CompDent Corporation

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CompDent Corporation

100 Mansell Court East
Suite 400
Roswell, Georgia 30076-8228
U.S.A.
(770) 998-8936
Fax: (770) 998-6871
Web site: http://www.compdent.com

Public Company
Incorporated: 1978 as American Prepaid Professional Services, Inc.
Employees: 460
Sales: $141.1 million (1996)
Stock Exchanges: NASDAQ
SICs: 8099 Dentists Service Organizations; 6719 Holding Companies, Not Elsewhere Classified; 6324 Hospital & Medical Service Plans; 6411 Insurance; 8021 Offices & Clinics of Dentists

CompDent Corporation is a fully integrated dental management company that provides full-service dental benefits. A growing company in a fragmented industry, CompDent provides attractive options to both the consumers it serves and the dentists who participate in its plans. By building large networks of dental care facilities and providers, CompDent offers its members convenient locations and cost-saving programs. Dentists who work with CompDent may choose their preferred method of affiliation in the plans. Also among their efforts to provide quality services, the company carefully evaluates each potential participating dentist in its programs. Its Quality Management function, headed by the company’s National Dental Director, includes a credential review, verification of license, DEA certification, and malpractice insurance verification.

A team of 40 direct sales people attend to CompDent’s national group participants, and a group of over 8,000 independent agents work for the company focusing on smaller employers and individuals. In addition the company provides management services, MIS, member service, and billing and underwriting support to each state. Local offices are responsible for marketing and dental relations.

CompDent deals with both dental HMO programs and fee-for-service programs. In the dental HMO, dentists receive, along with the patient copayment, a capitation—a monthly flat fee for each patient rather than payment for specific treatments, whether or not the patient wants services that month. The patient benefits of dental HMOs include no deductibles and low copayments for visits, with payments of only 20 percent to 50 percent for special procedures. According to one analyst, “Under a capitated system, dentists don’t want to see you (so) they have a lot of incentive to give high quality dental care.” The fee-for-service arrangement allows dentists to sidestep the risks of managed care, but still get the volume of patients which are often missed by not joining an HMO. In such a program, dentists give patients discounts and then receive discounted fees for all services performed. Regarding its relatively new fee-for-service plans, CEO and Chairman David R. Klock told Investor’s Business Daily, “[Dentists] know they will collect on all the services they perform. Some find this friendlier and are more likely to sign on.” CompDent product offerings also include: CompSave, a discount fee-for-service product; Comp-Net, a PPO and network rental dental product; and ASO Services for self-insured dental plans.

Company Beginnings to 1990s Growth

CompDent was founded in 1978 as American Prepaid Professional Services, Inc. in Florida, and began de novo operations in seven other states in 1987. TA Associates arranged a buyout of APPS from its original investors for approximately $29.5 million in cash in June 1993. Business commenced under this new arrangement in July 1993.

Soon thereafter the company began its strides in growth through a series of acquisitions. December, 1994 was the date for acquiring both DentiCare, Inc. of Houston, Texas, and UniLife Insurance Co. DentiCare is a managed dental care company, and its acquisition increased the company’s presence in this Texas market. UniLife, an indemnity insurer, was purchased with plans to eventually phase out its dental indemnity business and/or to change its offerings to dual-choice, so that subscribers could choose their managed dental plans. The cost for this acquisition was $17 million, plus approximately $600,000 in transaction costs.

The company’s initial public offering came in May 1995, as APPS Dental, Inc. (APPS ticker symbol on the NASDAQ exchange). Following this, in July 1995, CompDent Corp., located in Louisville, Kentucky, was acquired for $32.5 million, plus approximately $1.1 million in transaction fees. With operations in 13 states, together with DentiCare, this acquisition doubled the membership in the company managed dental care plan for a total of 1.4 million individuals in 16 states. After this large addition, the company’s secondary offering of 3.4 million shares came in August 1995. This month also brought a name change, as APPS Dental, Inc. of Atlanta, Georgia, changed its name to CompDent Corporation. This change acknowledged the recent large acquisitions of DentiCare and CompDent, and was effective September 15, 1995. The company now traded under CPDN on the NASDAQ exchange.

A three-year contract with the State of North Carolina was won in November 1995, and began in January 1996. This was a big victory for CompDent, who had worked previously in the state for approximately two years. Because of the relatively few number of dentists in North Carolina, the company had difficulties recruiting new dentists to their program. With more customers to offer their professional clients, CompDent had more success in signing them on. In 1996 there were about 50 dentists working with the company, and about 9,000 of the 150,000 eligible state employees took part in CompDent’s managed dental care plans. With the success of its recent acquisitions and contract awards, at year’s end, 1995, the company’s stock was up by a margin of 186 percent.

Texas Dental Plans, Inc. (Texas Dental) of San Antonio, Texas, and its subsidiary, National Dental Plans, Inc. were acquired in January 1996 for $23 million in cash. Texas Dental, a seller of referral fee-for-service plans, added roughly 400,000 plan members to CompDent’s roster, and broadened their product lines. Texas membership then totaled over 500,000, which made CompDent a leader in the state’s dental care program administrators. Texas Dental’s network of over 5,000 dentists in 14 states bolstered the company’s total coverage, adding on seven states for a total of 23 states and the District of Columbia.

The managed dental care industry, like CompDent, was growing through consolidation. To meet the increased demand, CompDent needed to continue to build a national network of facilities and clients by acquiring smaller managed dental care companies. As of February 1996, CompDent was the third largest managed dental care company in the country. Cigna and Prudential were the two largest.

In May 1996, Dental Care Plus Management Corp. (Dental Care) of Chicago, Illinois, and its wholly owned subsidiary, I.H.C.S., Inc. were acquired for $27 million in cash, and were scheduled to be fully integrated in 1997. With the addition of 450,000 members to its plans, CompDent was now one of the largest dental care administrators in Illinois, a state with the sixth largest concentration of managed dental care enrollment in 1996. These acquisitions helped the company earn a contract with the Illinois state government. Dental Care was a third party administrator and managed dental care provider, with approximately one-third of its members in managed care programs, the rest in employer-funded fee-for-service plans. I.H.C.S., Inc. processed claims for fee-for-service programs. Previously, CompDent did not have a claims processing unit. Claims for indemnity plans not sold in Illinois were processed by Shenandoah Life Insurance Co. of Roanoke, Virginia, which assumed all risks for the plans.

A new president of CompDent, Phyllis Klock, was elected in 1996. She began with the company in 1981 as a consultant, became vice-president of operations in 1986, then senior vice-president in 1993, and executive vice-president in 1996. Klock succeeded her husband, David, who remained as chairman and CEO. Dr. David Klock also began with the company as a consultant in 1981, was a board member since 1988, and then joined the company in 1991.

An additional 20,000 members were added to CompDent’s plans with the March 1997 acquisition of American Dental Providers, Inc., and Diamond Dental for an undisclosed amount. These companies marked the expansion into CompDent’s 24th covered state, Arkansas. The enlargement proved profitable to the company, as the six months ending June 30, 1997, reported record revenues of $76.04 million, up 15 percent from the same period in 1996.

1997 Expansion and Additions

In the first quarter of 1997, CompDent established Dental Health Management, Inc. (DHM), to provide management services to dental practices. The wholly owned subsidiary was expected to help expand CompDent dental networks in markets that were previously resistant to managed dental care programs. The unit was also planned to assist in the establishment of new dental offices where there was demand for CompDent products, but lack of participants. Philip Hertik, a CompDent board member since 1993, was elected president of DHM.

Company Perspectives:

Our mission is to remain, or become, the leading provider of managed dental care plans in each of our markets. Our business is really very simple. We offer our members affordable, convenient dental care —we make it easy for people to go to the dentist and we help build profitable dental practices, making it attractive for dentists to participate in our plans.

DHM entered into an agreement in June 1997 to acquire 21 dental facilities in Illinois for $14.3 million. It also entered into a 40-year management contract with the group practices, which consisted of 26 dentists that operated in these facilities. These offices were previously managed by the Effingham, Illinois-based Workman Management Group, Ltd. CompDent also optioned to acquire nine other dental centers managed by Workman Management Group, Ltd., over the next four years. As of August 1997, DHM either owned or operated 27 offices in the South and Midwest, and planned to expand its operations even further. That same month DHM arranged an agreement with Quality Systems, Inc. to use Quality Systems’ practice-management systems. The computer functions for this operation were centralized at CompDent’s Roswell, Georgia, corporate headquarters. August 1997 also brought the resignation of CFO Sharon Graham. Graham’s position was filled by Bruce Mitchell, an advisor to the company since 1981. At the time of his placement as interim CFO, he was also executive vice-president, corporate secretary, and general counsel to the company.

Together with a private equity firm, Golder Thoma Cressey Rauner, CompDent agreed to provide funding for Dental Health Development Corp. in September 1997. This corporation worked in the development of start-up dental facilities and was funded by a $15 million equity commitment from Golder Thomas Cressey Rauner and a $1.5 million investment by CompDent. Managed by DHM, Dental Health Development had its own independent board, and was to fund a total of 400 dental offices, and develop 35 to 50 de novo offices by 1999.

Room for Growth in the Future

In 1994, the National Association of Dental Plans in Dallas, Texas, approximated that 18.4 million people were enrolled in managed dental care plans, up from 7.8 million in 1990, showing growth of 25 percent per year. Still, CompDent estimated that one-half of Americans do not have dental insurance. An estimated 26,000 dentists were part of a dental HMO (15 percent of all general dentists), and an estimated 88 percent of dentists practiced either alone or with one partner. Facts such as these revealed how much potential room there was for expansion in this growing market. One health care fund manager noticed, “From an investor perspective, it’s a hot area because there aren’t many of them yet. They’re just beginning the transition from more indemnity-type practices to more managed-care plans.” Industry, like CompDent, grew through consolidation. One way CompDent attracted new members was by building large groups of dentists in convenient locations. In 1997 the company operated approximately 4,500 dental facilities. With coverage of 24 states, CompDent boasted 2.2 million plan members, 65 percent of which were located in Florida, Illinois, and Texas. They served 19,000 group customers, including government groups, municipalities, school systems, and private industry. Regarding CompDent’s growth and future capacities, then-president David R. Klock stated in his 1995 annual report, “Our goal is to continue to build critical mass and to be not only an important regional managed dental plan, but... a strong national leader.” CompDent seemed well on its way to achieving these goals.

Principal Subsidiaries

American Prepaid Professional Services, Inc.; American Dental Plan, Inc.; American Dental Plan of Georgia, Inc.; American Prepaid Dental Plan of Ohio, Inc.; American Dental Plan of Alabama, Inc.; American Dental Plan, Inc.; American Dental Plan of North Carolina, Inc.; DentiCare, Inc.; UniLife Insurance Co.; CompDent Corp.; Texas Dental Plans, Inc.; National Dental Plans, Inc.; Dental Plans International, Inc.; Dental Provider Resources, Inc.; Dental Care Plus Management Corp.; CompDent of Illinois, Inc. (formerly I.H.C.S.).