducing revolving $35 million line of credit (the "Credit Facility") from banks and on July 5, 1995, to partially finance the acquisition of CompDent, the Company borrowed $25 12 15 million under the Credit Facility. During the six months ended June 30, 1996 the Credit Facility was amended to increase the available line of credit to $65 million. On May 7, 1996, the Company borrowed $38 million under the Credit Facility to finance the acquisition of Dental Care. The Credit Facility as amended requires, beginning at the end of three and one-half years from the date of closing, a 33% reduction per year in available and outstanding borrowings. Outstanding indebtedness under the Credit Facility bears interest, at the Company's option, at a rate equal to the prime rate plus up to 1/4% or LIBOR plus up to 1 3/4%, with the margin over the prime rate and LIBOR decreasing as the ratio of consolidated debt to EBITDA decreases. Currently borrowings under the Credit Facility bear interest at the LIBOR-based rate. The Credit Facility prohibits payment of dividends and other distributions and restricts or prohibits the Company from making certain acquisitions, incurring indebtedness, incurring liens, disposing of assets or making investments, and requires it to maintain certain financial ratios on an ongoing basis. The Credit Facility is collateralized by pledges of the stock of the Company's direct and indirect subsidiaries. The Company had $44 million of borrowings outstanding as of June 30, 1996 under the Credit Facility. The Company believes that cash flow generated by operations will be sufficient to fund its normal working capital needs and capital expenditures for at least the next twenty-four months because cash receipts are principally premium revenue received prior to expected capitation payments and claims for dental services and the Company's operations are not capital intensive. Additional financing, under the Credit Facility or otherwise, would be required in connection with an acquisition or acquisitions which the Company may consummate in the future. Under applicable insurance laws of most states in which the Company conducts business, the Company's subsidiary operating in the particular state is required to maintain a minimum level of net worth and reserves. In general, minimum capital requirements are more stringent for insurance companies, such as UniLife. The Company may be required from time to time to invest funds in one or more of its subsidiaries to meet regulatory capital requirements. Applicable laws generally limit the ability of the Company's subsidiaries to pay dividends to the extent that required regulatory capital would be impaired, and dividend payments are further restricted under the Credit Facility. RECENTLY ISSUED ACCOUNTING STANDARDS During the first quarter of 1996, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Implementing the requirements of SFAS No. 121 did not have a material impact on the financial position, results of operations, or cash flows of the Company. Also during the first quarter of 1996, the Company adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." In accordance with the provisions of SFAS No. 123, the Company has chosen to continue to apply the accounting provisions of Accounting Principles Board (APB) No. 25, "Accounting for Stock Issued to Employees," to its stock-based employee compensation arrangements. Implementing the disclosure provisions of SFAS No. 123 which supersede the disclosure requirements of APB No. 25 did not have any material effect on the Company's financial position, results of operations, or cash flows. 13 16 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As previously reported in the Company's Form 10-K for the period ending December 31, 1995, the Company's subsidiaries, American Prepaid Professional Services, Inc. ("American Prepaid") and American Dental Plan, Inc. are currently defendants to a civil complaint filed on September 8, 1994 in the Circuit Court of Alachua County, Florida, by three participating dentists (one of whom has since withdrawn) who have entered into Participating Dentist Agreements with various subsidiaries of the Company. See "Notes to Consolidated Unaudited Financial Statements -- Contingent Liabilities" for a discussion of material developments with regard to that action which have taken place since the previous report. The Company is not a party to any other material legal proceeding. ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K (a) Exhibits. 10.1 First Amendment to Credit Facility (b) Reports on Form 8-K. Reports on Form 8-K and Form 8-K/A were filed with the Securities and Exchange Commission on May 23, 1996, July 22, 1996, and July 26, 1996, respectively. The following items were reported in the Forms 8-K. 1. Item 2. Acquisition or Disposition of Assets 2. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. The following historical financial statements (including the notes thereto) were contained in the Forms 8-K/A: (i) Financial Statements of Dental Care Plus Management, Corp. as of and for the years ended December 31, 1995 and 1994; (ii) Financial Statements of I.H.C.S., Inc. as of and for the years ended December 31, 1995 and 1994; (iii) Financial Statements of Dental Care Plus Management, Corp. as of March 31, 1996 and for the three months ended March 31, 1996 and 1995; and (iv) Financial Statements of I.H.C.S., Inc. as of March 31, 1996 and for the three months ended March 31, 1996 and 1995. The following Unaudited Pro Forma Condensed Combined Financial Statements (including the notes thereto) were contained in the Form 8-K/A: (i) Unaudited Pro Forma Condensed Consolidated Financial Statements of CompDent Corporation as of and for the three months ended March 31, 1996 and for the year ended December 31, 1995. 14 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMPDENT CORPORATION Date: August 14, 1996 By: /s/ SHARON S. GRAHAM ------------------------------------------- Sharon S. Graham Treasurer and Chief Financial Officer (Signing as duly authorized officer and chief financial officer) 15 18 EXHIBIT INDEX 10.1 -- First Amendment to Credit Agreement 27.1 -- Financial Data Schedule (for SEC use only)
16 EX-10.1 2 FIRST AMENDMENT TO CREDIT AGREEMENT 1 EXHIBIT 10.1 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT, dated as of the 3rd day of May, 1996 (this "Amendment"), is made among AMERICAN PREPAID PROFESSIONAL SERVICES, INC., a Florida corporation (the "Borrower"), COMPDENT CORPORATION, a Delaware corporation formerly known as APPS Dental, Inc. (the "Parent"), FIRST UNION NATIONAL BANK OF NORTH CAROLINA ("First Union") and NATIONSBANK, N.A. (SOUTH), formerly known as NationsBank of Georgia, N.A. ("NationsBank," and, together with First Union, the "Lenders"), and FIRST UNION, as agent for the Lenders (in such capacity, the "Agent"). RECITALS A. The Borrower, the Parent, the Lenders and the Agent are parties to a Credit Agreement, dated as of June 30, 1995 (the "Credit Agreement"), providing for the availability of certain credit facilities to the Borrower upon the terms and conditions set forth therein. Capitalized terms used herein without definition shall have the meanings given to them in the Credit Agreement. B. The Borrower has requested that the Lenders agree to increase the aggregate principal amount of the Total Revolving Credit Commitment and make certain other amendments to the Credit Agreement, and the Lenders have agreed to effect such amendments upon the terms and conditions set forth herein. STATEMENT OF AGREEMENT NOW, THEREFORE in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I AMENDMENTS 1.1 Definitions. Section 1.1 of the Credit Agreement is hereby amended as follows: (a) The definition of "Acquisition Amount" is hereby amended by deleting clause (iv) therefrom and renumbering clause (v) as clause (iv). 1 2 (b) The definition of "Expiry Date" is hereby amended by deleting the words "June 30, 2000" therefrom and substituting the words "December 31, 2000" therefor. (c) The definition of "Reportable Event" is hereby amended and restated in its entirety as follows: " 'Reportable Event' shall mean (i) any "reportable event" within the meaning of Section 4043(c) of ERISA for which the 30-day notice under Section 4043(a) of ERISA has not been waived by the PBGC (including any failure to meet the minimum funding standard of or timely make any required installment under Section 412 of the Internal Revenue Code or Section 302 of ERISA, regardless of the issuance of any waivers in accordance with Section 412(d) of the Internal Revenue Code), (ii) any such "reportable event" subject to advance notice to the PBGC under Section 4043(b)(3) of ERISA, (iii) any application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Internal Revenue Code, and (iv) a cessation of operations described in Section 4062(e) of ERISA." (d) The following definition is hereby added to the Credit Agreement in proper alphabetical order: " 'Consolidated EBITDA' shall mean, for any period, the aggregate of (i) Consolidated Net Income for such period, plus (ii) the sum of Consolidated Interest Expense, federal and state income taxes, depreciation, amortization of intangible assets and other noncash expenses or charges reducing income, all to the extent taken into account in the calculation of Consolidated Net Income for such period, minus (iii) to the extent taken into account in the calculation of Consolidated Net Income for such period, noncash credits increasing income for such period." 1.2 Scheduled Reductions in Aggregate Commitment. The table set forth in Section 2.6(b) of the Credit Agreement is hereby amended and restated in its entirety as follows:
AGGREGATE "DATE COMMITMENT ------------------------------------------------------------------------ ----------- December 31, 1998....................................................... $43,333,333 December 31, 1999....................................................... $21,666,667 December 31, 2000....................................................... 0"
1.3 Permitted Acquisitions. Section 5.8(a) of the Credit Agreement is hereby amended and restated in its entirety as follows: 2 3 "(a) Subject to the provisions of subsection (c) below and the requirements contained in the definition of Allowed Acquisition, and subject to the other terms and conditions of this Agreement, the Borrower may from time to time after the Closing Date effect Allowed Acquisitions, provided that (i) the aggregate of the Acquisition Amounts for all Allowed Acquisitions consummated during any single fiscal year shall not exceed (y) for the fiscal year ending December 31, 1996, $20,000,000 (such limitation being calculated without regard to the Acquisition Amounts in connection with the Acquisitions by the Borrower of Texas Dental Plans, Inc., Dental Plans International, Inc., Dental Provider Resources, Inc., National Dental Plans, Inc., Dental Care Plus Management, Corp. and I.H.C.S., Inc. and (z) for any fiscal year ending after December 31, 1996, Consolidated EBITDA for the immediately preceding fiscal year, and (ii) with respect to each Allowed Acquisition, no Default or Event of Default shall have occurred and be continuing at the time of the consummation of such Allowed Acquisition or would exist immediately after giving effect thereto." 1.4. Financial Covenants. (a) Section 6.1 of the Credit Agreement is hereby amended and restated in its entirety as follows: "6.1. Ratio of Consolidated Funded Debt to Consolidated Total Capital. The Parent will not permit the ratio of Consolidated Funded Debt to Consolidated Total Capital to be greater than: (i) 0.5 to 1.0 as of the last day of the fiscal quarter ending September 30, 1995, and as of the last day of any fiscal quarter ending thereafter up to and including the fiscal quarter ending December 31, 1998; (ii) 0.4 to 1.0 as of the last day of the fiscal quarter ending March 31, 1999, and as of the last day of any fiscal quarter ending thereafter up to and including the fiscal quarter ending December 31, 1999; and (iii) 0.3 to 1.0 as of the last day of any fiscal quarter ending thereafter." (b) Section 6.2 of the Credit Agreement is hereby amended and restated in its entirety as follows: "6.2. Ratio of Consolidated EBITA to Consolidated Interest Expense. The Parent will not permit the ratio of Consolidated EBITA to Consolidated Interest Expense to be less than: (i) 3.0 to 1.0 for the fiscal quarter ending September 30, 1995, and for any fiscal quarter ending thereafter up to and including the fiscal quarter ending December 31, 1996; (ii) 3.5 to 1.0 for 3 4 the fiscal quarter ending March 31, 1997, and for any fiscal quarter ending thereafter up to and including the fiscal quarter ending December 31, 1997; and (iii) 4.0 to 1.0 for any fiscal quarter ending thereafter." (c) Section 6.3 of the Credit Agreement is hereby amended and restated in its entirety as follows: "6.3. Ratio of Consolidated Funded Debt to Consolidated Pro Forma EBITDA. The Parent will not permit the ratio of Consolidated Funded Debt as of the last day of any fiscal quarter to Consolidated Pro Forma EBITDA for the period of four consecutive fiscal quarters then ending to be greater than: (i) 3.0 to 1.0 as of the last day of the fiscal quarter ending September 30, 1995, and as of the last day of any fiscal quarter ending thereafter up to and including the fiscal quarter ending December 31, 1998; (ii) 2.5 to 1.0 as of the last day of the fiscal quarter ending March 31, 1999, and as of the last day of any fiscal quarter ending thereafter up to and including the fiscal quarter ending December 31, 1999; and (iii) 2.0 to 1.0 as of the last day of any fiscal quarter ending thereafter." (d) Section 6.4 of the Credit Agreement is hereby amended and restated in its entirety as follows: "6.4. Consolidated Net Worth. The Parent will not permit Consolidated Net Worth as of the last day of any fiscal quarter, beginning with the fiscal quarter ending March 31, 1996, to be less than the sum of (i) $100,000,000, plus (ii) 90% of the aggregate of Consolidated Net Income for each fiscal quarter ending after March 31, 1996 (provided that Consolidated Net Income for any such fiscal quarter shall be taken into account for purposes of this calculation only if positive), plus (iii) 100% of the aggregate amount of all increases in the stated capital and additional paid-in capital accounts of the Parent and its Subsidiaries, as determined on a consolidated basis in accordance with Generally Accepted Accounting Principles, resulting from the issuance of equity securities or other capital investments after March 31, 1996." 1.5. Revolving Credit Commitments. The Revolving Credit Commitment of each Lender set forth opposite such Lender's name on its signature page to the Credit Agreement under the caption "Revolving Credit Commitment" is hereby deleted and is replaced with the amount set forth opposite such Lender's name on the signature pages to this Amendment under the caption "Revolving Credit Commitment." 4 5 1.6. Name Changes. (a) All references in the Credit Agreement to "NationsBank" shall be deemed to be references to NationsBank, N.A. (South). (b) All references in the Credit Agreement to the "Parent" or "APPS Dental, Inc." shall be deemed to be references to CompDent Corporation, a Delaware corporation formerly known as APPS Dental, Inc. ARTICLE II REPRESENTATIONS AND WARRANTIES Each of the Parent and the Borrower hereby represents and warrants to the Agent and each Lender as follows: 2.1 Corporate Organization and Power. Each of the Parent and the Borrower is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the full corporate power and authority to execute, deliver and perform this Amendment and each of the other Credit Documents required in connection herewith to which it is a party. 2.3 Authorization; Enforceability. Each of the Parent and the Borrower has taken all necessary corporate action to execute, deliver and perform, and has validly executed and delivered, this Amendment and each of the other Credit Documents required in connection herewith to which it is a party. This Amendment and each of such other Credit Documents constitutes the legal, valid and binding obligation of each of the Parent and the Borrower, as applicable, enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general equitable principles. 2.3. No Violation. The execution, delivery and performance by each of the Parent and the Borrower of this Amendment and each of the other Credit Documents required in connection herewith to which it is a party, and compliance by it therewith, do not and will not (i) violate any provision of its articles or certificate of incorporation or bylaws, (ii) contravene in any material respect any other applicable Requirement of Law, (iii) conflict with, result in a breach of or constitute (with notice, lapse of time or both) a default under any indenture, loan agreement, mortgage or other instrument relating to Debt or any other material lease, agreement or instrument to which it is a party, by which it or any of its properties is bound or to which it may be subject, (iv) result in or require the creation or imposition of any Lien upon any of its properties, other than Liens created 5 6 pursuant to the Credit Documents, or (v) require the approval or consent of any Person not a Governmental Authority, other than such approvals and consents as have been obtained as required and such approvals and consents the failure to obtain which, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. 2.4 Governmental Authorization. No consent, approval, authorization, exemption or other action by, notice to, or filing with, any Governmental Authority is required as a condition to or otherwise in connection with the due execution, delivery and performance by each of the Parent and the Borrower of this Amendment and the other Credit Documents required in connection herewith to which it is a party or the legality, validity or enforceability hereof or thereof. 2.5 Representations and Warranties. Each of the representations and warranties of the Parent and the Borrower contained in the Credit Agreement and in the other Credit Documents is true and correct on and as of the date hereof with the same effect as if made on and as of the date hereof (except to the extent any such representation or warranty is expressly stated to have been made as of a specific date, in which case such representation or warranty is true and correct as of such date). 2.6 No Default. No Default or Event of Default has occurred and is continuing. ARTICLE III CONDITIONS TO EFFECTIVENESS The effectiveness of the amendments to the Credit Agreement set forth in this Amendment is subject to the satisfaction of the following conditions: 3.1 Revolving Credit Notes. The Agent shall have received, in replacement of the outstanding Revolving Credit Notes, a new Revolving Credit Note for each Lender in the amount of such Lender's Revolving Credit Commitment (as set forth opposite its signature hereto), each duly completed and executed by the Borrower in substantially the form of EXHIBIT A. 3.2 Representations and Warranties; Officer's Certificate. The following shall be true and the Agent shall have received a certificate, signed by the chief executive officer or chief financial officer of each of the Parent and the Borrower, in form and substance satisfactory to the Lenders, certifying that (i) each of the representations and warranties of the Parent and the Borrower contained in this Amendment, the Credit Agreement 6 7 and the other Credit Documents is true and correct as of the date of such certificate, both immediately before and after giving effect to the amendments effected hereby (except to the extent any such representation or warranty is expressly stated to have been made as of a specific date, in which case such representation or warranty is true and correct as of such date), (ii) no Default or Event of Default has occurred and is continuing, both immediately before and after giving effect to the amendments effected hereby, and (iii) each of the conditions set forth in this Article III has been satisfied. 3.3 Parent Secretary's Certificate. The Agent shall have received a certificate, signed by the secretary or an assistant secretary of the Parent, in form and substance satisfactory to the Lenders, certifying (i) that attached thereto is a true and complete copy of the certificate of incorporation and all amendments thereto of the Parent, certified as of a recent date by the Secretary of State of Delaware, and that such certificate has not been amended since the date of such certification, (ii) that attached thereto is a true and complete copy of the bylaws of the Parent as in effect at all times from the date on which the resolutions referred to in clause (iii) below were adopted to and including the date of such certificate, and (iii) that attached thereto is a true and complete copy of resolutions adopted by the board of directors of the Parent authorizing the execution, delivery and performance of this Amendment and the other Credit Documents to which it is a party, and as to the incumbency and genuineness of the signature of each officer of the Parent executing this Amendment or any of such other Credit Documents, and attaching all such copies of the documents described above. 3.4 Borrower Secretary's Certificate. The Agent shall have received a certificate, signed by the secretary or an assistant secretary of the Borrower, in form and substance satisfactory to the Lenders, certifying (i) that attached thereto is a true and complete copy of the articles of incorporation and all amendments thereto of the Borrower, certified as of a recent date by the Secretary of State of Florida, and that such articles have not been amended since the date of such certification, (ii) that attached thereto is a true and complete copy of the bylaws of the Borrower as in effect at all times from the date on which the resolutions referred to in clause (iii) below were adopted to and including the date of such certificate, and (iii) that attached thereto is a true and complete copy of resolutions adopted by the board of directors of the Borrower authorizing the execution, delivery and performance of this Amendment and the other Credit Documents to which it is a party, and as to the incumbency and genuineness of the signature of each officer of the Borrower executing this Amendment or any of such other Credit Documents, and attaching all such copies of the documents described above. 7 8 3.5 Good Standing Certificates. The Agent shall have received (i) a certificate as of a recent date of the good standing of each of the Parent and Borrower under the laws of its jurisdiction of incorporation, from the appropriate Governmental Authority of such jurisdiction and (ii) a certificate as of a recent date as to the qualification of each of the Parent and the Borrower to conduct business as a foreign corporation in the State of Georgia, from the Secretary of State of Georgia. 3.6 Opinions of Counsel. The Agent shall have received the favorable opinions, addressed to the Agent and the Lenders, of (i) Goodwin, Proctor & Hoar, special counsel to the Parent and the Borrower, in substantially the form of Exhibit B-1, and (ii) Bruce A. Mitchell, general counsel to the Parent and the Borrower, in substantially the form of Exhibit B-2, and in each case addressing such other matters as the Agent or any Lender may reasonably request. 3.7 No Material Adverse Change. Since December 31, 1994, both immediately before and after giving effect to the consummation of the transactions contemplated by this Amendment, there shall not have occurred any Material Adverse Change or any event, condition or state of facts that could reasonably be expected to have a Material Adverse Effect (it being understood that neither the CompDent Acquisition nor the acquisition of Texas Dental Plans, Inc., Dental Plans International, Inc., Dental Provider Resources, Inc. or National Dental Plans, Inc. constitutes, as such, a Material Adverse Change). 3.8 Payment of Fees. The Borrower shall have paid (i) to First Union, for its own account, the facility fee set forth in the Commitment letter from the Agent to the Borrower dated March 1, 1996, and (ii) to NationsBank, for its own account, any commitment, facility or other fees agreed upon by the Borrower and NationsBank and required to be paid as a condition to the effectiveness of the amendments to the Credit Agreement set forth herein. 3.9 Other Documents. The Agent and each Lender shall have received such other documents, certificates, opinions and instruments as it shall have reasonably requested. ARTICLE IV EFFECT OF AMENDMENT 4.1 Credit Agreement From and after the effective date of the amendments to the Credit Agreement set forth herein, all references to the Credit Agreement set forth in any other Credit Document or other agreement or instrument shall, unless otherwise 8 9 specifically provided, be references to the Credit Agreement as amended by this Amendment and as may be further amended, modified, restated or supplemented from time to time. This Amendment is limited as specified and shall not constitute or be deemed to constitute an amendment, modification or waiver of any provision of the Credit Agreement except as expressly set forth herein. Except as expressly amended hereby, the Credit Agreement shall remain in full force and effect in accordance with its terms. 4.2 Parent Guaranty and Pledge. The Parent recognizes and acknowledges (i) that it has obtained and will continue to obtain benefits as a result of the extension of credit to the Borrower under the Credit Agreement, (ii) that it is a condition to the effectiveness of the amendments to the Credit Agreement set forth in this Amendment and to the continued extension of credit to the Borrower under the Credit Agreement that the Parent shall have confirmed and ratified its agreements under the Parent Guaranty and the Parent Pledge Agreement, and shall have evidenced its agreement to the other terms and provisions hereof, by executing and delivering this Amendment, and (iii) that the Agent and the Lenders have relied and will continue to rely on the Parent Guaranty and the Parent Pledge Agreement in their decision to extend credit to the Borrower under the Credit Agreement, and would not enter into this Amendment or continue to extend credit to the Borrower under the Credit Agreement without the agreements of the Parent set forth herein. Accordingly, the Parent hereby irrevocably, absolutely and unconditionally (a) approves and consents to the amendments to the Credit Agreement set forth in this Amendment and to the execution and delivery by the Borrower of this Amendment and all other Credit Documents required or provided in connection herewith, (b) confirms and ratifies all of its covenants and agreements set forth in the Parent Guaranty (including, without limitation, the guaranties set forth in Section 1 thereof) and the Parent Pledge Agreement (including, without limitation, the pledge and grant of security interests set forth in Section 1 thereof), and (c) agrees that its liabilities and obligations under the Parent Guaranty and the Parent Pledge Agreement shall not be discharged, limited or otherwise affected by reason of the amendments to the Credit Agreement set forth in this Amendment and that each of the Parent Guaranty and the Parent Pledge Agreement shall remain in full force and effect in accordance with its terms. ARTICLE V MISCELLANEOUS 5.1 Governing Law. This Amendment shall be governed by and construed and enforced in accordance with the laws of the State 9 10 of North Carolina (without regard to the conflicts of law provisions thereof). 5.2 Expenses. The Borrower agrees to pay upon demand all reasonable out-of-pocket costs and expenses of the Agent and each Lender (including, without limitation, the reasonable fees and expenses of counsel to the Agent and each Lender) in connection with the preparation, negotiation, execution and delivery of this Amendment and the other Credit Documents delivered in connection herewith. 5.3 Severability. To the extent any provision of this Amendment is prohibited by or invalid under the applicable law of any jurisdiction, such provision shall be ineffective only to the extent of such prohibition or invalidity and only in any such jurisdiction, without prohibiting or invalidating such provision in any other jurisdiction or the remaining provisions of this Amendment in any jurisdiction. 5.4. Counterparts; Effectiveness. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. This Amendment shall become effective upon the execution and delivery of a counterpart hereof by each of the parties hereto (provided that the amendments to the Credit Agreement set forth herein shall become effective as provided in Article III hereof). 10 11 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized officers as of the date first above written. AMERICAN PREPAID PROFESSIONAL SERVICES, INC. By: /s/ SHARON S. GRAHAM -------------------------------------- Title: Chief Financial Officer COMPDENT CORPORATION (f/k/a APPS Dental, Inc.) By: /s/ SHARON S. GRAHAM -------------------------------------- Title: Chief Financial Officer Revolving Credit FIRST UNION NATIONAL BANK OF Commitment: NORTH CAROLINA, as Agent and as Lender $35,000,000 By: /s/ ANN M. DODD ----------------------------------------------- Title: Senior Vice President Revolving Credit NATIONSBANK, N.A. (SOUTH) Commitment: $20,000,000 By: /s/ LAURA GRAY ----------------------------------------------- Title: Vice President
11 EX-27 3 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, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 28,145 0 4,348 0 0 36,001 2,056 0 184,072 27,038 0 0 0 101 106,775 184,072 0 66,147 0 58,012 (309) 0 480 8,262 3,618 4,644 0 0 0 4,644 .46 .46
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