<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                             ---------------------
 
                                   FORM 10-K
                       FOR ANNUAL AND TRANSITION REPORTS
                    PURSUANT TO SECTIONS 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
<TABLE>
<C>               <S>
   (MARK ONE)
      [X]         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                  THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
                                               OR
      [ ]         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                  THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
 
                        COMMISSION FILE NUMBER: 0-26090
 
                              COMPDENT CORPORATION
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                                        <C>
                DELAWARE                                  04-3185995
     (State or other jurisdiction of                   (I.R.S. Employer
     incorporation or organization)                   Identification No.)

         100 MANSELL COURT EAST,
       SUITE 400, ROSWELL, GEORGIA                           30076
(Address of principal executive offices)                  (zip code)
</TABLE>
 
       Registrant's telephone number, including area code: (770) 998-8936
                             ---------------------
 
       Securities registered pursuant to Section 12(b) of the Act: NONE.
 
          Securities registered pursuant to Section 12(g) of the Act:
 
<TABLE>
<S>                                        <C>
 Common Stock, par value $.01 per share         Preferred Stock Purchase Rights
            (Title of Class)                           (Title of Class)
</TABLE>
 
     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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
     As of March 1, 1999, there were 10,115,189 shares of the registrant's
Common Stock outstanding. The aggregate market value of the voting stock held by
non-affiliates of the registrant on March 25, 1999, was $125,832,951.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
                                      None
 
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<PAGE>   2
 
                                     PART I
 
     STATEMENTS MADE OR INCORPORATED INTO THIS ANNUAL REPORT INCLUDE A NUMBER OF
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934.
FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS CONTAINING
THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE" AND WORDS OF
SIMILAR IMPORT WHICH EXPRESS MANAGEMENT'S BELIEF, EXPECTATIONS OR INTENT
REGARDING THE COMPANY'S FUTURE PERFORMANCE. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE THE TIMING OF THE PENDING
RE-CAPITALIZATION TRANSACTION DISCUSSED ON PAGES 1-2, THE INCREASING COMPETITION
DISCUSSED ON PAGES 6-7, CHANGING GOVERNMENTAL REGULATION DISCUSSED ON PAGES 7-8,
THE TREATMENT OF GOODWILL AMORTIZATION FOR PRIOR ACQUISITIONS DISCUSSED ON PAGES
13 AND 16, AND THE EXTENT OF ANY YEAR 2000 COMPLIANCE ISSUES DISCUSSED ON PAGES
18-19, AND THE FACTORS ARE DESCRIBED IN THE SECTION ENTITLED "CERTAIN FACTORS
THAT MAY AFFECT FUTURE RESULTS" FOUND ON PAGE 18 OF THIS ANNUAL REPORT.
 
ITEM 1.  BUSINESS
 
     The information contained in this report is provided as of December 31,
1998, unless otherwise indicated.
 
OVERVIEW
 
     CompDent Corporation, a Delaware corporation (the "Company"), is a fully
integrated dental management company. The Company offers a full line of dental
care plan services, including network-based dental care, reduced fee-for-service
and third-party administration, and provides dental coverage for approximately
2.1 million plan members at December 31, 1998. The Company currently has
operations in more than 23 states and markets its products through a network of
more than 9,000 independent agents and a direct marketing sales force that
assists the independent agents. The Company markets its products to employers
and other business entities ("Groups"), to Group employees or other members and
their families as a unit ("Subscribers") and to individuals. The Company has
contracted with more than 11,800 dental facilities ("Panel Dentists") to provide
dental services to covered individuals ("Members"). The Company's benefit plans
also include CompSave(C) (a reduced fee-for-service product), CompNet(C) (a
preferred provider organization ("PPO") and network rental product), and
administrative services for self-insured dental plans. In the first quarter of
1997, CompDent established Dental Health Management, Inc. ("DHMI"), a wholly-
owned subsidiary providing management and administrative services to dental
practices. At December 31, 1998, DHMI provides management and administrative
services to 57 dental practices in 7 states.
 
     On July 28, 1998, the Company entered into a merger agreement ("Merger
Agreement") with a newly formed company, TAGTCR Acquisition, Inc. (the
"Acquiror"), which was organized at the direction of Golder, Thoma, Cressey,
Rauner, Inc., TA Associates, Inc. and NMS Capital Partners (the "Equity
Investors"). Under the Merger Agreement, the Company will be re-capitalized and
each outstanding share of the Company's common stock, other than certain shares
held by management and other investors, will be converted into the right to
receive $15.00 in cash, and the existing funded indebtedness of the Company will
be refinanced (the "Pending Re-capitalization Transaction").
 
     The price to be paid to the Company's stockholders in the Pending
Re-capitalization Transaction initially was $18.00 per share. Subsequently, the
Acquiror informed the Company it was unlikely that the Acquiror would be able to
obtain financing for the Merger at the transaction price of $18.00 per share. As
a result, and following a review and analysis of relevant factors, the Merger
Agreement was amended on January 18, 1999 (the "Amendment") to, among other
things, reduce the cash purchase price to be paid to the Company's
<PAGE>   3
 
stockholders pursuant to the merger by $3.00 per share, from $18.00 per share to
$15.00 per share, and modify provisions of the Merger Agreement relating to
solicitation of other offers and termination fees.
 
     Specifically, the Amendment eliminated the "no solicitation" covenant in
the Merger Agreement, thus permitting the Company to solicit, respond to and
otherwise engage in negotiations concerning alternative proposals to engage in
business combinations (each, an "Acquisition Proposal"). In this regard, the
Special Committee of the Board of Directors ("Special Committee") continues to
recommend and support the TAGTCR transaction but expects that it will review any
alternative proposals that may arise, although no assurance can be given that
such proposals will be forthcoming. The Amendment also reduces the termination
fee which the Company is obligated to pay the Acquiror in the event it enters
into a transaction resulting from an Acquisition Proposal to the amount of the
out-of-pocket fees and expenses incurred in connection with the transactions
contemplated by the Merger Agreement up to a maximum of $1.5 million. The
Robinson-Humphrey Company, LLC, financial advisor to the Special Committee, has
advised that the merger consideration, as amended, is fair from a financial
point of view to the Company's stockholders.
 
     Prior to the signing of the Amendment, the Equity Investors received
revised commitment letters from NationsBank, N.A. and NationsBridge, L.L.C.
(collectively, "NationsBank") pursuant to which NationsBank agreed, subject to
customary terms and conditions, to provide a portion of the financing for the
proposed transaction, as amended, in the form of certain credit facilities. As a
result of the Amendment to the Merger Agreement, the total indebtedness now
required to finance the merger will be approximately $126.9 million; the
financial commitments of the Equity Investors remain unchanged at $87.7 million.
 
     Completion of the proposed transaction with the Acquiror remains subject to
availability of financing. However, the Acquiror has agreed that if it is unable
to close the merger due to the failure to receive financing, the Acquiror will
reimburse the Company for its out-of-pocket fees and expenses incurred in
connection with the transactions contemplated by the Merger Agreement up to a
maximum of $1.0 million. The Company currently expects to consummate the
transaction in the second quarter of 1999, with closing remaining subject to a
number of conditions, including shareholder and regulatory approval. At December
31, 1999, the Company has incurred approximately $1.2 million costs to complete
the proposed transaction. If the proposed transaction is not consummated, the
Company will recognize those costs.
 
     During 1998, the Company incurred $1,200 of costs related to its proposed
re-capitalization transaction. At December 31, 1998, these costs are included in
the Company's consolidated balance sheet. If the proposed transaction is not
consummated, then these costs will be expensed at that time.
 
MARKETS AND OPERATIONS; ACQUISITIONS
 
     The Company commenced operations in Florida in 1978 and until 1987
conducted business only in Florida. The Company established operations in
Georgia and Ohio in 1987 and 1990, respectively. The Company established
operations on a de novo basis in Alabama (1992), North Carolina (1993),
Mississippi (1993), Tennessee (1994) and South Carolina (1995). In 1994 and
1995, the Company entered markets in eight new states, including Texas,
Kentucky, Indiana and Missouri through acquisitions. In January 1996, the
Company acquired Texas Dental Plans, Inc. and certain of its affiliated entities
(collectively, "TDP") for $23.0 million in cash (the "TDP Acquisition"). TDP is
a San Antonio-based provider of low cost dental referral plans with operations
in fourteen states, including principally Texas, Louisiana, Oklahoma and
Pennsylvania. As a result of the TDP Acquisition, the Company expanded its
presence in seven states, entered markets in seven new states and expedited the
Company's development of the CompSave(C) product line. In addition, in May 1996,
the Company acquired all of the outstanding capital stock of Dental Care Plus
Management, Corp. and its wholly owned subsidiary (collectively, "Dental Care
Plus"), a Chicago-based third-party administrator and managed dental care plan,
for an aggregate purchase price of approximately $38.0 million (the "Dental Care
Plus Acquisition"). The Dental Care Plus Acquisition significantly expanded the
Company's presence in Illinois. In March 1997, the Company acquired American
Dental Providers, Inc. and Diamond Dental & Vision, Inc. (the "AMDP & DDV
Acquisitions") for $1.7 million in cash and stock. As a result of the AMDP & DDV
Acquisitions, the Company entered the Arkansas market. In July 1997, the Company
entered the dental practice management business with the acquisition of 21
dental facilities in
 
                                        2
<PAGE>   4
 
Illinois and one clinic in Florida for approximately $16.9 million in cash. In
addition, in September 1997, the Company acquired one dental facility in
Tennessee for $1.6 million in cash. In November 1997, the Company acquired six
dental facilities in Indiana for $2.0 million in cash. In January 1998, the
Company acquired five dental facilities in Georgia for $3.5 million in cash and
in April 1998, acquired two dental facilities in Arkansas for $1.4 million in
cash.
 
PRODUCTS AND SERVICES
 
     Managed Dental Plans.  The Company offers a variety of managed dental care
plans under the principal trade names American Dental Plan, American Prepaid
Dental Plan, DentiCare and CompDent(C) Dental Plan. The Company's managed dental
care plans operate similarly in each state in which business is conducted.
 
     Under the Company's managed dental care plans a premium is paid to the
Company by the Subscriber through payroll deduction or directly (in the case of
individual Subscribers), or by the Subscriber's employer, from the date the
Subscriber enrolls in the plan. The Subscriber selects a dentist from the
Company's panel to provide dental services. Each Panel Dentist provides dental
services to the Subscribers who selected that dentist in return for a portion of
the premium paid ("Capitation Payments") by the Subscriber. Thus, the Panel
Dentist receives steady monthly Capitation Payments from the Company according
to the number of Subscribers who have selected the dentist, regardless of the
frequency or value of dental services performed. Under a managed dental care
plan, Capitation Payments are fixed. Therefore, incentive to control costs and
the risk of over-utilization of dental services is shifted to the dentists.
 
     Members covered under the Company's managed dental care plans obtain
certain basic dental procedures (such as exams, x-rays, cleanings, and certain
fillings) at no additional charge beyond premium payments (other than, in some
cases, a small per visit co-payment). The plans establish co-payments for more
complicated services provided by the Panel Dentist, such as root canals and
crowns, which vary according to the complexity of the service and the level of
benefits purchased by subscribers. The Company's managed dental care plans also
cover services provided by specialists participating in the dental panel rather
than by the Panel Dentist selected by the Subscriber, including oral surgery,
endodontics, periodontics, orthodontics and pediatric dentistry. Members
typically receive a reduction from the specialist's usual and customary fees for
the services performed. The Company does not assume traditional insurance risk
under its managed dental care plan arrangements, except with respect to certain
specialty benefit plans described in more detail below under "Specialty Benefit
Plan."
 
     The Company's managed dental care plans are tailored to meet the needs of
different customers, and range from products having relatively higher levels of
benefits and premiums to products having relatively lower levels. A majority of
the Company's revenues from managed dental care plans for the year ended
December 31, 1998, were paid by Subscribers either directly or through employee
payroll deductions, with the remainder paid by employers on behalf of their
employees. The contracts between the Company and its Subscribers require the
payment of a monthly premium that is generally fixed for one year.
 
     Dual Choice Plans.  The Company's products also include dual choice plans
("Dual Choice Plans"), which allow Subscribers to choose between a managed
dental care plan offered by the Company and an indemnity dental insurance plan
underwritten by an unaffiliated licensed insurance company but marketed and
administered by the Company under an agreement with the underwriting insurer.
The Company believes that the ability to offer Dual Choice Plans enables it to
offer prospective customers flexibility, particularly when there are potential
Subscribers outside the area served by the Company's dental panel. Certain
states require that managed dental care plans be offered only as part of a Dual
Choice Plan and other states may do so in the future. Dual Choice Plans are
particularly effective as part of the Company's growth strategy in areas in
which the Company's dental panel is less developed and Subscribers may value the
ability to choose non-panel dentists.
 
     The indemnity insurance portion of the Company's Dual Choice Plans is
marketed and administered by the Company under contractual arrangements
primarily with independent insurance companies. Under the dental indemnity
insurance portion of the Dual Choice Plans, Subscribers are required to pay
small deductibles and co-payments which are generally higher than those which
are required under the Company's
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<PAGE>   5
 
managed dental care plans. Subscribers who select the indemnity plan are not
limited to the Company's Panel Dentists and may receive dental services from the
dentist of their choice. Under the contract with the third-party insurers, the
Company retains as a marketing and servicing fee a specified percentage
(typically 10-25%) of premiums paid by Subscribers under indemnity dental
insurance plans underwritten by the insurer and remits the remainder of such
premiums to the insurer.
 
     Reduced Fee-For-Service Plans.  In January 1996, the Company acquired TDP,
a Texas-based reduced fee-for-service dental company. The Company's reduced
fee-for-service products are offered principally under the trade names
CompSave(C), Texas Dental Plans and National Dental Plan. Members receive dental
care from a list of participating dentists who offer discounts from their usual
and customary fees. There are no claim forms or deductibles and no
pre-authorization approval is required. No Capitation Payments are made to the
dentists. The plan covers certain basic dental procedures as well as
orthodontics and cosmetic dentistry.
 
     Network Rental.  The Company has contracted to provide discount dental
benefits to members of several HMOs. Under this plan Members of the HMO receive
certain limited dental services from Panel Dentists at reduced rates as an
additional benefit under the health care plan provided by the HMO. The Company
receives a fixed monthly fee per Member to administer this plan and does not
make Capitation Payments to the Panel Dentists, who receive payments at rates
established under the plan directly from the Members who receive services. The
TDP Acquisition expanded the number of network rental Members. The Company may,
in the future, seek to provide similar plans to other organizations.
 
     ASO Services.  In connection with the Dental Care Plus Acquisition, the
Company began providing services as an Administrative Services Organization
("ASO") in certain markets to self-insured groups. The Company provides
comprehensive services to employers and other groups offering self-insured
dental plans, including billing and collections, claims processing and payment,
Member eligibility processing and customer service. The Company receives a
monthly fee in exchange for such services equal to a specified amount per each
Member of the plan.
 
     Specialty Benefit Plan.  The Company also offers a managed dental care plan
(the "Specialty Benefit Plan") whereby Members who require covered dental
services from participating specialists rather than their selected Panel
Dentists may receive them for specific co-payments rather than at a discount
from the specialists' usual and customary fees (as under the Company's more
standard plans). The Company typically collects a higher premium from the
Subscriber for this benefit and reimburses the specialist, resulting in the
Company assuming some risk of utilization of covered specialty dental services.
The Company uses actuaries to determine the cost of expected benefits under the
plan based on the anticipated level of utilization of specialty services by
Members.
 
     Dental Practice Management.  The Company has established a subsidiary,
DHMI, through which the Company manages and provides administrative services to
dental practices. The Company earns fees paid by the dental facilities for
providing management and administrative services and support to such dental
facilities. The Company owns the operating assets of the dental practices but
does not employ or contract with dentists or clinical personnel or control,
directly or indirectly, the provision of dental care or equipment related
thereto.
 
     Existing dental practices create the foundation for DHMI networks. DHMI
acquires the assets of and signs a Management Services Agreement ("MSA") with
the practices. Through the MSA, DHMI provides the resources and expertise
necessary to operate and improve the business and management elements of a
dental practice. These services may include billing and collections, accounting,
marketing, materials management, human resources, facility management and payor
relations. The practice, in turn, is obligated through the MSA to oversee the
provision of all patient care.
 
     DHMI derives all of its revenue from MSAs with its affiliated dental
practices. Under certain of the MSAs, DHMI receives a management fee equal to
DHMI's costs plus the lower of (i) the practice's net pre-tax income or (ii) 30%
of the practice's net revenue. DHMI's costs include all direct and indirect
costs, overhead and expenses relating to the provision of management services to
the practice under the MSA, such that substantially all of the costs associated
with the provision of dental services by the practice are borne by DHMI, other
than the compensation and benefits of the clinical personnel who are employed by
the practice.
 
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<PAGE>   6
 
PANEL DENTISTS
 
     The design and operating features of the Company's dental benefits are
intended to assist it in attracting and retaining quality Panel Dentists. These
plan features include co-payments, capitation rates, timely remittance of
Capitation Payments, maintenance of accurate Member eligibility information,
reduction of paperwork and other administrative functions, and the Company's
ability to deliver a reliable supply of new patients. As of December 31, 1998,
more than 7,300 primary-care and 4,500 specialty-care dentists were participants
on the Company's panel. The Company has experienced difficulty during the later
part of 1997 and 1998 in increasing the number of dentists in certain of its
markets. This was primarily due to the increased competition from indemnity and
PPO providers.
 
     In its efforts to establish a large panel of quality dentists in convenient
locations, the Company engages in an active marketing and recruitment program
emphasizing personal visits to potential Panel Dentists followed by a quality
management program involving screening of applications for panel membership,
reference checks with state licensing authorities, validation of malpractice
coverage, initial certification and periodic re-certification. Once a dentist
has been admitted to the Company's panel, the Company seeks to re-credential the
dentist on an annual basis by updating verification of professional credentials,
licenses, malpractice insurance coverage and legal compliance, conducting an
on-site visit and evaluation, and reviewing any complaints and/or questions
received from Members. The Company administers its quality management program
through a full-time staff of three dentists who serve as Regional Dental
Directors under the supervision of its National Dental Director, who is also a
dentist.
 
     Panel Dentists are generally independent from the Company and provide
services to Members pursuant to contractual arrangements with the Company. The
Company's relationships with its Panel Dentists are terminable by either party,
upon advance written notice (typically thirty or sixty days). The contracts do
not require Panel Dentists to provide services exclusively to Members of the
Company's plans. The Company may, following any required regulatory approval,
change the terms, capitation rates, benefits and conditions of the various plans
serviced by its Panel Dentists upon advance written notice. The Company's
contracts with Panel Dentists require the Dentists to maintain their own
malpractice insurance. The Company also carries insurance protecting it against
liability relating to acts or omissions of Panel Dentists.
 
MARKETING
 
     The Company markets its dental benefits through a large network of
independent agents and a direct sales force consisting of Company employees.
This dual distribution system is designed to reach large groups as well as
smaller groups and individual subscribers in an efficient and cost effective
manner. The Company seeks to avoid competition between its direct sales force
and its independent agents for the same or similar accounts and seeks to conduct
its direct sales efforts in a manner that avoids undermining the loyalty of
independent agents or their incentive to market the Company's plans on a regular
basis. The Company's direct sales force (often working with independent agents)
generally focuses on soliciting larger accounts, including employers with over
250 employees. Independent agents typically target mid-size and smaller
employers and individuals. The Company pays the independent agents commissions
based on revenue generated while its direct sales force receives a combination
of salary and a bonus program based on new Subscribers enrolled. The independent
agents typically do not market the Company's dental benefits on an exclusive
basis.
 
     The Company also has several departments and employees who facilitate Group
and Member retention. These departments and employees assist Members on such
matters as schedules of benefits, available Panel dentists, transfers from one
Panel dentist to another, emergency dental services, billing issues and other
administrative and customer service matters.
 
MANAGEMENT INFORMATION SYSTEMS
 
     The management information systems used by the Company are designed to
facilitate subscriber, provider and agent service. The Company depends on these
systems for comprehensive customer service, premium collection and
reconciliation, administration of capitation and commission payments, Member
eligibility processing, corporate accounting, and management reporting. The
Company's management infor-
                                        5
<PAGE>   7
 
mation systems are sufficiently flexible to allow it to offer multiple dental
benefits tailored to the needs of its customers and have the capability to
interface directly with the systems of its customers, which can facilitate
expeditious processing of changes in membership information. The Company has
established a disaster avoidance and recovery plan and has entered into
agreements for the transfer of its system and backed-up data to a compatible
computer in Atlanta. The Company utilizes a separate management information
system in connection with ASO services provided in Illinois.
 
     DHMI has licensed for use at its dental offices a management information
system for dental practice management. Substantially all of the managed dental
offices are currently utilizing this information system. DHMI uses the
information system to track data related to each dental office's operations. The
information system can provide each of the dental offices with data such as
patient and practitioner scheduling information, insurance coverage information,
clinical record-keeping and revenue and collection data (including credit
history). Within each market, DHMI uses the information system to manage billing
and collections, including electronic insurance claims processing.
 
     For specific Year 2000 disclosures, refer to Item 7, Certain Factors That
May Affect Future Results.
 
COMPETITION
 
     The Company operates in a highly competitive environment. Its principal
competitors include large insurance companies, which offer managed dental care
and indemnity dental products in most of the Company's markets, and independent
companies including for-profit and not-for-profit HMOs, DHMOs, self-funded
plans, PPOs and reduced fee-for-service dental plans offering dental benefits
similar to those offered by the Company.
 
     The principal competitive factors in the dental benefits industry are the
cost of services (based on the level and type of benefits, premiums and
co-payments), the reputation of the plan for providing quality dental care and
the size of the plan's provider network (including the number of available Panel
Dentists and the convenience of their locations). Price competition may be
especially relevant in seeking the accounts of governmental employers which
award contracts on a periodic basis through competitive bidding. The dental
benefits industry in general has been subjected to periods of intense price
competition in the past, and similar intense competition in the managed dental
care industry may occur in the future. The Company has experienced increased
competition from indemnity insurance companies through direct entry into the
managed dental care market. It is likely that these efforts will intensify in
the future. Frequently, such plans are offered in tandem with indemnity dental
insurance coverage and/or PPO alternatives. In addition, an increasing number of
medically oriented HMOs and PPOs include dental care benefits as part of their
benefit programs.
 
     The Company's dental benefits business does not require substantial amounts
of capital and, other than government regulation, systems operating costs and
the cost of obtaining and monitoring a dental panel, there are no significant
barriers to new competitors entering the market. There can be no assurance that
the Company will be able to compete successfully with existing competitors or
new market entrants. Any such additional competition could adversely affect the
Company's results of operations.
 
     Indemnity dental insurance coverage offered by insurance carriers may have
a competitive advantage over other dental benefit plans because many such
carriers are better known, are significantly larger and have substantially
greater financial and other resources than the Company. Indemnity dental
insurance coverage also has the benefit of allowing a beneficiary to select
almost any licensed dentist, while participants in the benefits offered by the
Company typically must select a dentist from the plan's panel.
 
     Beginning in the latter part of 1997 and continuing through 1998, the
Company experienced increased competition for subscribers and aggressive pricing
by competitors, in particular, by a number of the larger indemnity insurance
companies with respect to PPOs and indemnity insurance plans. A number of these
larger competitors also entered the dental HMO market by either acquiring small
dental HMO companies or starting their own dental HMO plans. The inability to
increase subscribers also had a significant adverse effect on the Company's
ability to expand its panel of dentists. This in turn, made it more difficult to
attract new
 
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<PAGE>   8
 
subscribers. In addition, growth through acquisitions in 1998 was more difficult
to achieve because of an overall increase in acquisition prices as well as the
fact that the Company's reduced stock price made acquisitions more expensive and
dilutive to earnings. These events had an adverse impact on the Company's
ability to increase its subscriber premiums and other revenue during 1998 as
compared to prior periods.
 
     The dental services industry is highly fragmented, consisting primarily of
solo and smaller group practices. The dental practice management segment of this
industry is highly competitive and is expected to become even more competitive.
In this regard, the Company expects that the provision of multi-specialty dental
services at convenient locations will become increasingly more common. The
Company is aware of several dental practice management companies that are
currently operating in its existing markets. Companies with dental practice
management businesses similar to that of DHMI, which currently operate in other
parts of the country, may begin targeting DHMI's existing markets for expansion.
Such competitors may be better capitalized or otherwise enjoy competitive
advantages which may make it difficult for the Company to compete against them
or to acquire additional dental offices on terms acceptable to the Company. As
the Company seeks to expand its operations into new markets, it is likely to
face competition from dental practice management companies, which already have
established a strong business presence in such locations.
 
     The business of providing general dental, orthodontic and other specialty
dental services are highly competitive in the markets in which DHMI operates.
DHMI believes it competes with other providers of dental and specialty services
on the basis of factors such as brand name recognition, convenience, cost and
the quality and range of services provided. Competition may include
practitioners who have more established practices and reputations. DHMI's
affiliated dental practices also compete in the retention and recruitment of
general dentists, specialists and clinical staff. If the availability of
dentists begins to decline in DHMI's markets, it may become more difficult to
attract qualified dentists to staff the dental offices sufficiently or to expand
them. The dental offices may not be able to compete effectively against other
existing practices or against new single or multi-specialty dental practices
that enter its markets, or to compete against such other practices in the
recruitment of qualified dentists.
 
GOVERNMENT REGULATION
 
     The Company's business is and will continue to be subject to substantial
governmental regulation, principally under the insurance laws of the states in
which the Company conducts business and may in the future conduct business.
Although specific requirements vary from state to state, these laws generally
require that the Company's subsidiaries operating in that state be licensed by
the relevant state insurance department to offer its dental care products and
otherwise conduct its operations, and may also prescribe minimum levels of net
worth and reserves; limit the ability of the Company's subsidiaries to pay
dividends to the extent required regulatory capital would be impaired; establish
the manner in which premiums are determined or structured, require filing for
approval of products; certain product literature, premium levels and contract
forms with subscribers, dentists and others (which may entail substantial delay
in implementing changes or introducing new products), in some cases establish
minimum benefit levels for the Company's dental products; provide for periodic
examinations, including quality assurance review; establish standards for the
Company's management and other personnel; specify measures for resolving
grievances and generally prohibit the acquisition of more than specified levels
(as low as 5% in current states of operation) of the Company's outstanding
voting power without prior approval. These regulatory provisions generally grant
plenary power to the relevant agencies in interpreting and administering the
applicable laws and regulations. Various state regulatory agencies and
legislatures have in the past considered, are presently considering, and may in
the future propose regulatory and legislative changes, such as the establishment
of prescribed minimum Capitation Payments to Panel Dentists, minimum loss ratios
or mandated schedules of benefits and the adoption of legislation requiring the
Company to admit "any willing provider" to its dental panels, that could
adversely affect the Company's business and profitability. In addition, health
care and insurance reform initiatives have been proposed and may be proposed in
the future at the state and federal levels, which may adversely affect the
Company's business and profitability. The Company is unable to determine the
likelihood or effect of any such regulatory or legislative changes.
 
                                        7
<PAGE>   9
 
     State regulatory requirements may also limit the Company's ability to
operate in certain existing markets or adversely affect its ability to enter new
markets on a de novo basis or through acquisitions. In some states the Company
can only conduct business through a contractual arrangement with a licensed
indemnity carrier or a full service HMO, which is generally a less advantageous
and more cumbersome arrangement than offering managed dental care plans
directly. The Company conducts business in such states through such arrangements
with Shenandoah Life Insurance Company ("Shenandoah") and American Chambers Life
Insurance Company. The Company cannot generally enter new states on a de novo
basis without obtaining required licenses and approvals, a process which can
take as long as two years or more in certain states. The acquisition of managed
dental care companies generally requires the prior approval of the state
regulatory authorities in the states in which these companies do business, which
can take up to six months or more, and relevant state laws concerning regulatory
capital and surplus in many cases prohibit these entities from guaranteeing
parent company debt, thus possibly limiting the Company's ability to obtain
acquisition financing. While the regulated nature of the Company's industry may
interfere with management's plans for further geographic expansion, this
regulatory environment also governs, to a greater or lesser extent, the conduct
and expansion prospects of existing and new competitors.
 
     Failure to maintain regulatory compliance and constructive relationships
with relevant regulatory authorities could adversely affect the Company's
ability to conduct its business, for example, by limiting the Company's ability
to obtain required approvals for new products or premium increases. In an
extreme case, failure to comply with relevant laws and regulations may result in
revocation of one or more of the Company's licenses. The Company's policy is to
pay close attention to regulatory compliance matters.
 
     In connection with the marketing and administration by the Company of the
indemnity insurance benefits that are offered as a part of its Dual Choice
Plans, the Company may be subject to license and regulation as a "third-party
administrator" in certain states. Such regulation typically is less extensive
than regulation applicable to the managed dental care plans offered directly by
the Company. In addition, if the Company is licensed to offer managed dental
care plans in such states, it may be exempt from regulation as a third-party
administrator.
 
     DHMI is also subject to a variety of governmental and regulatory
requirements relating to the conduct of its business. DHMI seeks to structure
its business practices and arrangements with dental practices to comply with
relevant federal and state law and believes that such arrangements and practices
comply in all material respects with all applicable statutes and regulations.
The health care industry and dental practices are highly regulated, and there
can be no assurance that the regulatory environment in which DHMI operates will
not change significantly and adversely in the future.
 
     The laws of many states prohibit corporations that are not owned entirely
by dentists from employing dentists (and in some states, dental hygienists and
dental assistants), having control over clinical decision-making or engaging in
other activities that are deemed to constitute the practice of dentistry. DHMI
does not employ dentists or dental hygienists and does not exercise control over
any prohibited areas. Also, the laws and regulations of certain states into
which DHMI seeks to expand may require DHMI to change the form of relationships
entered into with dentists in a manner that restricts DHMI's operations in those
states.
 
     The operations of DHMI are also subject to compliance with regulations
promulgated by the Occupational Safety and Health Administration ("OSHA"),
relating to such matters as heat sterilization of dental instruments and the
usage of barrier techniques; such as, masks, goggles and gloves. DHMI incurs
expenses on an ongoing basis relating to OSHA monitoring and compliance.
 
     DHMI believes that health care regulations will continue to change, and as
a result, regularly monitors developments in health care law. DHMI expects to
modify its agreements and operations from time to time, if necessary, as the
business and regulatory environment change.
 
EMPLOYEES
 
     The Company had approximately 900 employees at December 31, 1998.
 
                                        8
<PAGE>   10
 
ITEM 2.  PROPERTIES
 
     All offices and facilities of the Company are leased. The Company's leased
properties are in generally good condition and are adequate for their intended
use.
 
ITEM 3.  LEGAL PROCEEDINGS
 
     The Company, from time to time, may be involved in various claims and legal
proceedings arising in the ordinary course of its business. The Company is not
currently a party to any such claims or proceedings, which if decided adversely
to the Company, would either individually or in the aggregate have a material
adverse effect on the Company's business, financial condition or results of
operations. See Note 16 in the Company's Consolidated Financial Statements
included herein.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     None
 
                                    PART II
 
ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
 
MARKET INFORMATION
 
     The Common Stock of the Company has been traded on the Nasdaq National
Market ("Nasdaq") since the Company's initial public offering on May 24, 1995
and currently trades under the symbol "CPDN". The following table sets forth the
high and low closing sales prices for the Company's Common Stock as reported by
Nasdaq for the periods indicated:
 
<TABLE>
<CAPTION>
                                                               MARKET PRICES(1)
                                                               ----------------
FISCAL QUARTERS                                                HIGH($)   LOW($)
---------------                                                -------   ------
<S>                                                            <C>       <C>
1998
  First.....................................................     20 1/4     9
  Second....................................................     17        12 1/2
  Third.....................................................     17 1/2    12 3/4
  Fourth....................................................     14 1/8     9 7/8
1997
  First.....................................................     39 1/4    27 1/2
  Second....................................................     27 3/8    14 1/4
  Third.....................................................     26 1/8    19 3/8
  Fourth....................................................     27 5/8    18 5/8
</TABLE>
 
---------------
 
(1) The prices listed reflect inter-dealer prices without retail mark-up,
    markdown or commission and may not necessarily represent actual
    transactions.
 
HOLDERS
 
     The number of record holders of the Company's Common Stock as of March 10,
1999 was approximately forty-three (43). The Company believes that the number of
beneficial owners of the Company's Common Stock at that date was substantially
greater.
 
DIVIDENDS
 
     The Company did not pay cash dividends on its Common Stock during the years
ended December 31, 1998 and December 31, 1997. The Company does not currently
intend to pay cash dividends on its Common Stock in the foreseeable future.
Under the Company's senior credit facility, the distribution of dividends would
require the lender's consent. Applicable laws generally limit the ability of the
Company's subsidiaries to pay
 
                                        9
<PAGE>   11
 
dividends to the extent that required regulatory capital would be impaired,
which in turn further limits the Company's ability to pay dividends.
 
ITEM 6.  SELECTED FINANCIAL DATA
 
     The selected consolidated statement of income data and balance sheet data
set forth below for, and at the end of, the years ended December 31, 1994, 1995,
1996, 1997 and 1998, are derived from the consolidated financial statements of
the Company. The selected consolidated financial information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's consolidated
financial statements and related notes.
 
                                  THE COMPANY
 
<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                               ---------------------------------------------------
                                                1994       1995       1996       1997       1998
                                               -------   --------   --------   --------   --------
                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                            <C>       <C>        <C>        <C>        <C>
Consolidated Statement of Income Data:
  Revenues...................................  $55,192   $106,661   $141,069   $158,726   $173,259
  Dental providers' fees and claim costs.....   30,262     62,218     73,431     81,690     78,470
  Commissions................................    6,800     10,763     12,184     13,272     13,478
  Gross profit...............................   18,130     33,680     55,454     63,764     81,311
  DHMI operating expenses....................       --         --         --      5,036     21,448
  General and administrative, including
     premium taxes...........................   10,827     20,827     31,412     40,329     33,150
  Depreciation and amortization..............    2,195      2,717      5,153      5,735      5,542
  Goodwill impairment........................       --         --         --     58,953         --
  Operating income (loss)....................    5,108     10,136     18,889    (46,289)    21,171
  Interest expense...........................    2,464      1,970      1,935      3,239      4,343
  Other (income) expense, net................      (77)      (803)      (804)      (723)      (875)
  Income (loss) before provisions for income
     taxes and extraordinary item............    2,721      8,969     17,758    (48,805)    17,703
  Income tax provision.......................    1,316      3,765      7,866      4,900      7,613
  Income (loss) before extraordinary item....    1,405      5,204      9,892    (53,705)    10,090
  Extraordinary loss, net of applicable tax
     benefit of $305.........................       --        498         --         --         --
  Net income (loss)..........................    1,405      4,706      9,892    (53,705)    10,090
Income (loss) per common share -- basic:
  Income (loss) before extraordinary item....     0.31       0.69       0.98      (5.32)      1.00
  Extraordinary loss.........................       --      (0.07)        --         --         --
  Income (loss) income per common share......     0.31       0.62       0.98      (5.32)      1.00
Income (loss) per common share -- diluted:
  Income (loss) before extraordinary loss....     0.30       0.68       0.97      (5.32)      0.99
  Extraordinary loss.........................       --      (0.07)        --         --         --
  Net income (loss) per common share.........     0.30       0.61       0.97      (5.32)      0.99
  Weighted average common shares
     outstanding.............................    4,149      7,241     10,049     10,098     10,113
  Weighted average common shares outstanding
     with dilutive securities................    4,252      7,352     10,177     10,098     10,176
</TABLE>
 
                                       10
<PAGE>   12
 
                                  THE COMPANY
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                              ---------------------------------------------------------
                                              1994(1)   1995(1)(2)   1996(3)(4)   1997(5)(6)   1998(7)
                                              -------   ----------   ----------   ----------   --------
<S>                                           <C>       <C>          <C>          <C>          <C>
Consolidated Balance Sheet Data:
  Total current assets......................  $14,488    $ 46,254     $ 34,083     $ 37,283    $ 24,328
  Total assets..............................   63,342     129,396      184,167      150,871     150,771
  Total current liabilities.................   16,597      21,041       24,273       26,067      18,089
  Total liabilities.........................   53,983      27,219       71,984       90,595      80,376
  Redeemable preferred......................    5,159          --           --           --          --
  Stockholders' equity......................    4,200     102,177      112,183       60,276      70,395
</TABLE>
 
---------------
 
(1) The DentiCare and UniLife acquisitions were completed on December 28, 1994,
    and DentiCare and UniLife are therefore included in the consolidated balance
    sheet of the Company at December 31, 1994, and the consolidated statement of
    income of the Company for the years ended December 31, 1995.
(2) The CompDent acquisition was completed on July 5, 1995, and CompDent is
    therefore included in the consolidated balance sheet of the Company at
    December 31, 1995, and the consolidated statement of income of the Company
    for the years ended December 31, 1995.
(3) The Texas Dental acquisition was completed on January 8, 1996 and Texas
    Dental is therefore included in the consolidated balance sheet of the
    Company at December 31, 1996, and the consolidated statement of income of
    the Company for the year ended December 31, 1996.
(4) The Dental Care Plus acquisition was completed on May 8, 1996, and Dental
    Care Plus is therefore included in the consolidated balance sheet of the
    Company at December 31, 1996, and the consolidated statement of income of
    the Company for the year ended December 31, 1996.
(5) The American Dental Providers and Diamond Dental & Vision acquisition was
    completed on March 21, 1997 and is therefore included in the consolidated
    balance sheet of the Company at December 31, 1997, and the consolidated
    statement of income of the Company for the year ended December 31, 1997.
(6) The Workman Management Group, Old Cutler Dental Associates, Robert T.
    Winfree, D.D.S. and the Stratman Management Group acquisitions were
    completed on July 2, 1997, July 2, 1997, September 26, 1997 and November 7,
    1997, respectively, and these five are included in the consolidated balance
    sheet of the Company at December 31, 1997, and the consolidated statement of
    income of the Company for the year ended December 31, 1997.
(7) The Michael H. Reznik, D.D.S., P.C. and R. Kendall Roberts, D.D.S., P.C.,
    d/b/a Newhealth Dental Group, acquisitions were completed on January 2, 1998
    and April 30, 1998, respectively, and are included in the consolidated
    balance sheet of the Company at December 31, 1998, and the consolidated
    statement of income of the Company for the year ended December 31, 1998.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
Overview
 
  Type of Services
 
     The Company is a full-service dental benefits provider. Approximately 82%
of revenues are generated from managed dental care plan subscriber premiums. In
addition, DHMI generates approximately 13% of the Company's revenues from
providing management services and support to dental practices. Reduced fee-for-
service plans and third-party administrator services generate the balance of
revenues.
 
     Under managed dental care plans, Subscribers pay a premium to receive
dental services from a dentist, which the subscriber selects from a panel of
dentists. The Company pays the Panel Dentists a monthly capitation fee, which is
fixed under the participating dental agreement regardless of the extent of
services provided. Historically, the cost structure within managed dental care
plans results in capitations of approximately 60% of revenues, commission
expense of approximately 10% of revenues, and general and administrative
expenses of approximately 20% of revenues, leaving an operating margin of
approximately 10% of revenues. Dual Choice plans allow members to choose between
a managed dental care plan offered by the Company or a traditional dental
indemnity insurance plan underwritten by an unaffiliated insurance company,
                                       11
<PAGE>   13
 
but marketed and administered by the Company under agreements with the
underwriting insurers. A small portion of the Company's revenues is generated
from commissions earned from the insurance companies underwriting such dental
indemnity insurance.
 
     In reduced fee-for-service plans, the subscriber pays a fee for access to a
panel of dentists. The dentists on the panel have agreed to provide services at
reduced rates. The subscriber pays the dentist at the reduced rate for services
provided at the time of service delivery. Therefore, this type of plan involves
no payment by the Company to the dentists. Historically, the cost structure
within reduced fee-for-service plans consists of no capitation expense,
commission expense of approximately 25% of revenues, and general and
administrative expenses of approximately 40% of revenues, leaving an operating
margin of approximately 35% of revenues.
 
     Revenues from third-party administrator arrangements are earned by managing
the claims processing and paying function for groups. The groups fund the claims
and pay a service fee to the Company. Historically, the cost structure within
third-party administrator arrangements consists of no capitation expense,
commission expense of approximately 5% of revenues, and general and
administrative expenses of approximately 70% of revenues, leaving an operating
margin of approximately 25% of revenues.
 
     DHMI earns its revenues from the provision of management services to the
dental practices. These services include billing and collections, accounting,
marketing, materials management, human resources, facility management and payor
relations. Affiliated practice revenue represents the gross revenue of the
affiliated dental practices, reported at estimated realizable amounts, received
from third-party payors and patients for dental services rendered. DHMI
operating expenses consist of the expenses incurred by DHMI in connection with
managing the affiliated dental practices, including salaries and benefits of
personnel, dental supplies, dental laboratory fees, occupancy costs, equipment
leases, management information systems and other expenses related to affiliated
dental practice operations. The Company also incurs personnel and administrative
expenses in connection with maintaining a corporate function that provides
management, administrative, marketing and development services to the affiliated
dental practices.
 
  Business Combinations
 
     Effective March 21, 1997, the Company completed the acquisition of American
Dental Providers, Inc. ("AMDP"), an Arkansas based managed dental care company,
and Diamond Dental & vision, Inc. ("DDV"), which provided to the Arkansas market
a vision plan and referral fee-for-service dental plan. The aggregate purchase
price of $1.7 million consisted of $0.5 million in cash and $1.2 million of
Company common stock issued at fair market value. AMDP provides managed dental
care services through a network of dental care providers, and DDV provides a
vision plan and referral fee-for-service dental plan to the Arkansas market. The
Company funded the cash portion of the purchase with cash available from
operations. The acquisition of AMDP and DDV was accounted for using the purchase
method of accounting with the results of operations of the businesses acquired
included from the effective date of the acquisition. The acquisition resulted in
excess of cost over fair value of net assets acquired of $2.4 million which is
being amortized over 40 years.
 
     Effective July 2, 1997, the Company completed the acquisition of 21 dental
facilities from The Workman Management Group, LTD ("Workman"). The dental
facilities are located in central and southern Illinois. The purchase price
consisted of $15.5 million in cash, and with funding mainly from the revolving
line of credit. Concurrent with the acquisition, the Company entered into a
forty-year agreement to manage the dental practices which are operating in the
dental facilities. The acquisition of Workman was accounted for using the
purchase method of accounting with the results of operations of the business
acquired included from the effective date of the acquisition. In accordance with
the transaction, the management agreement resulted in fair value of an
intangible asset of $16.6 million which is currently being amortized over 40
years.
 
     During the third and fourth quarter of 1997, the Company completed the
acquisition of several dental facilities from three additional dental groups.
Effective July 2, 1997, the Company completed the acquisition of one dental
facility located in southern Florida from the Old Cutler Dental Associates, P.A.
("Old Cutler"). Effective September 26, 1997, the Company completed the
acquisition of one dental facility located in central Tennessee from Robert T.
Winfree, D.D.S., P.C. ("Winfree"). Effective November 7, 1997, the Company
                                       12
<PAGE>   14
 
completed the acquisition of Stratman Management Group ("Stratman") and its six
dental facilities located in Indiana. The purchase price of these facilities
consisted of $5.0 million in cash less discharge of liabilities related to the
purchased assets. Funding for the acquisitions was obtained from cash available
from operations and from the Company's revolving line of credit. Concurrent with
the acquisitions, the Company entered into forty-year agreements to manage the
dental practices which are operating in the dental facilities. Each acquisition
was accounted for using the purchase method of accounting with the results of
operations of the businesses acquired included from the effective date of the
acquisition. In accordance with the transaction, the management agreement
resulted in fair value of an intangible asset of $6.2 million which is currently
being amortized over 40 years.
 
     During the fourth quarter of 1997, management evaluated goodwill impairment
pursuant to the Company's existing policy. The evaluation indicated no
impairment which was deemed contrary to events occurring in the fourth quarter.
The events that led to this conclusion and to the Company experiencing declines
in historic growth rates, pricing, and margins are as follows: predatory pricing
of traditionally more expensive indemnity and preferred provider organization
products, a significant penetration of the Company's market by large insurance
carriers either by acquiring the Company's competitors or starting their own
dental health maintenance organization (HMO), and difficulty the Company
experienced in recruiting new panel dentists in certain markets where there was
not full acceptance of the prepaid concept. These events combined with a
significant unanticipated decrease in the growth of the overall dental HMO
market forced the Company's projected growth rates from their historic levels of
approximately 20% to 6% to 8% per annum. Although these events were occurring
throughout 1997, the Company believed that historic growth rates could be
achieved in 1998. However, it became apparent that new business and renewals,
which are traditionally sold in the fourth quarter for the following year, did
not support this assertion.
 
     Consistently applying the historical policy mentioned above did not result
in the recognition of impairment which was inconsistent with the events that had
occurred in the Company's business. Therefore, management concluded that its
accounting policy pursuant to APB No. 17 for assessing recoverability of
goodwill not identified with assets subject to an impairment loss should be
changed from an undiscounted approach to a discounted approach as an estimate of
fair value.
 
     The Company's discounted cash flow analysis was calculated using
projections for a period of 5 years and a discount rate and terminal value
multiple that would be customary for evaluating current dental benefit company
transactions and multiples. At December 31, 1997 the discount rate and the
terminal multiple used was 13% and 7, respectively. The assumptions were
selected by utilizing a weighted average cost of capital and multiple for the
Company's peer group. In addition, the Company estimated a growth rate of 6% per
annum. The assumptions used in this analysis represent management's best
estimate of future results. However, actual results could differ from these
estimates.
 
     As a result of this accounting change, the goodwill attributable to the
acquisition of CompDent was reduced from $32.1 million to $13.9 million.
Additionally, the goodwill attributable to the acquisition of Dental Care Plus
was reduced from $39.1 million to $8.8 million, DentiCare was reduced from $14.4
million to $6.0 million and AMDP and DDV was reduced from $2.1 million to $0, or
a total reduction of $59.0 million. The goodwill associated with these
acquisitions is being amortized over the remaining forty-year life.
 
     Effective January 2, 1998, the Company completed the acquisition of five
dental facilities from Michael H. Reznik, D.D.S., P.C. ("Reznik"). The dental
facilities are located in Atlanta, Georgia. The purchase price consisted of $3.5
million in cash less discharge of liabilities related to the purchased assets.
Funding for the acquisition was obtained from cash available from operations and
from the Company's revolving line of credit. Concurrent with the acquisition,
the Company entered into a 40-year agreement to manage the dental practices,
which are operating in the dental facilities. The acquisition of Reznik was
accounted for using the purchase method of accounting with the results of
operations of the business acquired included from the effective date of the
acquisition. In accordance with the transaction, the management agreement
resulted in fair value of an intangible asset of $5.1 million which is being
amortized over 40 years.
 
     Effective April 30, 1998, the Company completed the acquisition of two
dental facilities from R. Kendall Roberts, D.D.S., P.C., d/b/a Newhealth Dental
Group, ("Roberts"). The dental facilities are located in Fort
                                       13
<PAGE>   15
 
Smith, Arkansas. The purchase price consisted of $1.4 million in cash. Funding
for the acquisition was obtained from cash available from operations and from
the Company's revolving line of credit. Concurrent with the acquisition, the
Company entered into a 40-year agreement to manage the dental practices, which
are operating in the dental facilities. The acquisition of Roberts was accounted
for using the purchase method of accounting with the results of operations of
the business acquired included from the effective date of the acquisition. There
were no liabilities, material assets acquired or material transaction costs
incurred. In accordance with the transaction, the management agreement resulted
in fair value of an intangible asset of $1.4 million which is being amortized
over 40 years.
 
RESULTS OF OPERATIONS
 
  Year ended December 31, 1998, compared to the year ended December 31, 1997
 
     Revenues increased by $14.6 million, or 9.2%, to $173.3 million in 1998
from $158.7 million in 1997. Of the increase, $14.1 million was attributable to
an increase in affiliated practice revenues at DHMI and $2.2 million was
attributable to management fees received from Dental Health Development
Corporation ("DHDC"), which commenced operations in the third quarter of 1997.
The increase was offset by a reduction in subscriber premiums and other revenue
of $1.7 million for 1998, compared to 1997. The decrease in subscriber premiums
and other revenue in 1998 as compared to 1997 was the result of factors
beginning in the latter part of 1997 and continuing through 1998, including
increased competition for subscribers and aggressive pricing by competitors,
especially larger indemnity insurance companies via PPOs and indemnity insurance
plans. A number of these larger competitors also entered the dental HMO market
by either acquiring small dental HMO companies or starting their own dental HMO
plans. The inability to increase subscribers also had a significant adverse
effect on the Company's ability to expand its panel of dentists. This in turn
has made it more difficult to attract new subscribers. In addition, growth
through acquisitions in 1998 was more difficult to achieve because of an overall
increase in acquisition prices as well as the fact the Company's inability to
finance acquisitions through the issuance of its stock due to its reduced stock
price.
 
     Dental care providers' fees and claim costs decreased $3.2 million, or
3.9%, to $78.5 million in 1998 from $81.7 million in 1997. Dental care
providers' fees represent capitation payments paid to Panel Dentists under the
Company's managed dental care plans. Under managed dental care plans, capitation
payments to Panel Dentists are fixed under the participating dental agreement
regardless of the extent of services provided. Dental claim costs represent
amounts payable to dental care providers under certain non-capitated plans. The
decrease in dental care providers' fees and claim costs was due in part to a
$2.0 million unusual charge in 1997 associated with the settlement of the
risk-sharing provisions of one of its indemnity relationships. The remainder of
the decrease was due to the decrease in subscriber premiums. Dental care
providers' fees and claims costs decreased to 55.1% from 56.9% of subscriber
premiums in 1998 and 1997, respectively. In December 1997, the Company settled
the claims of certain of its participating dentists with respect to the failure
to make capitation payments to the participating dentists for the period of time
between when the affected subscribers enrolled and the time at which the
subscribers selected a dentist. In connection with its settlement of these
claims, various subsidiaries of the Company amended their Participating Dentist
Agreements to provide that they will pay capitation fees to the dentist when
there has been a delay between the time a subscriber initially enrolled in the
dental plan and the date they selected a dentist for all subscribers who enroll
after January 1, 1999. Although the Company believes the impact of the
amendments will have an insignificant effect on providers' fees and claim costs,
no reasonable estimate of this effect can be made at this time.
 
     Commission expense increased $0.2 million, or 1.5%, to $13.5 million in
1998 from $13.3 million in 1997. The increase reflects a shift in emphasis
toward reliance on independent agents and away from a larger direct sales force.
As a percentage of subscriber premiums, commissions increased to 9.5% in 1998
from 9.3% in 1997.
 
     General and administrative and DHMI operating expenses increased $9.4
million, or 21.2%, to $53.7 million in 1998 from $44.3 million in 1997. Of the
increase, $16.4 million was the result of expenses related to the generation of
affiliated practice revenue from DHMI which was offset by the absence in 1998 of
the $7.4
 
                                       14
<PAGE>   16
 
million in unusual charges which were recorded in the fourth quarter of 1997.
The unusual charges included a reserve for a surplus note ($2 million), reserve
for incurred practice management startup costs ($1.4 million), litigation
settlement costs ($1.6 million) and other costs ($2.4 million). As a percentage
of total revenues, this expense increased to 31.0% in 1998 from 27.9% in 1997.
 
     Depreciation and amortization expense, including goodwill impairment,
decreased $59.2 million, or 91.5%, to $5.5 million in 1998 from $64.7 million in
1997. This decrease was primarily due to the $59.0 million in write-offs for
goodwill impairment in the fourth quarter of 1997. The goodwill impairment
resulted from the Company's determination that the recoverability of goodwill
should be determined through discounted projections of future cash flows instead
of un-discounted cash flows, utilizing an economic rate of return that would be
customary for evaluating the present value of future cash flows of current
dental benefit company transactions. The remaining $0.2 million decrease was
comprised of a decrease in goodwill amortization from 1997 to 1998 of $1.4
million due to the goodwill impairment which was offset by an increase from 1997
to 1998 of $1.2 million in depreciation expense derived from purchases of
leasehold improvements and dental equipment for the Company's dental office
management business. Effective January 1, 1999, the Company has implemented a
change in estimate, for the dental office management business, from 40 to 25
years, to amortize the remaining intangible assets prospectively using the
remaining life as of January 1, 1999. The remaining life will be calculated
using the original purchase date. This change in estimate will result in an
increase of amortization from 1998 to 1999.
 
     Interest income increased $0.2 million, or 28.6%, to $0.9 in 1998 from $0.7
in 1997. This increase was primarily due to a shift in investing cash in higher
yielding liquid instruments.
 
     Interest expense increased $1.1 million, or 34.4%, to $4.3 million in 1998
from $3.2 million in 1997. The Company had $55.5 million of debt outstanding at
December 31, 1998. The increase was primarily related to interest on additional
debt incurred to finance DHMI acquisitions during the third and fourth quarters
in 1997 and the first and second quarters of 1998. Any future acquisitions may
cause the Company to incur additional indebtedness under its revolving credit
facility or otherwise. The Pending Re-capitalization Transaction contemplates a
substantial increase in the Company's indebtedness which will in turn increase
the Company's interest expense.
 
     In 1998, the Company's effective income tax rate decreased to 43.0%
compared with 48.3% (excluding the $59.0 million in write-offs for goodwill
impairment) in 1997. The decrease is primarily attributable to the reduction of
non-deductible goodwill amortization and an increased level of net income.
 
     As a result of the above mentioned factors, the net income for 1998 was
$10.1 million, or $1.00 per share -- basic ($0.99 per share-diluted), compared
to net loss of $53.7 million, or $5.32 per share -- basic and diluted, for 1997.
 
  Year ended December 31, 1997, compared to the year ended December 31, 1996
 
     Revenues increased by $17.6 million, or 12.5%, to $158.7 million in 1997
from $141.1 million in 1996. Of the increase, $6.1 million, was attributable to
revenues contributed by DHMI and $1.8 was attributable to management fees
received from DHDC, which commenced operations in 1997. The addition of AMDP and
DDV and Dental Care Plus revenues following the acquisitions of these companies
accounted for $0.9 million and $2.1 million, respectively, of this increase.
Internal growth accounted for $6.7 million of the growth in subscriber premiums.
 
     Other revenue increased by $2.9 million, or 54.7%, to $8.2 million in 1997
from $5.3 million in 1996. The increase was primarily attributable to $2.0
million of Dental Care Plus third-party administrator fees and management fees
in 1997 following the May 1996 Dental Care Plus acquisition.
 
     Dental care providers' fees and claim costs increased $8.3 million, or
11.3%, to $81.7 million in 1997 from $73.4 million in 1996. Dental care
providers' fees represent capitation payments paid to panel dentists under the
Company's managed dental care plans. Under managed dental care plans, capitation
payments to panel dentists are fixed under the participating dental agreement
regardless of the extent of services provided. Dental claim costs represent
amounts payable to dental care providers under certain non-capitated plans. The
increase
                                       15
<PAGE>   17
 
in dental care providers' fees and claim costs was due in part to a $2.0 million
unusual charge associated with the settlement of the risk-sharing provisions of
one of its indemnity relationships. Dental care providers' fees and claims costs
increased to 57.0% from 54.1% of subscriber premiums in 1997 and 1996,
respectively. The increase was partially the result of the unusual charge
mentioned above.
 
     Commission expense increased $1.1 million, or 9.0%, to $13.3 million in
1997 from $12.2 million in 1996. The $1.0 million increase in commission expense
was the result of internal growth in subscriber premiums. As a percentage of
subscriber premiums, commissions increased to 9.3% in 1997 from 9.0% in 1996.
 
     Premium taxes remained the same in 1997 as a percentage of subscriber
premiums at 0.7%
 
     General and administrative expenses increased $13.9 million, or 45.7%, to
$44.3 million in 1997 from $30.4 million in 1996. As a percentage of total
revenues, this expense increased to 27.9 % in 1997 from 21.5% in 1996. Of this
increase, $5.0 million, or 35.5%, was related to the operating costs of DHMI's
dental facilities. This increase as a percentage of revenues is due to higher
general and administrative costs ($2.1 million or 14.8%) added following the
January startup of DHMI. The remaining increase related to the $7.4 million in
unusual and one-time charges which were recorded in the fourth quarter of 1997.
The unusual and one-time charges included a reserve for a surplus note ($2
million), reserve for incurred practice management startup costs ($1.4 million),
litigation settlement costs ($1.6 million) and other costs ($2.4 million). The
other costs consisted of the following amounts: $700 revenue reserve, $525
termination benefits, $313 office closures and consolidations, $250 legal
expenses related to litigation settlement, $295 of costs related to a proposed
business combination that was never consummated, and $250 of other miscellaneous
charges. The increases were partially offset by a $0.6 million decrease from
further assimilation of acquired business, which resulted in reductions of
general and administrative costs.
 
     Depreciation and amortization expense increased $59.5 million, or 115.5%,
to $64.7 million in 1997 from $5.2 million in 1996. This includes $59.0 million
in write-offs for goodwill impairment. The goodwill impairment resulted from the
Company's determination that the recoverability of goodwill should be determined
through discounted projections of future flows instead of un-discounted cash
flows, utilizing an economic rate of return that would be customary for
evaluating the present value of future cash flows of current dental benefit
company transactions. Depreciation expense increased $600,000 due to additional
office furniture, equipment, and leasehold improvements and capital expenditures
at DHMI.
 
     Interest income increased from $0.6 million in 1996 to $0.7 in 1997. This
increase is primarily attributed to the rise in interest rates and a concerted
effort to invest cash in higher yielding instruments.
 
     Interest expense increased to $3.2 million in 1997 from $1.9 million in
1996. The Company had $56.6 million of debt outstanding at December 31, 1997. At
each quarter end, the Company draws from its credit facility to pay down
inter-company balances. The increase is primarily related to the increase in
interest rates and in the amounts outstanding under the Company's credit
facility. Any future acquisitions may cause the Company to incur additional
indebtedness under its revolving credit facility or otherwise.
 
     In 1997, the Company's effective income tax rate increased to 48.3%
(excluding the $59.0 million in write-offs for goodwill impairment) compared
with 44.3% in 1996. The increase is primarily attributable to additional
nondeductible goodwill amortization recorded in 1997 following the recent
acquisitions and the relatively lower base of net income.
 
     As a result of the above mentioned factors, the net loss for 1997 was $53.7
million, or $5.32 per share -- basic and diluted, compared to net income of $9.9
million, or $0.98 per share -- basic and $0.97 per share -- diluted, for 1996.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company's primary source of cash in 1998 was $8.0 million provided by
operating activities. The primary uses of cash for the period were the
acquisitions of Reznik and Roberts and capital expenditures related to the
expansion of the Company's dental practice management business.
 
                                       16
<PAGE>   18
 
     Cash flows from operating activities were $8.0 million and $4.3 million for
1998 and 1997, respectively. Cash flows from operations consist primarily of
subscriber premiums and affiliated practice revenue net of capitation payments
to panel dentists, claims paid, brokers' and agents' commissions, general and
administrative expenses, and income tax payments. The Company receives some
premium payments in advance of anticipated capitation payments and claims and
invests cash balances in excess of current needs in interest-bearing accounts.
 
     Cash used in investing activities was $17.6 million in 1998 and $24.9
million in 1997. The decrease, in 1998, relates primarily to decreased use of
cash for acquisitions of dental practices which was partially offset by an
increased use of cash for build out of dental offices and purchases of leasehold
improvements and dental equipment. Capital expenditures increased $8.4 million
in 1998 from $4.0 million in 1997, due primarily to purchases of leasehold
improvements and dental equipment for the Company's dental office management
business, and telephone and computer purchases. The Company has entered into a
joint venture with Golder, Thoma, Cressey, Rauner Fund V, a leading private
equity firm ("GTCR"), relating to the development of 35 to 50 de novo dental
offices within the next two years. The Company invested approximately $1.5
million in DHDC and owns 150 shares of its Series B Preferred Stock. The Series
B Preferred Stock is voting but the Company's voting interest represents less
than 1 percent of the voting shares. The Company's ownership of the Series B
Preferred Stock allows the Company to elect one of six members of the Board of
Directors. While it is not exercisable until February 28, 2001, the Company has
the unilateral option to purchase all of the outstanding shares of voting stock.
The rights under the option terminate on August 30, 2003. The Company does not
have any requirements, directly or indirectly, to exercise its rights under the
option. The Company carries its investment in DHDC at cost. Under the joint
venture with GTCR, the Company has agreed to fund certain development costs
(including the purchase of dental equipment, supplies, and leasehold
improvements) in an amount equal to amounts funded by GTCR in connections with
the joint initiative, not to exceed $15.0 million. At December 31, 1998, the
Company had funded approximately $10.0 million of this $15.0 million commitment.
 
     The Company, through DHMI, a wholly-owned subsidiary of the Company, has
entered into an Administrative Service Agreement with DHDC whereby DHMI provides
DHDC a range of services, including the services of a management team, business
development, and managed care contracting, as well as a variety of other
financial, administrative, and support services. DentLease, Inc., a wholly owned
subsidiary of the Company, also leases facility space and equipment to DHDC. The
lease arrangements are at arm's length and provide for monthly fair market value
rental payments.
 
     Cash flows used in financing activities in 1998 were $1.1 million,
representing repayments under the Company's revolving line of credit. Cash flows
from financing activities in 1997 were $15.6 million, primarily representing
borrowings under the Company's revolving line of credit to finance the
acquisitions of various dental care practices and to repay inter-company
borrowings to its regulated subsidiary companies at quarter-ends.
 
     On June 30, 1995, the Company obtained a reducing revolving $35 million
line of credit (the "Credit Facility") from banks. On July 5, 1995, to partially
finance the acquisition of CompDent, the Company borrowed $25 million under the
Credit Facility. On May 3, 1996, the Credit Facility was amended to increase the
available line of credit to $65 million. On May 7, 1996, the Company borrowed
$38 million under the Credit Facility to finance the acquisition of Dental Care
Plus. The Credit Facility, pursuant to a second amendment entered into on March
16, 1998 requires a 50% reduction in available borrowings on December 31, 1999,
and expiration of the Credit Facility on December 31, 2000. Outstanding
indebtedness under the Credit Facility bears interest, at the Company's option,
at a rate equal to the prime rate plus up to 1/4% or LIBOR plus up to 1 3/4%,
with the margin over the prime rate and LIBOR decreasing as the ratio of
consolidated debt to EBITDA decreases. Currently borrowings under the Credit
Facility bear interest at the LIBOR-based rate. The Credit Facility prohibits
payment of dividends and other distributions and restricts or prohibits the
Company from making certain acquisitions, incurring indebtedness, incurring
liens, disposing of assets or making investments; and requires it to maintain
certain financial ratios on an ongoing basis. The Credit Facility is
collateralized by pledges of the stock of the Company's direct and indirect
subsidiaries. The Company was in technical default of certain financial ratios
periodically throughout 1998 and at December 31,
                                       17
<PAGE>   19
 
1998, primarily due to the significant capital expenditures associated with DHMI
operations. The Company has received a waiver with respect to all such
violations. On August 10, 1998, the Company entered into the Fourth Amendment
which adjusted one of the financial ratios to acknowledge the increased capital
expenditures. On March 23, 1999, the Company entered into the Fifth Amendment
which extends the required 50% reduction of the Credit Facility to March 31,
2000. On March 29, 1999, the Company entered into the Sixth Amendment which
revised certain financial ratios. The Company had $55.5 million of borrowings
outstanding as of December 31, 1998, 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 12 months. Historically, the Company's operations have not
been capital intensive; however, the Company's recent initiative in the
establishment of dental offices through its subsidiary operation Dental Health
Management, Inc. will present capital needs, the extent of which is
indeterminate. Additional financing, under the Credit Facility or otherwise,
will be required in connection with an acquisition or acquisitions which the
Company may consummate in the future. The Pending Re-capitalization Transaction
contemplates a substantial increase in the Company's indebtedness which will in
turn increase the Company's interest expense.
 
     Under applicable insurance laws of most states in which the Company
conducts business, the Company's subsidiary operating in the particular state is
required to maintain a minimum level of net worth and reserves. In general,
minimum capital requirements are more stringent for insurance companies, such as
UniLife. The Company may be required from time to time to invest funds in one or
more of its subsidiaries to meet regulatory capital requirements. Applicable
laws generally limit the ability of the Company's subsidiaries to pay dividends
to the extent that required regulatory capital would be impaired, and dividend
payments are further restricted under the Credit Facility.
 
     During the fourth quarter of 1997, the Company completed an extensive
review of its operation and determined there were changes that occurred that
necessitated a number of unusual and one-time charges for 1997. The charges
include $2.0 million for the termination of an indemnity contract with
risk-sharing provisions, $2.0 million for reserve for a surplus note, $1.6
million for litigation settlement costs, $1.4 million for a reserve for incurred
practice management costs and $2.4 million in other costs. There was also $59.0
million in a write off for a goodwill impairment. Historically, the goodwill was
reviewed on an undiscounted cash flow basis. It was determined that potential
goodwill impairment should be analyzed on a discounted cash flow basis utilizing
an economic rate of return that would be customary for evaluating the present
value of future cash flows of current dental benefit company transactions. The
Company believes that this method of valuation better reflects the performance
of each acquisition.
 
INFLATION
 
     The Company does not believe that its financial performance has been or
will be materially affected by inflation.
 
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
 
     The Company's actual results could differ materially from its historical
results or from any forward-looking statements made or incorporated into this
Annual Report. Factors that may cause such differences include: the Company's
ability to successfully complete new acquisitions and integrate acquired
companies; the Company's ability to successfully expand its business to include
the management of dental practices; the Company's ability to attract and retain
qualified personnel and management; changes in state insurance laws and related
government regulations; increased competition and growth in the dental benefits
coverage market, and other unanticipated changes in economic conditions.
 
     The statements in the following section include "Year 2000 Readiness
Disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
 
     The Company recognizes the significance of the Year 2000 problem and is
executing a project to achieve Year 2000 readiness. The Company's goal is to
have its major internal systems ready for the year 2000 by
 
                                       18
<PAGE>   20
 
December 31, 1998, and to complete testing of the major application systems,
supporting hardware and operating systems by September 30, 1999. A dedicated
machine has been put in place to undertake the appropriate Year 2000 validation
testing. All major application systems, supporting hardware and operating
systems appear to be Year 2000 capable. Secondary systems, such as desktop
computers and phone systems, in field offices were addressed in 1998 and will
continue to be addressed in early 1999. This goal allows for twelve months of
internal testing prior to the year 2000. At September 30, 1999, if testing
indicates the Company has not achieved Year 2000 readiness, a contingency plan
will be established.
 
     The total cost associated with the required modifications or upgrades to
become Year 2000 compliant is not expected to be material to the Company's
financial position. Costs associated with the Year 2000 Project are being
expensed as incurred. Funding for the program is being provided through the
Company's normal budget with no additional funding allocated to the Company's
information technology (IT) department due to the Year 2000 issues. The total
estimated cost of the Year 2000 Project is approximately $300,000. The total
amount expended on the Project through December 31, 1998, was $100,000, which
includes costs of a project manager, programmers, upgrading of personal
computers and replacing or upgrading field office phone systems. As mentioned
above, the Company believes its crucial systems and software are Year 2000
compliant. If during testing it is determined that there are significant Year
2000 issues in these crucial systems and software, then costs could exceed
$300,000. Even though the costs of the Year 2000 Project can not be estimated
with absolute certainty, the Company does not believe that the amount to be
spent will be material to the Company's results of operations, liquidity or
financial condition.
 
     The Company is reviewing, and has initiated formal communications with,
third parties which provide goods or services which are essential to the
Company's operations in order to: (1) determine the extent to which the Company
is vulnerable to any failure by such material third parties to remediate their
respective Year 2000 problems: and (2) resolve such problems to the extent
practicable. The failure to correct a material Year 2000 problem could result in
an interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. In response to the lack of
readiness on the part of certain third-party customers, the Company is utilizing
a rolling 100-year methodology in its interface programs for customer supplied
data. The Company believes that, with the implementation of upgrades of select
phone systems and completion of the Project as scheduled, the possibility of
significant interruptions of normal operations should be reduced.
 
RECENTLY ISSUED ACCOUNTING STANDARDS
 
     None.
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     Not Applicable.
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The consolidated financial statements of the Company for the fiscal year
ended December 31, 1998 are set forth on pages F-1 through F-29 herein.
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     None.
 
                                       19
<PAGE>   21
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
                        INFORMATION REGARDING DIRECTORS
 
     Set forth below is certain information regarding the Directors of the
Company, including the Class III Directors who have been nominated for
re-election at the Annual Meeting, based on information furnished by them to the
Company.
 
<TABLE>
<CAPTION>
                                                                    DIRECTOR
                            NAME                              AGE    SINCE
                            ----                              ---   --------
<S>                                                           <C>   <C>
CLASS I-TERM EXPIRES 1999
Joseph E. Stephenson........................................  66      1993
William G. Jens, Jr. (1)....................................  52      1998
CLASS II-TERM EXPIRES 2000
Philip Hertik...............................................  48      1993
David F. Scott, Jr..........................................  57      1996
Phyllis A. Klock (2)........................................  53      1998
CLASS III-TERM EXPIRES 2001
David R. Klock..............................................  54      1993
Joseph A. Ciffolillo........................................  60      1995
</TABLE>
 
---------------
 
(1) William G. Jens, Jr. was appointed to the Board on January 27, 1998.
(2) Phyllis A. Klock was appointed to the Board on February 20, 1998.
 
     The principal occupation and business experience for at least the last five
years of each Director of the Company is set forth below.
 
     Joseph A. Ciffolillo has served as a Director of the Company since 1995.
Mr. Ciffolillo retired from his position as Executive Vice President -- Office
of the Chairman of Boston Scientific Corp. ("Boston Scientific"), a
Massachusetts-based manufacturer of medical devices, in April 1996 after having
served in that capacity since 1995. From 1987 to 1995, Mr. Ciffolillo was Chief
Operating Officer of Boston Scientific. Mr. Ciffolillo currently serves on the
Board of Directors of Innovative Devices.
 
     Philip Hertik has served as a Director of the Company since June 1993. Mr.
Hertik has been a Principal at the firm of P. Hertik & Associates, Inc. since
January 1996. He also served as President of Dental Health Management Inc., a
wholly owned subsidiary of the Company, from January, 1997 to June, 1998. Mr.
Hertik served as the Chief Executive Officer of Coventry Corporation
("Coventry"), a managed health care company, from June 1992 to December 1995,
and as a director of Coventry from August 1990 to December 1995. From November
1990 to June 1992, he was President and Chief Operating Officer of Coventry.
 
     William G. Jens, Jr., CPA, Ph.D. has served as a Director of the Company
since January 1998 and was appointed Executive Vice President of Dental Health
Management, Inc., a wholly owned subsidiary of the Company, in July 1998. Dr.
Jens has also served as Senior Vice President of Finance of the Company from
July 1997 through January 1998. Dr. Jens, who has served as a consultant to
CompDent since 1993, has more than 20 years of experience as a senior financial
officer in the chemical and agricultural industries. Dr. Jens has also been
serving as Chairman of the accounting department of Stetson University and
Director of the M.E. Rinker, Sr., Institute of Tax and Accountancy.
 
     David R. Klock, Ph.D. was appointed President of the Company in 1991 and
Chairman, President and Chief Executive Officer in 1993, has served a Director
of the Company since June 1995 and currently serves as Chairman and Chief
Executive Officer. Dr. Klock was a Professor of Finance and Insurance at the
University of Central Florida from 1981 through 1991, when he joined the Company
on a full-time basis.
 
     Phyllis A. Klock became associated with the Company in 1981 as a
consultant. She joined the Company on a full-time basis in 1986 as Vice
President of Administration and was appointed Corporate Secretary in
 
                                       20
<PAGE>   22
 
1987, Senior Vice President, Corporate Secretary and Chief Administrative
Officer in 1993, Executive Vice President in 1995 and President in January 1997.
Ms. Klock was appointed to the Board and became Chief Operating Officer of the
Company on February 20, 1998. Prior to becoming associated with the Company, Ms.
Klock served as an academic administrator and held various management positions
with two insurance companies.
 
     David F. Scott, Jr., Ph.D. became a Director of the Company on February 1,
1996. Dr. Scott is a Holder, Phillips-Schenck Chair in American Private
Enterprise, is Executive Director of the Dr. Phillips Institute for the Study of
American Business Activity and has been Professor of Finance at the College of
Business Administration, University of Central Florida since 1982. Prior to
1982, Dr. Scott served as Head of the Department of Finance, Insurance and
Business Law at Virginia Polytechnic Institute and State University. Dr. Scott
also serves on the economic forecasting panel (Livingston Survey) of the Federal
Reserve Bank of Philadelphia and is a member of the Board of Economists of
Florida Trend magazine.
 
     Joseph E. Stephenson has served as Director of the Company since June 1993.
Mr. Stephenson is currently serving as Chairman and Chief Executive Officer of
Washington Life and has been serving in that capacity since 1995. Mr. Stephenson
served as Chairman of the Board of Directors, President and Chief Executive
Officer of Shenandoah Life Insurance Company from August 1989 through June 1993,
when he retired.
 
                               EXECUTIVE OFFICERS
 
     Set forth below is certain information regarding each of the executive
officers of the Company as of March 1, 1999, including their principal
occupation and business experience for at least the last five years.
 
<TABLE>
<CAPTION>
                   NAME                     AGE                         POSITION
                   ----                     ---                         --------
<S>                                         <C>   <C>
David R. Klock............................  54    Chairman and Chief Executive Officer(1)
Phyllis A. Klock..........................  53    President and Chief Operating Officer(1)
Bruce A. Mitchell.........................  43    Executive Vice President, General Counsel and
                                                  Secretary
Keith J. Yoder............................  46    Executive Vice President, Treasurer and Chief
                                                  Financial Officer(2)
</TABLE>
 
---------------
 
(1) David R. Klock and Phyllis A. Klock are husband and wife.
(2) Keith J. Yoder joined the Company and assumed this position effective
    January 1998.
 
     The principal occupation and business experience for at least the last five
years of each executive officer of the Company, other than executive officers
also serving as Directors, are set forth below.
 
     Bruce A. Mitchell, Esq. was appointed Executive Vice President and General
Counsel of the Company in February 1996 and assumed the additional role of
Secretary in January 1997. Mr. Mitchell was formerly a Partner in the Melbourne,
Florida law firm of Reinman, Harrell, Mitchell & Wattwood, P.A., from 1985
through February 1996, where Mr. Mitchell served as corporate counsel to the
Company beginning in 1982.
 
     Keith J. Yoder joined the Company as Executive Vice President and Chief
Financial Officer in January 1998. From July 1997 to November 1997, Mr. Yoder
served as Chief Financial Officer of GranCare, Inc. ("GranCare") and as its
Senior Vice President, Controller and Treasurer from July 1995 to June 1997.
Prior to the merger of Evergreen Healthcare, Inc. ("Evergreen") with GranCare in
July 1995, he served as Vice President and Chief Financial Officer of Evergreen
(since January 1992), as Secretary of Evergreen (since June 1993) and as
Treasurer of Evergreen (since December 1993). From December 1992 to June 1993,
Mr. Yoder served as Vice President of National Heritage, Inc. ("NHI") and as the
Chief Financial Officer and Secretary of NHI from January 1993 to June 1993. Mr.
Yoder served as Area Controller for ARA Living Centers from 1989 to 1992.
 
                                       21
<PAGE>   23
 
     Each of the executive officers holds his or her respective office until the
regular annual meeting of the Board following the annual meeting of stockholders
and until his or her successor is elected and qualified or until his or her
earlier resignation or removal.
 
            SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
     Section 16(a) of the Exchange Act requires the Company's officers and
Directors, and persons who own more than 10% of the Company's outstanding shares
of Common Stock (collectively, "Section 16 Persons"), to file initial reports of
ownership and reports of changes in ownership with the Commission and Nasdaq.
Section 16 Persons are required by the Commission to furnish the Company with
copies of all Section 16(a) forms they file.
 
     Based solely on its review of the copies of such forms received by it, or
written representations from certain Section 16 Persons that no Section 16(a)
reports were required for such persons, the Company believes that during fiscal
year ended December 31, 1998, the Section 16 Persons complied with all Section
16(a) filing requirements applicable to them.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
                             DIRECTOR COMPENSATION
 
     Directors who are officers or employees of the Company receive no
compensation for service as Directors. Directors who are not officers or
employees of the Company receive such compensation for their services as the
Board may from time to time determine. Each of Messrs. Ciffolillo, Scott and
Stephenson received an annual fee of $20,000 for service on the Board and its
committees. Mr. Hertik received $5,000 for service on the Board after leaving
his officer position with the Company. All Directors are reimbursed for expenses
incurred in connection with attendance at meetings. Under the Directors' Plan,
each new non-employee Director will receive options to purchase 20,000 shares of
Common Stock on the date such Director is initially elected or appointed to the
Board. Dr. Jens was granted an option pursuant to the Directors' Plan to
purchase 20,000 shares of Common Stock at an exercise price of $9.563 per share
upon his appointment to the Board on January 27, 1998. On August 1, 1997, the
Company amended the Directors' Plan to permit the grant of options to Directors
in addition to those initially received at the discretion of the Board of
Directors. In August 1997, each of Messrs. Scott and Ciffolillo received options
to purchase 16,000 shares of Common Stock of the Company at an exercise price of
$20.50. Each of these options vests annually in equal installments over a four-
year period and expires ten years from the date of grant.
 
                             EXECUTIVE COMPENSATION
 
     The following sections of this Annual Report on Form 10K set forth and
describe the compensation paid or awarded during the last three years to the
Company's Chief Executive Officer and the four other most highly compensated
executive officers and one former executive officer who earned in excess of
$100,000 during the fiscal year ended December 31, 1998 (the "named executive
officers").
 
                                       22
<PAGE>   24
 
SUMMARY COMPENSATION
 
     Summary Compensation.  The following summary compensation table sets forth
information concerning compensation for services rendered in all capacities
awarded to, earned by or paid to the Company's Chief Executive Officer and the
named executive officers during each of the fiscal years ended December 31,
1998, December 31, 1997 and December 31, 1996.
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                          LONG TERM
                                                                         COMPENSATION
                                                                            AWARDS
                                                       ANNUAL          ----------------
                                                    COMPENSATION          SECURITIES
                                                --------------------      UNDERLYING       ALL OTHER(1)
      NAME AND PRINCIPAL POSITION        YEAR   SALARY($)   BONUS($)   OPTIONS(#)($)(2)   COMPENSATION($)
      ---------------------------        ----   ---------   --------   ----------------   ---------------
<S>                                      <C>    <C>         <C>        <C>                <C>
David R. Klock.........................  1998    250,009         --             --             14,043
  Chief Executive Officer                1997    237,506     74,000        120,000             12,491
                                         1996    200,000     88,000         80,000(2)          13,404
Phyllis A. Klock.......................  1998    215,000         --             --             10,244
  President and Chief                    1997    206,250     61,000         50,000             12,720
  Operating Officer                      1996    180,000     79,200         50,000(2)          13,258
Bruce A. Mitchell......................  1998    199,998         --             --             40,965
  Executive Vice President               1997    193,746     47,500         50,000             33,095
                                         1996    165,000     99,000         50,000(2)          18,580
Keith J. Yoder.........................  1998    194,845     58,192        100,000             13,334
  Executive Vice President(3)
</TABLE>
 
---------------
 
(1) The figures for 1998 include premiums, grossed up for taxes, on life
    insurance policies paid by the Company of $2,474, $2,485, $2,296, and $2,517
    on behalf of Dr. Klock, Ms. Klock, Mr. Mitchell and Mr. Yoder; insurance
    premiums for group long-term disability insurance policies paid by the
    Company of $1,500, $1,290, $1,200 and $1,200 on behalf of Dr. Klock, Ms.
    Klock, Mr. Mitchell, and Mr. Yoder, respectively; and $869, $869, $869 and
    $417 contributed by the Company under its 401(k) plan on behalf of Dr.
    Klock, Ms. Klock, Mr. Mitchell and Mr. Yoder, respectively. Such figures
    also include annual car allowances of $9,200, $5,600, $9,600 and $9,200 paid
    to Dr. Klock, Ms. Klock, Mr. Mitchell and Mr. Yoder, respectively; and a
    housing allowance of $27,000 paid to Mr. Mitchell.
(2) The number of shares underlying options granted in 1996 does not include
    options which such executives agreed to rescind in 1997.
(3) Mr. Yoder joined the Company on January 12, 1998.
 
     Option Grants.  The following table sets forth certain information
concerning the individual grant of options to purchase shares of Common Stock of
the Company to certain named executive officers of the Company who received such
grants during fiscal year ended 1998.
 
                       OPTION GRANTS IN LAST FISCAL YEAR
 
<TABLE>
<CAPTION>
                                                                                                POTENTIAL
                                                      INDIVIDUAL GRANTS                        REALIZABLE
                                     ----------------------------------------------------   VALUE AT ASSUMED
                                     NUMBER OF       PERCENT                                  ANNUAL RATES
                                     SECURITIES      OF TOTAL                                OF STOCK PRICE
                                     UNDERLYING      OPTIONS       EXERCISE                 APPRECIATION FOR
                                      OPTIONS        GRANTED        OR BASE                  OPTION TERM(1)
                                      GRANTED      TO EMPLOYEES    PRICE PER   EXPIRATION   -----------------
NAME                                    (#)       IN FISCAL YEAR    ($/SH)        DATE       5%($)      10%
----                                 ----------   --------------   ---------   ----------   -------   -------
<S>                                  <C>          <C>              <C>         <C>          <C>       <C>
Keith J. Yoder.....................   100,000(2)       75.2%         12.50       1/12/08
</TABLE>
 
---------------
 
(1) This column shows the hypothetical gain or option spreads of the options
    granted based on assumed annual compound stock appreciation rates of 5% and
    10% over the full 10-year term of the options. The
 
                                       23
<PAGE>   25
 
    5% and 10% assumed rates of appreciation are mandated by the rules of the
    Securities and Exchange Commission and do not represent the Company's
    estimate or projection of future Common Stock prices.
(2) Of these stock options 10,000 shares vested immediately upon the date of
    grant and 90,000 shares vest in equal annual increments over the four-year
    period ending January 12, 2002, subject to acceleration upon a sale of the
    Company.
 
     Option Exercises and Option Values.  The following table sets forth
information concerning the number and value of unexercised options to purchase
Common Stock of the Company held by certain named executive officers of the
Company who held such options at December 31, 1998. (None of the named executive
officers of the Company exercised any stock options during fiscal year ended
1998.)
 
                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR-END OPTION VALUES
 
<TABLE>
<CAPTION>
                                                      NUMBER OF SECURITIES          VALUE OF UNEXERCISED
                                                     UNDERLYING UNEXERCISED         IN-THE-MONEY OPTIONS
                                                     OPTIONS AT DECEMBER 31,           AT DECEMBER 31,
                                                             1998(#)                     1998($)(1)
                                                   ---------------------------   ---------------------------
NAME                                               EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
----                                               -----------   -------------   -----------   -------------
<S>                                                <C>           <C>             <C>           <C>
David R. Klock...................................    130,000        70,000         *              *
Phyllis A. Klock.................................     71,250        28,750         *              *
Bruce A. Mitchell................................     71,250        28,750         *              *
Keith J. Yoder...................................     10,000        90,000         *              *
</TABLE>
 
---------------
 
  * These options are out of the money.
(1) Based on the last reported sale price on the Nasdaq National Market on
    December 31, 1998 of $10.38 less the option exercise price.
 
COMPENSATION AND OPTIONS COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     Since July 1993, all decisions with respect to executive officer
compensation have been made by the Compensation and Options Committee. The
Compensation and Options Committee reviews and makes recommendations regarding
the compensation for senior executives of the Company, including salaries and
bonuses. The members of the Compensation and Options Committee for Fiscal 1998
were Messrs. Ciffolillo, Jens, Scott and Stephenson.
 
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
 
     The Company has entered into employment agreements with each of David R.
Klock, Phyllis A. Klock, Bruce A. Mitchell and Keith J. Yoder on July 6, 1998.
The agreements generally provide for continuation of base salary, pro rated
bonus payments and continuation of certain benefits for two years following
termination of employment without cause or in the event of a breach by the
Company. Upon termination of employment without cause by the Company or for
reason by the executive within two years following a change of control of the
Company (as defined), the Company shall pay severance in the amount equal to up
to three times the executive's base salary and, average bonus received by the
executive for the three most recently completed years and continuation of
certain benefits. Further, following a change in control, David R. Klock and
Phyllis A. Klock are entitled to receive $1,000,000 and $750,000, respectively,
if they agree (i) to remain employed by the Company until the first anniversary
of the consummation of a change in control; (ii) to be bound by an extended
period of time by certain non-competition provisions, and (iii) provide certain
consulting services to the Company. The Employment Agreement of Bruce A.
Mitchell provides that should his Employment Agreement be terminated (for any
reason) prior to the third anniversary following a change in control, he shall
be entitled to receive payments in the amount of $200,000 annually for an
extended period of two-and-a-half years provided he (i) agrees to be bound for
an extended period of time by certain non-competition provisions, and (ii)
provide certain consulting services to the Company. Each of the executives is
subject to a multi-year restriction on competition with the Company following
termination of employment for any reason.
 
                                       24
<PAGE>   26
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
                     PRINCIPAL AND MANAGEMENT STOCKHOLDERS
 
     The following table sets forth, to the best knowledge and belief of the
Company, certain information regarding the beneficial ownership of the Company's
Common Stock as of the date indicated by (i) each person known by the Company to
be the beneficial owner of more than 5% of the outstanding Common Stock as of
December 31, 1998, (ii) each of the Company's Directors as of March 1, 1999,
(iii) each of the named executive officers in the Summary Compensation Table as
of March 1, 1999 and (iv) all of the Company's executive officers and Directors
as a group as of March 1, 1999.
 
<TABLE>
<CAPTION>
                                                                  BENEFICIAL
                                                                 OWNERSHIP(2)
                                                              -------------------
NAME OF BENEFICIAL OWNER(1)                                    SHARES     PERCENT
---------------------------                                   ---------   -------
<S>                                                           <C>         <C>
The Kaufman Fund, Inc. .....................................  1,158,300     11.5
FMR Corporation(3)..........................................  1,011,300    10.00
Dimensional Fund Advisors, Inc.(4)..........................    696,300     6.88
Strong Capital Management, Inc.(5)..........................    656,375     6.49
J. & W. Seligman & Co. Incorporated(6)......................    471,300     4.66
Joel M. Greenblatt(7).......................................    593,600     5.87
The Prudential Insurance Company of America(8)..............    580,100     5.73
David R. Klock(9)...........................................    332,139     3.28
Phyllis A. Klock(10)........................................    239,444     2.37
Bruce A. Mitchell(11).......................................     78,149        *
Keith J. Yoder(12)..........................................     32,800        *
William G. Jens, Jr.(13)....................................     15,400        *
Joseph A. Ciffolillo(14)....................................     10,000        *
Philip Hertik(15)...........................................     18,000        *
David F. Scott, Jr.(16).....................................     10,000        *
Joseph E. Stephenson(17)....................................     19,000        *
All executive officers and Directors as a group (9
  persons)(18)..............................................    754,932     7.46
</TABLE>
 
---------------
 
   * Represents less than 1% of the outstanding shares.
 (1) The address of The Kaufman Fund, Inc. is 140 E. 45th Street, 43rd Floor,
     New York, NY 10017. The address of FMR Corp. is 82 Devonshire Street,
     Boston, MA 02109. The address of Dimensional Fund Advisors, Inc.
     ("Dimensional") is 1299 Ocean Avenue, 11th Floor, Santa Monica, CA 96401.
     The address of Strong Capital Management, Inc. ("Strong") is 100 Heritage
     Reserve, Menomone Falls, WI 53051. The address of J. & W. Seligman & Co.
     Incorporated ("JWS") is 100 Park Avenue, New York, NY 10017. The address of
     Joel M. Greenblatt is 100 Jericho Oradrangle, Suite 212, Jericho, NY 11253.
     The address of The Prudential Insurance Company of America ("Prudential")
     is 751 Broad Street, Newark, NJ 07102-3777. Information with respect to the
     beneficial owners of more than 5% of the outstanding Common Stock is based
     solely on information provided to the Commission and the Company.
 (2) All percentages have been determined as of March 1, 1999 in accordance with
     Rule 13d-3 under the Exchange Act. As of the March 1, 1999, a total of
     approximately 10,115,189 shares of Common Stock were issued and outstanding
     and options to acquire a total of 529,750 shares of Common Stock were
     exercisable within 60 days.
 (3) As reported on the Schedule 13G filed with the Commission by FMR Corp.,
     such figure constitutes 618,400 shares of which Fidelity Management &
     Research Company, a wholly owned subsidiary of FMR Corp and an investment
     adviser registered under the Investment Advisers Act of 1940, is the
     beneficial owner as a result of acting as investment adviser to the
     Fidelity Low-Priced Stock Fund (the "Fund"). The Fund owned all 618,400
     shares beneficially owned by FMR Corp. According to the Schedule 13G filed
     with the Commission by FMR Corp., each of Edward C. Johnson, FMR Corp. and
 
                                       25
<PAGE>   27
 
     the Fund has the sole power to dispose of the shares held by the Fund, but
     sole power to vote or direct the voting of such shares resides with the
     Fund's Board of Trustees.
 (4) As reported on the Schedule 13G filed with the Commission by Dimensional,
     it is an investment advisor registered under the Investment Advisors Act of
     1940, and possesses voting and investment power over the 696,300 shares
     owned by its portfolios. Dimensional disclaims all beneficial ownership in
     such shares.
 (5) As reported in the Schedule 13G filed with the Commission by Strong, Strong
     is an investment advisor registered under the Investment Advisors Act of
     1940, and has been granted discretionary depositive power and in some
     instances has voting power over its clients' securities. Richard S. Strong,
     as the Chairman of the Board and principal shareholder of Strong, may be
     deemed to beneficially own the shares held by Strong.
 (6) As reported on the Schedule 13G filed with the Commission by JWS, William
     C. Morris, as the owner of a majority of the outstanding voting securities
     of JWS may be deemed to beneficially own the shares held by JWS.
 (7) As reported in Schedule 13G filed with the Commission by Greenblatt, of the
     reported shares, 419,650 shares and 173,942 shares are beneficially owned
     respectively by Gotham Capital V, LLC and Gotham Capital VII, LLC, which
     entities may be deemed to be controlled by Greenblatt.
 (8) As reported on the Schedule 13G filed with the Commission by Prudential,
     Prudential holds 357,600 shares for the benefit of its general account and
     202,300 shares for the benefit of its clients and its separate accounts,
     externally managed accounts, registered investment companies, subsidiaries
     and/or other affiliates, over which Prudential may have direct or indirect
     voting and/or investment discretion.
 (9) Includes 145,000 shares which Dr. Klock may acquire upon the exercise of
     stock options within 60 days after the Record Date. Does not include
     233,194 shares held by Dr. Klock's wife, Phyllis A. Klock, President and
     Chief Operating Officer of the Company, with respect to which Dr. Klock
     disclaims beneficial ownership.
(10) Includes 77,500 shares which Ms. Klock may acquire upon the exercise of
     stock options within 60 days after the Record Date. Does not include
     317,139 shares held by Ms. Klock's husband, David R. Klock, Chairman and
     Chief Executive Officer of the Company, with respect to which Ms. Klock
     disclaims beneficial ownership.
(11) Includes 77,500 shares which Mr. Mitchell may acquire upon the exercise of
     stock options within 60 days after the Record Date.
(12) Represents 32,500 shares which Mr. Yoder may acquire upon the exercise of
     stock options within 60 days after the Record Date.
(13) Represents 15,000 shares which Mr. Jens may acquire upon the exercise of
     stock options within 60 days after the Record Date.
(14) Represents 10,000 shares which Mr. Ciffolillo may acquire upon the exercise
     of stock options within 60 days after the Record Date.
(15) Represents 18,000 shares which Mr. Hertik may acquire upon exercise of
     stock options within 60 days after the Record Date.
(16) Represents 10,000 shares which Dr. Scott may acquire upon the exercise of
     stock options within 60 days after the Record Date.
(17) Includes 18,000 shares which Mr. Stephenson may acquire upon the exercise
     of stock options within 60 days after the Record Date.
(18) Includes 485,250 shares which may be acquired upon the exercise of stock
     options within 60 days after the Record Date.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
     None.
 
                                       26
<PAGE>   28
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
(a)(1) Financial Statements
 
     The response to this Portion of Item 14 is submitted as a separate section
of this Annual Report beginning on page F-1.
 
(a)(2) Schedules
 
     The response to this portion of Item 14 is submitted as a separate section
of this Annual Report beginning on page S-1.
 
(a)(3) Exhibits
 
     Exhibits 10.7 through 10.19 and 10.29 through 10.33 constitute all of the
management contracts and compensation plans and arrangements of the Company
required to be filed as exhibits to this Annual Report.
 
     1. The following is a complete list of Exhibits filed or incorporated by
reference as part of this Annual Report.
 
<TABLE>
<CAPTION>
  EXHIBIT
    NO.                                    DESCRIPTION
  -------                                  -----------
<C>           <C>  <S>
   2.1         --  Agreement and Plan of Merger by and between CompDent
                   Corporation, TAGTCR Acquisition, Inc., and the Guarantors
                   dated as of July 28, 1998(16)
   2.2         --  Amended and Restated Agreement and Plan of Merger by and
                   between CompDent Corporation, TAGTCR Acquisition, Inc. and
                   the Guarantors dated as of January 18, 1999(17)
   3.1         --  Amended and Restated Certificate of Incorporation(8)
   3.2         --  Amended and Restated By-laws(1)
   4.1         --  Specimen certificate for shares of the Company's Common
                   Stock(2)
   4.2         --  Shareholder Rights Agreement, dated as of August 16, 1996,
                   between the Company and State Street Bank and Trust Company,
                   as Rights Agent.(7)
   4.3         --  Certificate of Designations, Preferences, and Rights of a
                   Series of Preferred Stock of CompDent Corporation(11)
   4.4         --  Amendment to the Shareholder Rights Agreement between
                   CompDent Corporation, TAGTCR Acquisition, Inc., and the
                   Guarantors described therein dated as of July 28, 1998(16)
  10.1         --  First Amendment to the Credit Agreement among the Company,
                   American Prepaid, the lenders named therein and First Union
                   National Bank of North Carolina, as Agent, dated May 3,
                   1996(10)
  10.2         --  Parent Guaranty of the Company in favor of First Union
                   National Bank of North Carolina, dated July 5, 1995(4)
  10.3         --  Parent Pledge Agreement between the Company and First Union
                   National Bank of North Carolina, dated July 5, 1995(4)
  10.4         --  Borrower Pledge Agreement between American Prepaid and First
                   Union National Bank of North Carolina, dated July 5, 1995(4)
  10.6         --  Amended and Restated Investment and Stockholders' Agreement
                   dated as of April 26, 1995 among the Company, American
                   Prepaid, the Brains, the TA Investors, the Chestnut
                   Investors and the Management Investors(2)
  10.7         --  Non-Qualified Stock Option Agreement dated November 1, 1993
                   between Philip Hertik and the Company(3)
</TABLE>
 
                                       27
<PAGE>   29
 
<TABLE>
<CAPTION>
  EXHIBIT
    NO.                                    DESCRIPTION
  -------                                  -----------
<C>           <C>  <S>
  10.8         --  Non-Qualified Stock Option Agreement dated as of November 1,
                   1993 between Joseph E. Stephenson and the Company(3)
  10.9         --  Non-Qualified Stock Option Agreement dated as of September
                   25, 1995 between Joseph Ciffolillo and the Company(9)
  10.10        --  The Company's 1994 Stock Option and Grant Plan(3)
  10.11        --  Amended and Restated CompDent Corporation 401(k)
                   Standardized Profit Sharing Plan effective January 1,
                   1997(11)
  10.12        --  Form of Indemnity Agreement between the Company and each of
                   its directors(2)
  10.13        --  The Company's Employee Stock Purchase Plan(9)
  10.14        --  The Company's Non-Employee Directors Stock Option Plan, as
                   amended(14)
  10.15        --  Form of Non-Qualified Stock Option Agreement under the
                   Company's Non-Employee Directors' Stock Option Plan(11)
  10.16        --  The Company's 1997 Stock Option Plan(12)
  10.17        --  Forms of Non-Qualified Stock Option Agreement under the
                   Company's 1994 Stock Option and Grant Plan and 1997 Stock
                   Option Plan(12)
  10.18        --  Forms of Non-Qualified Stock Option Agreement issued in
                   connection with that certain Asset Purchase Agreement dated
                   June 13, 1997 by and among the Company, Dental Health
                   Management, Inc., DentLease, Inc., Workman Management Group,
                   Ltd., Associated Dental Professionals, Ltd., Premier
                   Management Group, Ltd., Supreme Dental Management, Ltd.,
                   Elite Management Group, Ltd., Paramount Dental Management,
                   Ltd. and the Stockholders thereof(13)
  10.19        --  Agreement by and between Shenandoah Life Insurance Company
                   and American Prepaid, effective December 27, 1993(3)
  10.20        --  Agreement by and between Shenandoah Life Insurance Company
                   and ADP-NC, effective January 20, 1994(3)
  10.21        --  Agreement by and between Shenandoah Life Insurance Company
                   and ADP-GA, effective January 20, 1994(3)
  10.22        --  Agreement by and between Shenandoah Life Insurance Company
                   and ADP, effective January 20, 1994(3)
  10.23        --  Agreement by and between Shenandoah Life Insurance Company
                   and American Dental Plan of Alabama, Inc., effective January
                   20, 1994(3)
  10.24        --  Agreement by and between Shenandoah Life Insurance Company
                   and American Prepaid Dental Plan of Ohio, Inc., effective
                   January 20, 1994(3)
  10.25        --  Prepaid Product Marketing/Administration Agreement by and
                   between The Centennial Life Insurance Company and CompDent
                   Corporation, effective January 1, 1995(1)
  10.26        --  Indemnity Products Marketing/Administrative Agreement by and
                   between the Centennial Life Insurance Company and CompDent
                   Corporation, effective January 1, 1995(1)
  10.27        --  Lease Agreement dated December 22, 1995, by and between
                   Mansell Overlook 100, LLC, and CompDent Corporation for
                   property located at 100 Mansell Court East, Roswell, GA
                   30076(7)
  10.28        --  Employment Contract between CompDent Corporation and David
                   R. Klock(15)
  10.29        --  Employment Contract between CompDent Corporation and Phyllis
                   A. Klock(15)
  10.30        --  Employment Contract between CompDent Corporation and Bruce
                   A. Mitchell(15)
  10.31        --  Employment Contract between CompDent Corporation and Keith
                   J. Yoder(15)
  10.32        --  Form of Employment Contract for Vice President(15)
</TABLE>
 
                                       28
<PAGE>   30
 
<TABLE>
<CAPTION>
  EXHIBIT
    NO.                                    DESCRIPTION
  -------                                  -----------
<C>           <C>  <S>
  13.1         --  Annual Report to Stockholders for the fiscal year ended
                   December 31, 1998(18)
  18.1         --  Letter of PricewaterhouseCoopers LLP
  21.1         --  Subsidiaries of the Company(11)
  23.1*        --  Consent of PricewaterhouseCoopers LLP
  27.1*        --  Financial Data Schedule (for SEC use only)
</TABLE>
 
---------------
 
   * Filed herewith.
 (1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
     filed with the Securities and Exchange Commission on August 4, 1995 (File
     No. 33-95444) and incorporated herein by reference thereto.
 (2) Filed as an exhibit to Pre-effective Amendment No. 1 to the Registrant's
     Registration Statement on Form S-1 filed with the Securities and Exchange
     Commission on April 27, 1995 (File No. 33-90316) and incorporated herein by
     reference thereto.
 (3) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
     filed with the Securities and Exchange Commission on March 14, 1995 (File
     No. 33-90316) and incorporated herein by reference thereto.
 (4) Filed as an exhibit to the Registrant's Current Report on Form 8-K filed
     with the Securities and Exchange Commission on July 5, 1995 and
     incorporated herein by reference thereto.
 (5) Filed as an exhibit to the Registrant's Current Report on Form 8-K filed
     with the Securities and Exchange Commission on January 8, 1996 and
     incorporated herein by reference thereto.
 (6) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
     the period ended March 31, 1996 filed with the Securities and Exchange
     Commission on May 15, 1996 and incorporated herein by reference thereto.
 (7) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
     period ended December 31, 1995 filed with the Securities and Exchange
     Commission on March 28, 1996 and incorporated herein by reference thereto.
 (8) Filed as an exhibit to the Registrant's Current Report on Form 8-K filed
     with the Securities and Exchange Commission on August 20, 1996 and
     incorporated herein by reference thereto.
 (9) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
     filed with the Securities and Exchange Commission on September 18, 1996
     (File No. 333-12227) and incorporated herein by reference thereto.
(10) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
     the period ended June 30, 1996 filed with the Securities and Exchange
     Commission on August 14, 1996 and incorporated herein by reference thereto.
(11) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
     Period ended December 31, 1996 filed with the Securities and Exchange
     Commission on March 31, 1997 and incorporated herein by reference thereto.
(12) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
     the period ended June 30, 1997 filed with the Securities and Exchange
     Commission on July 14, 1997 and incorporated herein by reference thereto.
(13) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
     the period ended September 30, 1997 filed with the Securities and Exchange
     Commission on November 13, 1997 and incorporated herein by reference
     thereto.
(14) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
     period ended December 31, 1997, filed with the Securities and Exchange
     Commission on March 31, 1998 and incorporated herein by reference thereto.
(15) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
     the period ended June 30, 1998, filed with the Securities and Exchange
     Commission on August 14, 1998 and incorporated herein by reference thereto.
 
                                       29
<PAGE>   31
 
(16) Filed as an exhibit to the Registrant's Current Report on Form 8-K filed
     with the Securities and Exchange Commission on August 12, 1998 and
     incorporated herein by reference thereto.
(17) Filed as an exhibit to the Registrant's Current Report on Form 8-K filed
     with the Securities and Exchange Commission on January 23, 1999 and
     incorporated herein by reference thereto.
 
(b) Reports on Form 8-K
 
     The Registrant did not file any reports on Form 8-K during the last quarter
of the period covered by this Annual Report.
 
(c) Exhibits.
 
     The response to this portion of Item 14 is contained in Item 14(a)(3) of
this report.
 
  Financial Statement Schedules.
 
     The response to this portion of Item 14 is submitted as a separate section
of this Annual Report begins on page S-1.
 
                                       30
<PAGE>   32
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
                                          COMPDENT CORPORATION
 
                                          By:      /s/ DAVID R. KLOCK
                                            ------------------------------------
                                            David R. Klock
                                            Chairman of the Board and
                                            Chief Executive Officer
 
Dated: March 31, 1999
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
SIGNATURE                                                           TITLE                    DATE
---------                                                           -----                    ----
<C>                                                    <S>                              <C>
 
                 /s/ DAVID R. KLOCK                    Chairman of the Board and Chief  March 31, 1999
-----------------------------------------------------    Executive Officer (Principal
                   David R. Klock                        Executive Officer) and
                                                         Director
 
                 /s/ KEITH J. YODER                    Chief Financial Officer and      March 31, 1999
-----------------------------------------------------    Treasurer (Principal
                   Keith J. Yoder                        Financial and Accounting
                                                         Officer)
 
                /s/ PHYLLIS A. KLOCK                   President and Chief Operating    March 31, 1999
-----------------------------------------------------    Officer and Director
                  Phyllis A. Klock
 
                /s/ JOSEPH CIFFOLILLO                  Director                         March 31, 1999
-----------------------------------------------------
                  Joseph Ciffolillo
 
                  /s/ PHILIP HERTIK                    Director                         March 31, 1999
-----------------------------------------------------
                    Philip Hertik
 
              /s/ WILLIAM G. JENS, JR.                 Director                         March 31, 1999
-----------------------------------------------------
                William G. Jens, Jr.
 
               /s/ DAVID F. SCOTT, JR.                 Director                         March 31, 1999
-----------------------------------------------------
                 David F. Scott, Jr.
 
              /s/ JOSEPH E. STEPHENSON                 Director                         March 31, 1999
-----------------------------------------------------
                Joseph E. Stephenson
</TABLE>
 
                                       31
<PAGE>   33
 
                     COMPDENT CORPORATION AND SUBSIDIARIES
                       CONSOLIDATED FINANCIAL STATEMENTS
             FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<PAGE>   34
 
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                               PAGES
                                                               -----
<S>                                                           <C>
Report of Independent Accountants...........................    F-2
 
Financial Statements:
 
Consolidated Balance Sheets December 31, 1998 and 1997......    F-3
 
Consolidated Statements of Operations for the years ended
  December 31, 1998, 1997 and 1996..........................    F-4
 
Consolidated Statements of Stockholders' Equity for the
  years
  ended December 31, 1998, 1997 and 1996....................    F-5
 
Consolidated Statements of Cash Flows for the years ended
  December 31, 1998, 1997 and 1996..........................    F-6
 
Notes to Consolidated Financial Statements..................  F-7-F-29
</TABLE>
 
                                       F-1
<PAGE>   35
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders of
CompDent Corporation and Subsidiaries
 
     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity, and of cash
flows present fairly, in all material respects, the financial position of
CompDent Corporation and its subsidiaries (collectively, the "Company") at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
 
     As discussed in Note 7 to the consolidated financial statements, in 1997,
the Company changed its method of assessing the recoverability of Excess of
Purchase Price over Net Assets Acquired (goodwill).
 
                                          PricewaterhouseCoopers LLP
 
Atlanta, Georgia
February 17, 1999, except as to the information presented
  in Note 8, for which the date is March 29, 1999
 
                                       F-2
<PAGE>   36
 
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                1998       1997
                                                              --------   --------
<S>                                                           <C>        <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents, including reverse
    repurchase agreements of $18,875 in 1997................  $ 11,263   $ 21,963
  Premiums receivable from subscribers......................     4,146      5,554
  Patient accounts receivable, net of allowance for
    doubtful accounts of $965 and $1,188....................     2,405      1,668
  Income taxes receivable...................................     1,561        175
  Deferred income taxes.....................................     2,161      5,081
  Other current assets......................................     3,788      2,842
                                                              --------   --------
         Total current assets...............................    25,324     37,283
                                                              --------   --------
Restricted funds............................................     2,674      2,321
Property and equipment, net of accumulated depreciation.....    16,288      6,292
Intangible assets...........................................    97,572     96,699
Reinsurance receivable......................................     5,539      5,331
Investment in DHDC..........................................     1,500      1,500
Other assets................................................     2,870      1,445
                                                              --------   --------
                                                              $151,767   $150,871
                                                              ========   ========
 
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Unearned revenue..........................................  $  9,207   $  9,538
  Accounts payable and accrued expenses.....................     7,814     14,918
  Accrued interest payable..................................        90        109
  Dental claims reserves....................................     1,848      1,502
                                                              --------   --------
         Total current liabilities..........................    18,959     26,067
                                                              --------   --------
  Aggregate reserves for life policies and contracts........     5,539      5,331
  Notes payable.............................................    55,459     56,595
  Deferred tax liability....................................       360      1,887
  Deferred compensation expense.............................       245        298
  Other liabilities.........................................       810        417
                                                              --------   --------
         Total liabilities..................................    81,372     90,595
                                                              --------   --------
Commitments and contingencies (See Notes 2, 4, 12 and 16)
Stockholders' equity:
  Preferred stock, $.01 par value, 2,000,000 shares
    authorized at December 31, 1998 and 1997, none issued at
    December 31, 1998 and 1997
  Common stock, $.01 par value, 50,000,000 shares authorized
    at December 31, 1998 and 1997, 10,115,189 and 10,112,629
    shares issued and outstanding at
    December 31, 1998 and 1997, respectively................       101        101
  Additional paid-in capital................................    97,647     97,618
  Retained deficit..........................................   (27,353)   (37,443)
                                                              --------   --------
         Total stockholders' equity.........................    70,395     60,276
                                                              --------   --------
                                                              $151,767   $150,871
                                                              ========   ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-3
<PAGE>   37
 
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                             1998          1997          1996
                                                          -----------   -----------   -----------
<S>                                                       <C>           <C>           <C>
Revenues:
  Subscriber premiums...................................  $   142,403   $   143,396   $   135,807
  Affiliated practice revenue...........................       23,387         7,113            --
  Other revenue.........................................        7,469         8,217         5,262
                                                          -----------   -----------   -----------
          Total revenue.................................      173,259       158,726       141,069
                                                          -----------   -----------   -----------
Expenses:
  Dental care providers' fees and claim costs...........       78,470        81,690        73,431
  Commissions...........................................       13,478        13,272        12,184
  Premium taxes.........................................          888         1,047         1,018
  DHMI operating expenses...............................       21,448         5,036            --
  General and administrative............................       32,262        39,283        30,394
  Depreciation and amortization.........................        5,542         5,735         5,153
  Goodwill impairment...................................           --        58,953            --
                                                          -----------   -----------   -----------
          Total expenses................................      152,088       205,015       122,180
                                                          -----------   -----------   -----------
          Operating income (loss).......................       21,171       (46,289)       18,889
                                                          -----------   -----------   -----------
Other (income) expense:
  Interest income.......................................         (875)         (725)         (585)
  Interest expense......................................        4,343         3,239         1,935
  Other, net............................................           --             2          (219)
                                                          -----------   -----------   -----------
          Total other expense...........................        3,468         2,516         1,131
                                                          -----------   -----------   -----------
          Income (loss) before provision for income
            taxes.......................................       17,703       (48,805)       17,758
Income tax provision....................................        7,613         4,900         7,866
                                                          -----------   -----------   -----------
  Net income (loss).....................................  $    10,090   $   (53,705)  $     9,892
                                                          ===========   ===========   ===========
  Net income (loss) per common share -- basic...........  $      1.00   $     (5.32)  $      0.98
                                                          ===========   ===========   ===========
  Net income (loss) per common share -- diluted.........  $      0.99   $     (5.32)  $      0.97
                                                          ===========   ===========   ===========
  Weighted average common shares outstanding............   10,112,629    10,098,323    10,048,513
                                                          ===========   ===========   ===========
  Weighted average common shares outstanding with
     dilutive securities................................   10,175,864    10,098,323    10,176,756
                                                          ===========   ===========   ===========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-4
<PAGE>   38
 
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                       (DOLLARS AND SHARES IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                  COMMON
                                                                  STOCK        ADDITIONAL   RETAINED
                                                              --------------    PAID-IN     EARNINGS
                                                              SHARES   VALUE    CAPITAL     (DEFICIT)    TOTAL
                                                              ------   -----   ----------   ---------   --------
<S>                                                           <C>      <C>     <C>          <C>         <C>
Balance, December 31, 1995..................................  10,016   $100     $95,707     $  6,370    $102,177
Issuance of Common Stock pursuant to option agreements......      48      1          65           --          66
Issuance of Common Stock pursuant to employee stock purchase
  plan......................................................       2     --          48           --          48
Net income..................................................      --     --          --        9,892       9,892
                                                              ------   ----     -------     --------    --------
Balance, December 31, 1996..................................  10,066    101      95,820       16,262     112,183
Issuance of Common Stock pursuant to purchase agreement (see
  Note 4)...................................................      40     --       1,141           --       1,141
Issuance of Common Stock pursuant to option agreements......       4     --          21           --          21
Issuance of Common Stock pursuant to employee stock purchase
  plan......................................................       3     --          53           --          53
Tax benefit from issuance of Common Stock (non-qualified
  options)..................................................      --     --         583           --         583
Net loss....................................................      --     --          --      (53,705)    (53,705)
                                                              ------   ----     -------     --------    --------
Balance, December 31, 1997..................................  10,113    101      97,618      (37,443)     60,276
Issuance of Common Stock pursuant to employee stock purchase
  plan......................................................       2     --          29           --          29
Net income..................................................      --     --          --       10,090      10,090
                                                              ------   ----     -------     --------    --------
Balance, December 31, 1998..................................  10,115   $101     $97,647     $(27,353)   $ 70,395
                                                              ======   ====     =======     ========    ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                   statements
 
                                       F-5
<PAGE>   39
 
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                               1998       1997       1996
                                                              -------   --------   --------
<S>                                                           <C>       <C>        <C>
Cash flows from operating activities:
  Net income (loss).........................................  $10,090   $(53,705)  $  9,892
  Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
    Depreciation and amortization...........................    5,542      5,735      5,248
    Goodwill impairment.....................................       --     58,953         --
    Gain on sale of assets held for sale....................       --         --       (174)
    Loss (gain) on sale of property and equipment, net......       --         53        (53)
    Bad debt expense........................................      774        183         --
    Deferred income tax expense.............................    1,393      2,136      1,526
    Changes in assets and liabilities:
      Premiums receivable from subscribers..................    1,408     (2,433)     1,813
      Patient receivables...................................   (1,511)    (1,029)        --
      Income taxes receivable...............................   (1,386)        71       (231)
      Other assets..........................................   (2,465)    (3,487)       (73)
      Unearned revenue......................................     (331)       (59)     (1445)
      Accounts payable and accrued expenses.................   (7,041)      (300)    (3,200)
      Income taxes payable..................................       --         --       (903)
      Other liabilities.....................................    1,571     (1,781)    (2,895)
                                                              -------   --------   --------
         Net cash provided by operating activities..........    8,044      4,337      9,505
                                                              -------   --------   --------
Cash flows from investing activities:
  Additions to property and equipment.......................  (12,393)    (3,985)    (2,394)
  Proceeds from sale of assets held for sale................       --         --        694
  Increase in restricted cash...............................     (353)      (175)      (607)
  Proceeds from sale of property and equipment..............       --         37        253
  Cash surrender value of life insurance....................      (41)       (28)        15
  Purchases of businesses, net of cash acquired.............   (4,850)   (20,770)   (62,462)
                                                              -------   --------   --------
         Net cash used in investing activities..............  (17,637)   (24,921)   (64,501)
                                                              -------   --------   --------
Cash flows from financing activities:
  Borrowings under credit agreement.........................   63,168     59,456     57,697
  Repayments under credit agreement.........................  (64,304)   (44,525)   (16,034)
  Loan fees paid............................................       --         --       (112)
  Proceeds from exercise of stock options...................       --         21         66
  Proceeds from employee stock purchase plan................       29         53         48
  Tax benefit realized from exercise of non-qualified stock
    options.................................................       --        583         --
  Other.....................................................       --         --        (98)
                                                              -------   --------   --------
         Net cash (used in) provided by financing
           activities.......................................   (1,107)    15,588     41,567
         Decrease in cash and cash equivalents..............  (10,700)    (4,996)   (13,429)
                                                              -------   --------   --------
Cash and cash equivalents, beginning of period..............   21,963     26,959     40,388
                                                              -------   --------   --------
Cash and cash equivalents, end of period....................  $11,263   $ 21,963   $ 26,959
                                                              =======   ========   ========
Supplemental disclosures of cash flow information:
  Cash paid during the period for:
    Interest................................................  $ 4,262   $  3,349   $  1,450
                                                              =======   ========   ========
    Income taxes............................................  $ 5,150   $  1,839   $  7,474
                                                              =======   ========   ========
Non-cash investing and financing activities:
  Stock issued in exchange for business acquired............            $  1,141
                                                                        ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-6
<PAGE>   40
 
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
1. ORGANIZATION AND BASIS OF PRESENTATION
 
     CompDent Corporation and subsidiaries (collectively, the "Company") operate
a system of dental benefit plans in more than 23 states. The Company's primary
source of revenue is managed dental care plans offered either separately or
together with a traditional indemnity insurance plan, underwritten by a third
party, under a "dual-choice" plan. The Company markets its plans primarily
through independent agents to private and governmental employers. Dental
services are provided through a network of selected independent dentists who are
responsible for each member's individual dental care. The Company currently
conducts business principally in Florida, Georgia, Kentucky, Texas, Illinois,
Indiana, and Ohio. For the years ended December 31, 1998, 1997, and 1996,
Florida operations accounted for approximately 32%, 34%, and 35%, respectively,
of the Company's revenues.
 
     The Company, through its subsidiary Dental Health Management, Inc.
("DHMI"), also manages dental practices which provide general dentistry
services. Collectively, 36 dental offices located in Illinois, Florida,
Tennessee, Georgia, Arkansas and Indiana are now being managed by DHMI. Based on
the criteria set forth in the Emerging Issues Task Force (EITF) Issue No. 97-2
("Issue 97-2"), these practices are consolidated with DHMI.
 
2. SIGNIFICANT ACCOUNTING POLICIES
 
     Basis of Consolidation -- The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, American Prepaid
Professional Services, Inc. ("American Prepaid"), and through American Prepaid,
the following wholly owned subsidiaries: American Dental Plan, Inc. (a Florida
corporation), American Dental Plan of Georgia, Inc., American Prepaid Dental
Plan of Ohio, Inc., American Dental Plan of Alabama, Inc., American Dental Plan,
Inc. (a North Carolina corporation, ceased operations in July 1997), American
Dental Plan of North Carolina, Inc., DentiCare, Inc. ("DentiCare"), UniLife
Insurance Company ("UniLife"), CompDent Corporation , CompDent of Alabama, Inc.,
CompDent of Georgia, Inc., CompDent of Tennessee, Inc., HealthStream Services,
Inc., Texas Dental Plans, Inc., National Dental Plans, Inc., Dental Plans
International, Inc., Dental Provider Resources, Inc., Dental Care Plus
Management Corp. ("Dental Care") and its wholly owned subsidiary, CompDent of
Illinois, Inc., Diamond Dental of Arkansas, Inc., American Dental Providers of
Arkansas, Inc., DentLease, Inc., and DHMI. All significant inter-company
balances and transactions have been eliminated in consolidation.
 
     The Company consolidates the dental practices managed by DHMI based on the
criteria set forth in EITF Issue 97-2. DHMI retains control of the nominee
shareholder, as it can at all times, in its sole discretion without cause,
establish or effect a change in the nominee shareholder and the naming of a new
nominee shareholder without limitation as to the number of times a change is
made. DHMI and the practice incur no more than a nominal cost, par value for the
current agreements, to change the shareholder and are not subject to any
significant adverse impact upon a change in the nominee shareholder.
 
     Segment Reporting -- In 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) 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. Financial information is required to be reported
on the basis that 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
 
                                       F-7
<PAGE>   41
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
reporting segment information and those used in the general purpose financial
statements, and changes in the measurement of segment amounts from period to
period. The adoption of SFAS No. 131 did not affect results of operations or
financial position but did affect the disclosure of segment information (see
Note 21).
 
     Subscriber Premiums -- Managed care subscriber premiums revenue is
recognized as earned over the related contract period. The unexpired portion of
such revenue collected is reported as unearned revenue in the consolidated
balance sheets. Indemnity dental and life premiums are recognized as earned on a
pro rata basis over the risk coverage periods. Unearned premium reserves are
provided for the portion of premiums written for dental and life insurance which
relate to the unexpired coverage period.
 
     Affiliated Practice Revenue -- Affiliated or dental practice revenue is
recognized as services are provided and includes fee-for-service revenue as well
as revenue from contracts with capitated managed dental care plans for general
dentistry services. Revenue is reported at estimated realizable amounts from
third-party payors and patients for services rendered, net of contractual and
other adjustments. Also included in affiliated practice revenue are contracted
management fees for administrative services provided to Dental Health
Development Corporation (DHDC) by DHMI.
 
     Other Revenue -- Other revenue consists of the following:
 
<TABLE>
<CAPTION>
                                                               1998     1997     1996
                                                              ------   ------   ------
<S>                                                           <C>      <C>      <C>
Indemnity income............................................  $1,554   $1,839   $1,558
HCS management fee (see Note 11)............................   1,640    3,103    1,749
Administrative services and other...........................   4,275    3,275    1,955
                                                              ------   ------   ------
          Total.............................................  $7,469   $8,217   $5,262
                                                              ======   ======   ======
</TABLE>
 
     Dental Care Providers' Fees and Claim Costs -- The Company contracts with
various independent dentists to provide services to covered enrollees. Most
dentists participating in the managed dental care plan are compensated by the
Company on a capitation basis which is a set per-member, per-month fee to
provide certain dental care for members. Capitation expense is recorded based on
the month of service beginning in the month a provider is selected by the
enrollee. Indemnity dental and life, and specialty dental benefits not covered
by capitation fees are charged to expense in the period that the claims are
incurred.
 
     DHMI Operating Expense -- The Company considers all expenses associated
with the direct management of dental facilities and patient care, excluding
depreciation, amortization and allocated DHMI corporate expenditures, to be DHMI
Operating Expenses.
 
     Advertising Costs -- Costs of advertising are expensed when incurred.
 
     Cash and Cash Equivalents -- The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
 
     Concentrations of Credit Risk -- The Company collects a significant amount
of premium revenue before services are provided. However, in instances where
this does not occur, the Company extends credit without requiring collateral.
Management believes exposure to losses on receivables is minimal due to the
nature of this business and the fact that the financial condition of the
Company's groups is monitored closely. Also, the dental offices grant credit
without collateral to their patients, most of whom are local residents and are
insured under third-party payor agreements. The Company does not believe these
receivables represent any significant concentration of credit risk.
 
     At December 31, 1997, the Company had $18,875 of U.S. government securities
under agreements to resell them on a specified date. The carrying value of the
agreements approximated fair market value because of the short maturity of the
investments. The Company did not recognize any significant gain or loss when
these reverse repurchase agreements were settled. Exclusive of the reverse
repurchase agreements, the
 
                                       F-8
<PAGE>   42
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Company's cash and restricted funds in financial institutions exceeded the
federally insured deposit limits by $13,821 and $3,992 at December 31, 1998 and
1997, respectively.
 
     Patient Accounts Receivable -- Current operations are charged with a
provision for uncollectible accounts based upon circumstances which affect the
collectibility of receivables. Accounts deemed uncollectible are charged against
the allowance. Accounts receivable are also reported net of contractual
adjustments which represent the difference between established billing rates and
estimated reimbursement from patients and other third-party payors.
 
     Property and Equipment -- Property and equipment is carried at cost less
accumulated depreciation which is computed using the straight-line method over
the estimated useful lives of two to ten years of the related assets.
Maintenance and repairs are charged to expense as incurred. Upon sale,
retirement, or other disposition of these assets, the cost and the related
accumulated depreciation are removed from the respective accounts and any gain
or loss on the disposition is included in income.
 
     Intangible Assets -- Intangible assets consist of the following amounts,
net of amortization:
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                              -------   -------
<S>                                                           <C>       <C>
Excess of purchase price over net assets acquired
  (goodwill)................................................  $69,236   $74,028
Management agreements.......................................   28,334    22,268
Deferred financing costs....................................       --        78
Non-competition agreements..................................        2       325
                                                              -------   -------
                                                              $97,572   $96,699
                                                              =======   =======
</TABLE>
 
     The goodwill arose from acquisitions of dental benefit entities and is
being amortized on a straight-line basis over 40 years. Accumulated
amortization, excluding impairment charges, at December 31, 1998 and 1997, was
$10,918 and $8,999, respectively.
 
     In accordance with Accounting Principles Board Opinion (APB) No. 17,
Intangible Assets, the recoverability of goodwill not identified with assets
subject to an impairment loss is reviewed for impairment, on an acquisition by
acquisition basis, whenever events or changes in circumstances indicate that it
may not be recoverable. If such an event occurred, the Company would prepare
projections of future discounted cash flows for the applicable acquisition. The
projections are for a period of 5 years using a discount rate and terminal value
multiple that would be customary for evaluating current dental benefit company
transactions and multiples. The Company believes this discounted cash flow
approach approximates fair market value. The utilization of this policy resulted
in an impairment charge of $58,953 being recognized in the fourth quarter of
1997 (see Note 7).
 
     The management agreements are entered into in connection with acquisitions
of dental practices and are amortized on a straight-line basis over 40 years
through December 31, 1998. In connection with the allocation of the purchase
price to intangible assets generated from the dental practice group acquisitions
(see Note 4), the Company analyzed the nature of each dental group practice with
which a management agreement was entered into, including the number of dentists
in each dental practice group, number of dental offices and ability to recruit
dentists, the dental group practice's relative market position, the length of
time each dental group practice has been in existence, and the term and
enforceability of the management agreement. The management agreements are for a
term of 40 years and cannot be terminated by the relevant P.C. without consent
of the Company or without cause, consisting primarily of bankruptcy, material
default, or failure to perform under the terms of the Agreement by the Company.
 
     The Company believes there is no material value allocable to the employment
and non-compete agreements entered into between the P.C.s and the individual
dentists, since the primary economic beneficiaries of these agreements are the
P.C.s, which are entities that the Company does not legally control.
 
                                       F-9
<PAGE>   43
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
The Company believes that the dental group practices operated by the P.C.s with
which it has Management Agreements are long-lived entities with an
indeterminable life and that the dentists, customer demographics and various
contracts will be continuously replaced. Therefore, the entire amount of excess
of purchase price over net assets acquired is allocated to the intangible asset
management agreements. The Company periodically reviews the Agreements for
indications of impairment. Accumulated amortization at December 31, 1998 and
1997, was $934 and $250, respectively.
 
     Effective January 1, 1999, the Company changed its estimate of the
amortization period from 40 to 25 years. This change in estimate was made in
response to indications that comparability to the policies of other entities in
the industry and others using management agreements as controlling instruments
is best achieved with a shorter amortization period. Future amortization will be
calculated by subtracting the period from the purchase date to December 31, 1998
from 25 years and utilizing this amount to divide into the carrying amount of
management agreements at December 31, 1998. Amortization expense for these
agreements would have increased by approximately $432 had a 25 year amortization
period been used for the year ended December 31, 1998.
 
     Deferred financing costs are amortized as an increase to interest expense
on a straight-line basis, which approximates the effective interest method, over
the terms of the related debt agreements (see Note 8). Accumulated amortization
at December 31, 1998 and 1997, was $319 and $241, respectively.
 
     Non-competition agreements are amortized on a straight-line basis over the
terms of the related agreements. Accumulated amortization at December 31, 1998
and 1997, was $3,088 and $2,765, respectively.
 
     The recoverability of the management agreements, the deferred financing
costs and the non-competition agreements (collectively, the "identifiable
intangible assets") is reviewed for impairment as required by SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, based on an evaluation of undiscounted projected cash flows
through the remaining amortization period. If an impairment exists, the amount
of such impairment is calculated based on the estimated fair value of the
identifiable intangible assets. The recoverability of the identifiable
intangible assets is reviewed for impairment whenever events or changes in
circumstances indicate that they may not be recovered. Management believes that
there has been no impairment of the identifiable intangible assets as reflected
in the Company's consolidated balance sheet as of December 31, 1998.
 
     The Company is subject to factors which could cause management to reassess
its estimates of the realizability and/or the amortization periods of its
goodwill and identifiable intangible assets. Specifically, changes in growth
rates, the ability to expand the dental panel, competition from indemnity
carriers and preferred provider organizations, and the ability to attract
patients to DHMI dental practices are among the factors that could lead
management to reassess the realizability and/or amortization periods of its
goodwill and identifiable intangible assets.
 
     Investment in DHDC -- During 1997, the Company invested $1,500 in exchange
for a 13% cash ownership and .15% voting interest in DHDC. DHDC is a dental
management company specializing in developing and managing start-up dental
practices. The Company has an option to purchase the remaining equity at
specified dates. The Company does not have any requirements directly or
indirectly to exercise its right under this option. The Company has agreed to
fund certain development costs (including the purchase of dental equipment,
supplies & leasehold improvements) not to exceed $15,000. At December 31, 1998,
the Company had funded approximately $10,000 of this commitment.
 
     The Company does not have the ability to exert significant influence over
the operations of DHDC and, therefore, carries its investment at cost.
 
                                      F-10
<PAGE>   44
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Long-Lived Assets -- In accordance with SFAS No. 121, the Company
periodically reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable.
 
     Income Taxes -- Under Statement of SFAS No. 109, deferred income taxes are
provided based on the estimated future tax effects of differences between
financial statement carrying amounts and the tax bases of existing assets and
liabilities.
 
     The Company and its subsidiaries file a consolidated U.S. federal income
tax return. Subsidiaries are allocated a tax provision as if each subsidiary
filed separate income tax returns.
 
     Dental Claims Reserves -- The Company's financial position includes
liabilities associated with indemnity and specialty insurance coverage. Dental
claims reserves include provisions for reported claims and claims incurred but
not reported, including estimated claim adjustment expenses, based upon
actuarial estimates which utilize the Company's historical claim development
patterns. Estimates and assumptions with respect to the Company's dental claims
reserves are required in accordance with generally accepted accounting
principles. Actual results could differ from these estimates. Changes in these
estimates are reflected in the results of operations in the period in which such
changes occur.
 
     Aggregate Reserve for Policies and Contracts -- The Company's financial
position includes liabilities associated with indemnity insurance coverage.
Liabilities for future life policy benefits are computed by the net level
premium method based upon estimated future investment yield, mortality and
withdrawal assumptions, commensurate with the Company's experience. Assumed
mortality is based on various industry published tables, modified as appropriate
for the Company's actual experience. The Company no longer writes life policies
and is fully reinsured for prior life policies (see Note 14).
 
     Comprehensive Income -- In 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Income, that establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in the financial statements. The Company does not have any
components of other comprehensive income as defined by SFAS No. 130, and
accordingly, has not included such disclosure.
 
     Fair Value of Financial Instruments -- The carrying amount of the Company's
cash and cash equivalents and restricted funds approximate fair value because of
the short maturity of these instruments. The fair value of the Company's notes
payable approximates its carrying amount because the interest rate associated
with the debt is variable. The investment in DHDC is carried at cost as the
Company does not maintain control or significant ownership. The Company's cost
approximates the estimated fair value as of December 31, 1998 and 1997.
 
     Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
 
     Earnings Per Share -- Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that shared in the earnings of the entity. The number of common
stock equivalents is determined using the treasury stock method. Options have a
dilutive effect under the treasury stock method only when the average market
price of the common stock during the period exceeds the exercise price of the
options.
 
     Reclassifications -- Certain amounts for 1997 have been reclassified to
conform to the 1998 presentation.
                                      F-11
<PAGE>   45
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
3. REGULATORY REQUIREMENTS AND RESTRICTED FUNDS
 
     The Company has restricted certificates of deposit bearing interest at
variable rates as required by various state statutes. Additionally, the
subsidiaries of American Prepaid are required to maintain certain levels of
regulatory capital for statutory reporting. At December 31, 1998 and 1997, the
various subsidiaries were required to cumulatively maintain approximately $4,302
and $3,927, respectively, in capital and surplus. Accordingly, the subsidiaries
may be limited in their ability to pay dividends to American Prepaid, and it in
turn to the Company.
 
4. BUSINESS COMBINATIONS
 
     Effective March 21, 1997, the Company completed the acquisition of American
Dental Providers, Inc. ("AMDP"), and Diamond Dental & Vision, Inc. ("DDV"). The
aggregate purchase price of $1,700 consisted of $500 in cash and $1,200 of
Company common stock issued at fair market value. AMDP provides managed dental
care services through a network of dental care providers, and DDV provides a
vision plan and referral fee-for-service dental plan to the Arkansas market. The
Company funded the cash portion of the purchase with cash available from
operations. The acquisition of AMDP and DDV was accounted for using the purchase
method of accounting with the results of operations of the businesses acquired
included from the effective date of the acquisition. The acquisition resulted in
excess of cost over fair value of net assets acquired of $2,400 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:
 
<TABLE>
<S>                                                           <C>
Fair value of assets acquired, including goodwill...........  $ 2,652
Cash paid and fair value of stock issued for assets
  acquired, net of cash acquired............................   (1,614)
Acquisition costs paid......................................     (416)
                                                              -------
Liabilities assumed.........................................  $   622
                                                              =======
</TABLE>
 
     During the fourth quarter of 1997, the Company assessed the recoverability
of goodwill, concluding that certain goodwill generated from the acquisitions of
AMDP, and DDV was impaired (see Note 7).
 
     Effective July 2, 1997, the Company completed the acquisition of twenty-one
dental facilities from The Workman Management Group, LTD ("Workman"). The dental
facilities are located in central and southern Illinois. The purchase price
consisted of $15,500 in cash, and funding for the acquisition was obtained from
cash available from operations and from the Company's revolving line of credit.
Concurrent with the acquisition, the Company entered into a 40-year agreement to
manage the dental practices which are operating in the dental facilities. In
accordance with the transaction, the management agreement resulted in the fair
value of an intangible asset of $16,618, which is currently being amortized over
40 years (see Note 2). The acquisition of Workman was accounted for using the
purchase method of accounting with the results of operations of the business
acquired included from the effective date of the acquisition.
 
     The following is a summary of assets acquired, liabilities assumed, and
consideration paid in connection with the acquisition:
 
<TABLE>
<S>                                                           <C>
Fair value of assets acquired, including intangible
  assets....................................................  $ 17,828
Cash paid for assets acquired, net of cash acquired.........   (15,340)
Acquisition costs paid......................................      (990)
                                                              --------
Liabilities assumed.........................................  $  1,498
                                                              ========
</TABLE>
 
     During the third and fourth quarter of 1997, the Company completed the
acquisition of several dental facilities from three additional dental groups.
Effective July 2, 1997, the Company completed the acquisition
 
                                      F-12
<PAGE>   46
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
of one dental facility located in southern Florida from the Old Cutler Dental
Associates, P.A. ("Old Cutler"). Effective September 26, 1997, the Company
completed the acquisition of one dental facility located in central Tennessee
from Robert T. Winfree, D.D.S., P.C. ("Winfree"). Effective November 7, 1997,
the Company completed the acquisition of Stratman Management Group ("Stratman")
and its six dental facilities located in Indiana. The purchase price of these
facilities consisted of $4,957 in cash less discharge of liabilities related to
the purchased assets. Funding for the acquisitions was obtained from cash
available from operations and from the Company's revolving line of credit.
Concurrent with the acquisitions, the Company entered into 40-year agreements to
manage the dental practices which are operating in the dental facilities. In
accordance with each of the transactions, the management agreements resulted in
the fair value of an intangible asset of $6,154, which is currently being
amortized over 40 years (see Note 2). Each acquisition was accounted for using
the purchase method of accounting with the results of operations of the
businesses acquired included from the effective date of the acquisition.
 
     The following is a summary of assets acquired, liabilities assumed and
consideration paid in connection with the acquisitions:
 
<TABLE>
<S>                                                           <C>
Fair value of assets acquired, including intangible
  assets....................................................  $ 6,681
Cash paid for assets acquired, net of cash acquired.........   (4,957)
Acquisition costs paid......................................     (227)
                                                              -------
Liabilities assumed.........................................  $ 1,497
                                                              =======
</TABLE>
 
     Effective January 2, 1998, the Company completed the acquisition of five
dental facilities from Michael H. Reznik, D.D.S., P.C. ("Reznik"). The dental
facilities are located in Atlanta, Georgia. The purchase price consisted of
$3,500 in cash less discharge of liabilities related to the purchased assets.
Funding for the acquisition was obtained from cash available from operations and
from the Company's revolving line of credit. Concurrent with the acquisition,
the Company entered into a 40-year agreement to manage the dental practices,
which are operating in the dental facilities. In accordance with the
transaction, the management agreement resulted in the fair value of an
intangible asset of $5,101, which is currently being amortized over 40 years
(see Note 2). The acquisition of Reznik was accounted for using the purchase
method of accounting with the results of operations of the business acquired
included from the effective date of the acquisition
 
     The following is a summary of assets acquired, liabilities assumed and
consideration paid in connection with the acquisitions:
 
<TABLE>
<S>                                                           <C>
Fair value of assets acquired, including intangible
  assets....................................................  $ 5,235
Cash paid for assets acquired, net of cash acquired.........   (3,500)
Acquisition costs paid......................................     (150)
                                                              -------
Liabilities assumed.........................................  $ 1,585
                                                              =======
</TABLE>
 
     Effective April 30, 1998, the Company completed the acquisition of two
dental facilities from R. Kendall Roberts, D.D.S., P.C., d/b/a Newhealth Dental
Group, ("Roberts"). The dental facilities are located in Fort Smith, Arkansas.
The purchase price consisted of $1,350 in cash. Funding for the acquisition was
obtained from cash available from operations and from the Company's revolving
line of credit. Concurrent with the acquisition, the Company entered into a
40-year agreement to manage the dental practices, which are operating in the
dental facilities. In accordance with the transaction, the management agreement
resulted in the fair value of an intangible asset of $1,395, which is currently
being amortized over 40 years (see Note 2). The acquisition of Roberts was
accounted for using the purchase method of accounting with the results of
operations of the business acquired included form the effective date of the
acquisition. There were no liabilities, material assets acquired or material
transaction costs incurred
 
                                      F-13
<PAGE>   47
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     In conjunction with certain acquisitions, the Company has entered into
contractual arrangements whereby the selling parties are entitled to receive
contingent consideration payments in cash based upon the achievement of certain
minimum operation results. Obligations related to these contingencies are
reflected as increases in intangible assets in the period they become known. At
December 31, 1998, the Company recorded $1,624 related to these contingencies
pursuant to agreements with Winfree, Stratman and Reznik. In accordance with the
agreements, the operating results for the years ended December 31, 1999 and
2000, may result in additional payments.
 
     Unaudited pro forma results of operations of the Company for the years
ended December 31, 1998 and 1997 are included below. Such pro forma presentation
has been prepared assuming that the AMDP, DDV, Workman, Old Cutler, Winfree and
Stratman had occurred as of January 1, 1997, and, Reznik and Roberts
acquisitions had occurred as of January 1, 1998 and 1997.
 
<TABLE>
<CAPTION>
                                                                1998       1997
                                                              --------   --------
<S>                                                           <C>        <C>
Revenues....................................................  $173,987   $174,767
                                                              ========   ========
Net income (loss)...........................................  $ 10,070   $(54,751)
                                                              ========   ========
  net income (loss) per common share -- basic...............  $   1.00   $  (5.40)
                                                              ========   ========
</TABLE>
 
     The unaudited pro forma results include the historical accounts of the
Company, and historical accounts of the acquired businesses and pro forma
adjustments including the amortization of the intangible assets, calculation of
interest expense on amounts borrowed to fund these acquisitions and the
applicable income tax effects of these adjustments. The pro forma results of
operations are not necessarily indicative of actual results which may have
occurred had the operations of the acquired companies been combined in prior
periods.
 
5. PROPERTY AND EQUIPMENT
 
     Property and equipment is comprised of the following as of December 31,
1998 and 1997:
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                              -------   -------
<S>                                                           <C>       <C>
Office furniture and equipment..............................  $ 3,349   $ 2,003
Data processing equipment and software......................    6,598     4,396
Leasehold improvements......................................    8,946     2,280
Dental equipment............................................    3,426     1,125
                                                              -------   -------
                                                               22,319     9,804
Less: accumulated amortization and depreciation.............   (6,031)   (3,512)
                                                              -------   -------
Property and equipment, net.................................  $16,288   $ 6,292
                                                              =======   =======
</TABLE>
 
     Depreciation expense was $2,531, $1,275, and $1,350 for the years ended
December 31, 1998, 1997 and 1996, respectively. Accumulated depreciation on
assets held for leasing at December 31, 1998 and 1997, was $1,474 and $321,
respectively.
 
                                      F-14
<PAGE>   48
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
6. INCOME TAXES
 
     Income tax expense includes income taxes currently payable and those
deferred because of temporary differences between the financial statement and
tax bases of assets and liabilities.
 
     Income tax expense consisted of the following:
 
<TABLE>
<CAPTION>
                                                               1998     1997      1996
                                                              ------   -------   ------
<S>                                                           <C>      <C>       <C>
Current payable:
  Federal...................................................  $3,316   $ 5,494   $5,286
  State.....................................................     531       900    1,054
                                                              ------   -------   ------
                                                               3,847     6,394    6,340
                                                              ------   -------   ------
Deferred:
  Federal...................................................   3,230    (1,284)   1,386
  State.....................................................     536      (210)     140
                                                              ------   -------   ------
                                                               3,766    (1,494)   1,526
                                                              ------   -------   ------
                                                              $7,613   $ 4,900   $7,866
                                                              ======   =======   ======
</TABLE>
 
     The differences between actual income tax expense (benefit) and income tax
expense (benefit) computed using the federal statutory income tax rate were as
follows:
 
<TABLE>
<CAPTION>
                                                              1998      1997      1996
                                                             ------   --------   ------
<S>                                                          <C>      <C>        <C>
Computed "expected" tax expense (benefit)..................  $6,196   $(17,082)  $6,215
Nondeductible goodwill amortization........................     685     21,870    1,106
Tax-exempt interest........................................      --        (57)     (73)
State income taxes, net of federal benefit.................     694        419      825
Increase (decrease) in valuation allowance, net............     179       (188)    (131)
Other, net.................................................    (141)       (62)     (76)
                                                             ------   --------   ------
Income tax expense.........................................  $7,613   $  4,900   $7,866
                                                             ======   ========   ======
</TABLE>
 
                                      F-15
<PAGE>   49
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Components of deferred tax assets and liabilities as of December 31, 1998
and 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                              -------   -------
<S>                                                           <C>       <C>
Deferred tax assets:
  Unearned revenue..........................................  $   398   $   447
  Investment in affiliate...................................       34        33
  Property and equipment, net...............................      148       469
  Other liabilities.........................................      167       112
  Accrued liabilities.......................................    1,763     4,627
  Net operating loss carry forwards.........................    1,224     1,625
  Capital loss carry forward................................      158       158
                                                              -------   -------
          Total deferred tax asset..........................    3,892     7,471
Valuation allowance.........................................   (1,347)   (1,301)
                                                              -------   -------
Net deferred tax asset......................................    2,545     6,170
                                                              -------   -------
Deferred tax liabilities:
  Reserves..................................................       --     2,752
  Deductible goodwill and identifiable intangible assets....      744       224
                                                              -------   -------
          Total deferred tax liability......................      744     2,976
                                                              -------   -------
          Total net deferred tax asset......................  $ 1,801   $ 3,194
                                                              =======   =======
</TABLE>
 
     From December 31, 1997 to December 31, 1998, the valuation allowance
increased by $46 due to the net impact of incurring additional state net
operating losses.
 
     SFAS No. 109 specifies that deferred tax assets are to be reduced by a
valuation allowance if it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The Company has established
valuation allowances primarily for net operating loss carry forwards and capital
loss carry forwards related to certain acquired companies due to uncertainty
surrounding their utilization prior to expiration. For similar reasons the
Company has established a valuation allowance for certain state operating loss
carry forwards generated at the holding company level.
 
     To the extent that certain of the pre-acquisition loss carry forwards are
utilized in the future and the associated valuation allowance reduced, the tax
benefit thereof will be allocated to reduce excess of purchase price over net
assets acquired. At December 31, 1998, the portion of the valuation allowance,
if utilized, that would reduce excess of purchase price over net assets acquired
is approximately $382.
 
     At December 31, 1998, certain subsidiaries have federal and state net
operating loss carry forwards expiring as follows:
 
<TABLE>
<CAPTION>
YEAR OF EXPIRATION                                            FEDERAL    STATE
------------------                                            -------   -------
<S>                                                           <C>       <C>
2002........................................................   $173     $    --
2003........................................................    706          --
2007........................................................     --         441
2008........................................................     --       1,027
2009........................................................     58         236
2010........................................................     --       1,271
2011........................................................     --       8,746
2012........................................................     --       2,087
2018........................................................     --       2,713
                                                               ----     -------
                                                               $937     $16,521
                                                               ====     =======
</TABLE>
 
                                      F-16
<PAGE>   50
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
7. ACCOUNTING FOR PURCHASE PRICE OVER NET ASSETS ACQUIRED (GOODWILL)
 
     The Company's accounting policy is to amortize goodwill on a straight-line
basis over a 40-year period. Prior to the fourth quarter of 1997, the Company
periodically assessed the recoverability of its goodwill through undiscounted
cash flows, excluding interest expense and amortization, over the remaining life
of such goodwill.
 
During the fourth quarter of 1997, management evaluated goodwill impairment
pursuant to the Company's existing policy. The evaluation indicated no
impairment which was deemed contrary to events occurring in the fourth quarter.
The events that led to this conclusion and to the Company experiencing declines
in historic growth rates, pricing, and margins are as follows: predatory pricing
of traditionally more expensive indemnity and preferred provider organization
products, a significant penetration of the Company's market by large insurance
carriers either by acquiring the Company's competitors or starting their own
dental health maintenance organization (HMO), and difficulty the Company
experienced in recruiting new panel dentists in certain markets where there was
not full acceptance of the prepaid concept. These events combined with a
significant unanticipated decrease in the growth of the overall dental HMO
market forced the Company's projected growth rates from their historic levels of
approximately 20% to 6% to 8% per annum. Although these events were occurring
throughout 1997, the Company believed that historic growth rates could be
achieved in 1998. However, it became apparent that new business and renewals,
which are traditionally sold in the fourth quarter for the following year, did
not support this assertion.
 
     Consistently applying the historical policy mentioned above did not result
in the recognition of impairment which was inconsistent with the events that had
occurred in the Company's business. Therefore, management concluded that its
accounting policy pursuant to APB No. 17 for assessing recoverability of
goodwill not identified with assets subject to an impairment loss should be
changed from an undiscounted approach to a discounted approach as an estimate of
fair value.
 
     The Company's discounted cash flow analysis was calculated using
projections for a period of 5 years and a discount rate and terminal value
multiple that would be customary for evaluating current dental benefit company
transactions and multiples. At December 31, 1997 the discount rate and the
terminal multiple used was 13% and 7, respectively. The assumptions were
selected by utilizing a weighted average cost of capital and multiple for the
Company's peer group. In addition, the Company estimated a growth rate of 6% per
annum. The assumptions used in this analysis represent management's best
estimate of future results. However, actual results could differ from these
estimates.
 
     As a result of this accounting change, the goodwill attributable to the
acquisition of CompDent Corporation was reduced from $32,080 to $13,869.
Additionally, the goodwill attributable to the acquisition of Dental Care Plus
Management, Corp. was reduced from $39,052 to $8,818, DentiCare, Inc. from $
14,433 to $6,010 and American Dental Providers, Inc. and Diamond Dental &
Vision, Inc. from $2,085 to $0, or a total reduction of $58,953.
 
     The Company tested the recoverability of the remaining goodwill of $45,331
relating to the American Prepaid Professional Services Inc., and Texas Dental
Plans, Inc. acquisitions, and based on the above methodology utilized,
management concluded that such goodwill appeared to be fully recoverable.
 
                                      F-17
<PAGE>   51
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
8. LONG-TERM DEBT
 
     Long-term debt consists of the following at December 31, 1998 and 1997:
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                              -------   -------
<S>                                                           <C>       <C>
Notes payable pursuant to a $65,000 reducing revolving line
  of credit agreement with banks (interest accrues at prime
  plus up to  1/4% or LIBOR plus up to 1 3/4%, with the
  margin over prime and LIBOR decreasing as the ratio of
  consolidated debt to EBITDA (as defined) decreases;
  American Prepaid's borrowing rate at December 31, 1998 was
  7.4%).....................................................  $55,459   $56,595
                                                              =======   =======
</TABLE>
 
     American Prepaid has a reducing revolving $65,000 line of credit (the
"Credit Facility") from a combination of lenders, as amended by the First
Amendment which increased the line of credit from $35,000. American Prepaid pays
a commitment fee of 0.375% per annum on any unused portion of the Credit
Facility.
 
     The Credit Facility prohibits payment of dividends and other distributions
and restricts or prohibits American Prepaid from making certain acquisitions,
incurring indebtedness, incurring liens, disposing of assets or making
investments without the lender's approval, and requires it to maintain certain
financial ratios on an ongoing basis. The Credit Facility is collateralized by
pledges of the stock of the Company's and American Prepaid's direct and indirect
subsidiaries.
 
     On March 16, 1998, the Credit Facility was amended by the Second Amendment
which reduced the minimum net worth requirement for future periods and modified
the scheduled reductions in the aggregate commitment. Prior to the Second
Amendment, the Credit Facility required a 33.0% reduction in available
borrowings for each year ending December 31, 2000, 1999, and 1998. The Company
was in technical default of certain financial ratios periodically throughout
1998 and at December 31, 1998, primarily due to the significant capital
expenditures associated with DHMI operations. The Company has received a
permanent waiver with respect to all such violations.
 
     On August 10, 1998, the Company entered into the Fourth Amendment which
adjusted one of the financial ratios to acknowledge the increased capital
expenditures and leasing costs associated with DHMI operations.
 
     On March 23, 1999, the Company entered into the Fifth Amendment which
extends the required 50% reduction of the Credit Facility from December 31, 1999
to March 31, 2000.
 
     Aggregate maturities as set forth in the Fifth Amendment are as follows:
 
<TABLE>
<S>                                                           <C>
Year Ending December 31:
  2000......................................................  $22,959
  2001......................................................   32,500
                                                              -------
                                                              $55,459
                                                              =======
</TABLE>
 
     On March 29, 1999, the Company entered into a Sixth Amendment which revised
certain financial ratios to acknowledge the increased capital expenditures and
leasing costs associated with DHMI operations.
 
9. STOCK OPTIONS
 
     Under the 1994 Stock Option and Grant Plan (the "1994 Plan"), the Company
may issue to officers, employees, consultants, and other key persons options to
purchase up to 360,000 shares of the Company's common stock. The Option
Committee may specify periods when certain options may be exercised following
retirement or termination of employment.
 
                                      F-18
<PAGE>   52
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     During 1997, the Company established the 1997 Stock Option Plan (the "1997
Plan") whereby the Company may issue to officers, employees, directors,
consultants, advisors, and other key persons options to purchase up to 500,000
shares of the Company's common stock. Unless specified by the Option Committee,
options are automatically terminated upon termination of employment. The 1997
Plan was approved by the shareholders at the annual shareholder meeting held on
April 30, 1998.
 
     The 1994 and 1997 Plans allow for incentive and non-qualified stock
options. Options granted are at an exercise price which is determined by the
Option Committee of the Board of Directors. The exercise price of the incentive
stock options shall not be less than fair market value of the stock on the date
of grant. Options are exercisable in installments as designated by the Option
Committee and shall expire no later than ten years after date of grant.
 
     During 1996, the Company established the Non-Employee Director's Stock
Option Plan (the "Director's Plan") whereby the Company may issue to directors
non-qualified options to purchase up to 100,000 shares of the Company's common
stock. Options granted are at an exercise price which is determined by the
Option Committee of the Board of Directors. The exercise price of the incentive
stock options shall not be less than fair market value of the stock on the date
of grant. Options vest ratably over a four-year period. Options granted under
the plan shall expire no later than ten years after date of grant.
 
     During 1998, the Company granted 4,000 and 9,000 incentive stock options
under the 1994 Stock Option Plan and the 1997 Stock Option Plan, respectively.
These incentive stock options vest at 25% per year from the date of grant. The
Company also granted 20,000 and 100,000 non-qualified stock options under the
Director's Plan and to new employees, respectively. Of the non-qualified stock
options, 10,000 vested immediately and the remainder vest ratably over a 4 year
period.
 
     During 1997, the Company granted 268,000 non-qualified stock options
outside of the 1994, 1997, and Director's Plans. In addition, there were 50,000
stock options outstanding that were issued in 1996 and are not part of any plan.
In connection with the Workman acquisition (see Note 4), 70,000 options were
granted and expire at the end of five years. The Company also granted 198,000
stock options to new employees. Options vest in installments as designated by
the Option Committee and expire no later than ten years after date of the grant.
 
     Prior to the adoption of the Director's Plan, the Company had granted
options to certain of its directors to purchase 72,000 shares of common stock at
$0.49 per share. These options vest 25% per year and, unless exercised, expire
at the end of six years. A total of 36,000, 36,000, and 18,000 of these options
were exercisable at December 31, 1998, 1997, and 1996, respectively. During
1998, no options were exercised.
 
                                      F-19
<PAGE>   53
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Pertinent information regarding the Plans are as follows:
 
<TABLE>
<CAPTION>
                                                                       WEIGHTED
                                           NUMBER        RANGE OF      AVERAGE
                                             OF          EXERCISE      EXERCISE    VESTING
                                           OPTIONS        PRICES        PRICE     PROVISIONS
                                          ---------   --------------   --------   ----------
<S>                                       <C>         <C>              <C>        <C>
Options outstanding, December 31,
  1995..................................    211,400   $ 0.49 - 29.00    $13.21     25%/year
Options granted.........................    187,000    29.25 - 42.75     34.29     25%/year
Options granted.........................    140,000            29.75     29.75    immediate
Options canceled........................    (36,700)    2.96 - 29.75     23.97
Options exercised.......................    (47,700)    0.49 -  5.89      1.37
                                          ---------
Options outstanding, December 31,
  1996..................................    454,000   $ 0.49 - 42.75     27.62
Options granted.........................    457,000    16.34 - 30.25     22.13     25%/year
Options granted.........................    200,000    16.12 - 30.25     18.36    immediate
Options canceled........................    (24,500)   29.00 - 39.50     32.55
Options exercised.......................     (3,500)            0.49      0.49
                                          ---------
Options outstanding, December 31,
  1997..................................  1,083,000   $ 0.49 - 42.75     23.56
Options granted.........................    123,000     9.56 - 13.13     11.97     25%/year
Options granted.........................     10,000            12.50     12.50    immediate
Options canceled........................    (83,000)   19.81 - 30.25     23.98
                                          ---------
Options outstanding, December 31,
  1998..................................  1,133,000   $ 0.49 - 42.75    $22.17
                                          =========
</TABLE>
 
     The following table summarizes information about stock options outstanding
at December 31, 1998:
 
<TABLE>
<CAPTION>
                                        OPTIONS OUTSTANDING                OPTIONS EXERCISABLE
                              ---------------------------------------    -----------------------
                                               WEIGHTED
                                               AVERAGE       WEIGHTED                   WEIGHTED
                                NUMBER        REMAINING      AVERAGE       NUMBER       AVERAGE
                              OUTSTANDING    CONTRACTUAL     EXERCISE    EXERCISABLE    EXERCISE
RANGE OF EXERCISE              12/31/98      LIFE (YEARS)     PRICE       12/31/98       PRICE
-----------------             -----------    ------------    --------    -----------    --------
<S>                           <C>            <C>             <C>         <C>            <C>
$ 0.49 - 14.50..............     206,000         7.62         $ 9.52        73,000       $ 5.36
$16.12 - 20.50..............     440,000         8.58          18.93       252,500        18.25
$23.22 - 30.25..............     359,000         7.87          28.22       227,625        29.08
$36.25 - 42.75..............     128,000         7.28          36.71        64,000        36.71
                               ---------         ----         ------       -------       ------
          Total.............   1,133,000         8.08         $22.17       617,125       $22.64
                               =========         ====         ======       =======       ======
</TABLE>
 
     The options above were issued at exercise prices which approximate fair
market value at the date of grant. At December 31, 1998, 230,300 shares are
available for grant under the various plans.
 
     At December 31, 1998 and 1997, the Company has stock options outstanding
under three stock-based compensation plans and other agreements which are
described above. The Company also has an Employee Stock Purchase Plan which
allows employees to purchase common stock at certain times during the year. The
Company applies APB Opinion No. 25 and related Interpretations in accounting for
its stock plans. Accordingly, no compensation cost has been recognized for its
fixed stock options or stock purchase plan. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates for awards under those plans consistent with the method
prescribed in SFAS No. 123,
 
                                      F-20
<PAGE>   54
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
the Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                                             1998       1997      1996
                                                            -------   --------   ------
<S>                                                         <C>       <C>        <C>
Net income (loss) -- as reported..........................  $10,090   $(53,705)  $9,892
Net income (loss) -- pro forma............................    8,940    (55,162)   8,611
Net income (loss) per common share (basic) -- as
  reported................................................     1.00      (5.32)    0.98
Net income (loss) per common share (basic) -- pro forma...     0.88      (5.46)    0.86
Net income (loss) per common share (diluted) -- as
  reported................................................     0.99      (5.32)    0.97
Net income (loss) per common share (diluted) -- pro
  forma...................................................     0.88      (5.46)    0.86
</TABLE>
 
     The pro forma amounts reflected above are not representative of the effects
on reported net income in future years because, in general, the options granted
typically do not vest for several years and additional awards are made each
year.
 
     The fair value of each option grant is estimated on the grant date using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
 
<TABLE>
<CAPTION>
                                                              1998    1997    1996
                                                              ----    ----    -----
<S>                                                           <C>     <C>     <C>
Dividend yield..............................................     0%      0%       0%
Expected life (years).......................................   3.9     3.4      4.2
Expected volatility.........................................  61.5%   56.2%   41.45%
Risk-free interest rate.....................................  5.20    6.04     5.80
</TABLE>
 
10. EMPLOYEE BENEFIT PLAN
 
     The Company maintains a 401(k) profit sharing plan for all full-time
employees who have completed six months of service. The plan allows employees to
defer from 1% to 20% of their earnings on a pretax basis through contributions
to the plan. Employer matching contributions are based upon a fixed percentage
of voluntary employee contributions. Employer profit sharing contributions are
based upon a fixed percentage of qualifying plan participants' annual
compensation. Both employer matching and profit sharing contribution levels are
discretionary and are determined by the Company and approved by the Board of
Directors on an annual basis. Employees are always 100% vested in their
contributions and become fully vested in employer contributions after five years
of service. On December 1, 1997, a 401(k) plan was created for employees of
DHMI. The Company also maintains the 401(k) plans of the companies that it
acquires until such time as they are merged into the Company's existing plan. As
of December 31, 1998, of all the acquired companies 401K plans had been merged
into the Company's existing plans. The Company contributed a total of $162, $91
and $203 to all of the plans during 1998, 1997, and 1996, respectively.
 
11. RELATED PARTY TRANSACTIONS
 
     In 1997, DHMI and DHDC entered into a contractual management agreement by
which DHDC pays a monthly fee to DHMI for accounting and information system
services, as well as general and administrative expenses. Management fees
recognized for the years ended December 31, 1998 and 1997 were $8,789 and
$1,854, respectively. At December 31, 1998 and 1997, $825 and $605,
respectively, was due from DHDC.
 
                                      F-21
<PAGE>   55
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     During 1998 and 1997, DentLease acquired and held various operating lease
agreements for office space and equipment relating to DHMI and DHDC acquisitions
and operations (see Note 12). Collective future rentals on existing leases with
DHDC as of December 31, 1998 are as follows:
 
<TABLE>
<S>                                                           <C>
YEAR ENDING DECEMBER 31:
  1999......................................................  $ 1,389
  2000......................................................    1,389
  2001......................................................    1,389
  2002......................................................    1,389
  2003......................................................    1,389
  Thereafter................................................    6,061
                                                              -------
                                                              $13,006
                                                              =======
</TABLE>
 
     The Company has an agreement whereby Dental Care provides marketing,
processing, and other administrative services to Health Care Systems, Inc.
("HCS"), a non-profit dental company. HCS is an indemnity insurer for dual
choice (managed indemnity) dental coverage in the state of Illinois. The
management fee may be waived if HCS will have a net loss after recognition of
the fee and cannot exceed 30% of net premiums, as defined in the agreement. The
management fee for the years ended December 31, 1998, 1997 and 1996 was $1,640,
$3,103 and $1,749, respectively. At December 31, 1998 and 1997, approximately
$61 and $146 was due from HCS, respectively.
 
     The Company has an agreement with a former stockholder of American Prepaid
who is also a current stockholder of the Company that provides for such
stockholder to receive certain future payments for a ten-year period upon
retirement. The stockholder retired in 1993 and commenced receiving payments
upon retirement. Amounts accrued for such future payments were $245 and $288 as
of December 31, 1998 and 1997, respectively. Deferred compensation expense
recognized pursuant to this agreement was $44, $41, and $38 for the years ended
December 31, 1998, 1997, and 1996, respectively.
 
     The Company has an agreement with a former stockholder of American Prepaid
who is also a current stockholder of the Company that provides for such
stockholder to receive future payment of medical costs. The Company has recorded
an actuarially determined liability of approximately $240 and $245 at December
31, 1998 and 1997, respectively. The discount rate and medical cost trend rate
used to compute this benefit were 7% and 10%, respectively. A 1% increase in the
medical cost trend rate would increase the liability by approximately $18.
Expense recognized pursuant to this agreement was $5, $7, and $6 for the years
ended December 31, 1998, 1997, and 1996, respectively.
 
     The Company had consulting agreements in place with a former director and
the former president of American Prepaid. The consulting agreement with the
former president expired in 1996, while the agreement with the former director
expired in 1998. Payments made pursuant to these agreements were $28, $55, and
$165, respectively, for each of the years in the three year period ended
December 31, 1998.
 
                                      F-22
<PAGE>   56
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
12. OPERATING LEASE COMMITMENTS
 
     The Company leases office facilities and certain office equipment under
various operating leases expiring through 2006. Collective future minimum lease
payments under these agreements as of December 31, 1998 are as follows:
 
<TABLE>
<S>                                                           <C>
YEAR ENDING DECEMBER 31:
  1999......................................................  $ 4,536
  2000......................................................    4,121
  2001......................................................    4,068
  2002......................................................    3,900
  2003......................................................    2,272
  Thereafter................................................    1,107
                                                              -------
                                                              $20,004
                                                              =======
</TABLE>
 
     Rental expense under such leases for the years ended December 31, 1998,
1997, and 1996 was $4,320, $2,359, and $1,770, respectively.
 
13. ARRANGEMENT WITH INDEMNITY INSURERS
 
     Effective January 1, 1998, the Company entered into a one-year agreement
with an unrelated indemnity insurer, wherein the Company may offer dual-choice
(managed or indemnity) dental coverage. For subscribers in groups offering
dual-choice dental coverage, subscribers select the type of coverage desired,
and indemnity coverage is underwritten by the indemnity insurer. The Company
invoices and collects all dual choice premiums. The Company retains, for the
majority of groups written under this contract, 100% of all premiums related to
the managed product and 10% of indemnity premiums collected under the
dual-choice plan to cover commissions and processing costs. The remaining 90% of
indemnity premiums are remitted to the indemnity carrier. The Company records
retention of indemnity premiums in the amount of $1,112 as other income.
 
     Effective January 1, 1998, the Company entered into an agreement with an
unrelated indemnity insurer, wherein the Company and the indemnity insurer may
offer dual-choice (managed or indemnity) dental coverage in specific states. For
subscribers in groups offering dual-choice dental coverage, subscribers select
the type of coverage desired, and indemnity coverage is underwritten by the
indemnity insurer. The indemnity insurer is responsible for invoicing and
collecting all dual choice premiums. The indemnity insurer remits to the Company
100% of managed care product premiums. The agreement also includes the sharing
of profits, but not losses, only between the two parties. The profit (premiums
less agreed upon expenses) realized by the Company (and/or the indemnity
insurer) is shared at 50% with the indemnity insurer (and/or the Company).
Losses, if any, are retained by the entity incurring the losses. This agreement
is effective indefinitely and can be terminated by either party upon mutual
consent, for cause effective upon receipt of notice by the other party, and
without cause by either party upon sixty days written notice. The Company
records these profit sharing amounts as other income which at December 31, 1998,
was not material.
 
     Effective March 1, 1998, the Company entered into an agreement with an
unrelated indemnity insurer, wherein the Company serves as an administrator in
offering with the indemnity insurer dual-choice (managed or indemnity) dental
coverage. For subscribers in groups offering dual-choice dental coverage,
subscribers select the type of coverage desired, and indemnity coverage is
underwritten by the indemnity insurer. The Company is responsible for invoicing
and collecting all dual choice premiums. The Company retains 100% of the managed
product and 22% of the indemnity product to cover commissions, administrative
processing costs as well as claims processing costs. The agreement provides that
the Company, as administrator, will also handle the processing of claims on
behalf of the indemnity insurer in accordance with stipulated guidelines.
 
                                      F-23
<PAGE>   57
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
The remaining 78% of the indemnity premiums are remitted to the indemnity
insurer. This agreement is effective indefinitely and can be terminated by
either party upon mutual consent, for cause effective upon receipt of notice by
the other party, and without cause by either party upon ninety days written
notice. The Company records these indemnity premiums in the amount of $158 as
other income.
 
     Effective May 1, 1998, the Company entered into an agreement with an
unrelated indemnity insurer, wherein the Company would offer with the indemnity
insurer dual-choice (managed or indemnity) dental coverage. For subscribers in
groups offering dual-choice dental coverage, subscribers select the type of
coverage desired, and indemnity coverage is underwritten on behalf of the
indemnity insurer. The Company is responsible for invoicing and collecting all
dual choice premiums. The Company retains 100% of the managed product and 25% of
the indemnity product to cover commissions and administrative processing costs.
The agreement provides that the Company will also handle the processing of
claims on behalf of the indemnity insurer in accordance with stipulated
guidelines. The remaining 75% of the indemnity premiums are remitted to the
indemnity insurer. This agreement is effective indefinitely and can be
terminated by either party upon mutual consent, for cause effective upon receipt
of notice by the other party, and without cause by either party upon ninety days
written notice. The Company records these indemnity premiums in the amount of
$252 as other income.
 
     Effective January 1, 1996, the Company entered into a two-year agreement
with an unrelated indemnity insurer, wherein the Company may offer dual-choice
(managed or indemnity) dental coverage. For subscribers in groups offering
dual-choice dental coverage, subscribers select the type of coverage desired,
and indemnity coverage is underwritten by the indemnity insurer. The Company
invoices and collects all dual choice premiums. The Company retains 100% of all
premiums related to the managed product and 10% of indemnity premiums collected
under the dual-choice plan to cover commissions and processing costs. The
remaining 90% of indemnity premiums are remitted to the indemnity carrier. The
agreement also provides for additional payments to the indemnity insurer
dependent on loss ratios of the underlying business. The Company records
retention of indemnity premiums as other income. Any additional payments subject
to the risk sharing provisions of the agreement are recorded as additions to
dental care providers' fees and claim costs. This contract expired December 31,
1997.
 
     The Company has an arrangement with another unrelated indemnity insurer,
expiring December 31, 1997, wherein the Company may offer indemnity dental
coverage. The indemnity coverage is underwritten by the indemnity insurer. The
Company invoices and collects all indemnity premiums, retaining 25% of all gross
premiums collected to cover commissions and processing costs. The Company
records these indemnity premiums as other income.
 
14. REINSURANCE
 
     In 1992, UniLife ceased writing life insurance, other than a small amount
of group life, and ceded substantially all of its existing ordinary life
insurance to another insurer. The face amount of these ceded ordinary life
policies was $14,264 and $14,974 at December 31, 1998 and 1997, respectively.
UniLife has recorded aggregate reserves of $5,539 and $5,331 and corresponding
receivables due from reinsurer for the same amount at December 31, 1998 and
1997, respectively.
 
     Effective January 1, 1996, UniLife and an indemnity insurer entered into an
assumption reinsurance agreement, transferring all dental indemnity risk from
UniLife to the indemnity insurer and notifying the policyholders of the
transaction. For the three years ended December 31, 1998, the indemnity insurer
paid UniLife a ceding commission of 2% of dental indemnity premiums recognized
on the policies transferred from UniLife.
 
     Non-assumption reinsurance contracts do not relieve the Company from its
obligations to policyholders. Failure of reinsurers to honor their obligations
could result in losses to the Company; therefore, allowances are
 
                                      F-24
<PAGE>   58
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
established if amounts are determined to be uncollectible. Management monitors
the financial condition of its reinsurers on a routine basis. Any exposure from
deterioration of reinsurers' financial condition would be recognized currently.
 
     The following table summarizes the effects of reinsurance on premiums,
benefits and surrenders for the years ended December 31, 1998, 1997, and 1996:
 
<TABLE>
<CAPTION>
                                                              1998    1997    1996
                                                              -----   -----   -----
<S>                                                           <C>     <C>     <C>
Direct premiums earned......................................  $ 231   $ 159   $ 218
Premiums ceded..............................................   (231)   (159)   (218)
                                                              -----   -----   -----
     Net premiums earned....................................  $   0   $   0       0
                                                              =====   =====   =====
Direct benefits.............................................  $  65   $  75   $ 165
Benefits ceded..............................................    (65)    (75)   (165)
                                                              -----   -----   -----
     Net benefits...........................................  $   0   $   0   $   0
                                                              =====   =====   =====
Direct surrenders...........................................  $  41     190
Surrenders ceded............................................    (41)   (190)
                                                              -----   -----
     Net surrenders.........................................  $   0       0
                                                              =====   =====
</TABLE>
 
15. LIABILITY FOR DENTAL CLAIMS RESERVES AND CLAIM ADJUSTMENT EXPENSES
 
     Activity in the dental claims reserves for the years ended December 31 is
summarized as follows:
 
<TABLE>
<CAPTION>
                                                               1998     1997
                                                              ------   ------
<S>                                                           <C>      <C>
Balance, January 1..........................................  $1,502   $1,421
                                                              ------   ------
Incurred related to:
  Current year..............................................   9,557    8,902
  Prior years...............................................    (274)    (475)
                                                              ------   ------
          Total incurred....................................   9,283    8,427
                                                              ------   ------
Paid related to:
  Current year..............................................   7,709    7,400
  Prior years...............................................   1,228      946
                                                              ------   ------
          Total paid........................................   8,937    8,346
                                                              ------   ------
Balance, December 31........................................  $1,848   $1,502
                                                              ======   ======
</TABLE>
 
16. CONTINGENCIES
 
     The Company was a defendant to a civil compliant filed by three
participating dentists (one of which later withdrew) who had entered into
Participating Dentist Agreements with various subsidiaries of the Company
("Subsidiaries"). The complaint alleged a breach of contract and sought damages
based on the failure of each subsidiary to make capitation payments to the
participating dentists for the period of time between when the affected
subscribers enroll and the time at which the subscribers select a dentist. The
plaintiffs in July of 1996 were originally denied class certification by the
trial court. However, the plaintiffs successfully appealed this ruling and the
class was certified.
 
     The Company believed its interpretation and administration of the
Participating Dentist Agreements were correct. However, due to the costs
involved in protracted litigation, the Company agreed to a final settlement on
February 6, 1998. The settlement costs included attorney's fees, payments to the
class and its
 
                                      F-25
<PAGE>   59
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
representatives, and various other payments approximated $1,600. This charge was
included in general and administrative expenses in the statement of operations
in 1997.
 
     The settlement also requires that the Subsidiaries amend the Participating
Dental Agreements to provide that they will pay capitation to the dentist when
there has been a delay between the time a subscriber initially enrolls in the
dental plan and the time they select a dentist for all subscribers who enroll
after January 1, 1999. In addition, the Subsidiaries have agreed to provide
additional notices to subscribers who have not selected a dentist. Although the
Company believes the impact of the amendments will have an insignificant effect
on providers' fees and claim costs, no reasonable estimate can be made at this
time.
 
     Various legal proceedings have arisen or may arise in the normal course of
business. Management does not believe that there are currently any asserted or
unasserted claims that will have a material adverse effect on the financial
position, results of operations, or cash flows of the Company.
 
17. EMPLOYEE STOCK PURCHASE PLAN
 
     During 1996, the Company adopted an Employee Stock Purchase Plan to provide
substantially all employees who have completed six months of service an
opportunity to purchase shares of its common stock through payroll deductions.
Annually, on December 31, participant account balances are used to purchase
whole shares of stock at the lesser of 85% of the fair market value of shares on
January 1 (offering date) (August 1, 1996 for initial offering period) or
December 31 (exercise date). Due to the impending re-capitalization (see Note
20), the Plan was amended and activity suspended as of July 31, 1998 (amended
exercise date). The aggregate number of shares purchased annually by an employee
are subject to limitations imposed by the Internal Revenue Code. A total of
100,000 shares are available for purchase under the plan. There were 2,560,
3,090 and 1,611 shares issued under the plan as December 31, 1998, 1997 and
1996, respectively, at an exercise price of $11.48, $17.24 and $29.96,
respectively.
 
18. EARNINGS PER SHARE
 
     The calculation of basic and diluted EPS is as follows:
<TABLE>
<CAPTION>
                                             FOR THE YEAR ENDED 1998                   FOR THE YEAR ENDED 1997
                                     ---------------------------------------   ---------------------------------------
                                       INCOME         SHARES       PER-SHARE     INCOME         SHARES       PER-SHARE
                                     (NUMERATOR)   (DENOMINATOR)    AMOUNT     (NUMERATOR)   (DENOMINATOR)    AMOUNT
                                     -----------   -------------   ---------   -----------   -------------   ---------
<S>                                  <C>           <C>             <C>         <C>           <C>             <C>
BASIC EPS
Income (loss) available to common
 stockholders......................    $10,090      10,112,629      $ 1.00      $(53,705)     10,098,323      $(5.32)
EFFECT OF DILUTIVE SECURITIES
Stock options......................                     63,235       (0.01)
                                       -------      ----------      ------      --------      ----------      ------
DILUTED EPS
(Loss) income available to common
 stockholders plus assumed
 conversions.......................    $10,090      10,175,864      $ 0.99      $(53,705)     10,098,323      $(5.32)
                                       =======      ==========      ======      ========      ==========      ======
 
<CAPTION>
                                             FOR THE YEAR ENDED 1996
                                     ---------------------------------------
                                       INCOME         SHARES       PER-SHARE
                                     (NUMERATOR)   (DENOMINATOR)    AMOUNT
                                     -----------   -------------   ---------
<S>                                  <C>           <C>             <C>
BASIC EPS
Income (loss) available to common
 stockholders......................    $9,892       10,048,513      $ 0.98
EFFECT OF DILUTIVE SECURITIES
Stock options......................                    128,243       (0.01)
                                       ------       ----------      ------
DILUTED EPS
(Loss) income available to common
 stockholders plus assumed
 conversions.......................    $9,892       10,176,756      $ 0.97
                                       ======       ==========      ======
</TABLE>
 
     Options to purchase 945,000 shares of common stock ranging from $14.50 to
$42.75 per share were outstanding during 1998 but are not included in the
computation of 1998 diluted EPS because the options' exercise price was greater
than the average market price of the common shares. The options, which expire
through April 2008, were still outstanding at December 31, 1998.
 
     Options to purchase 479,000 shares of common stock ranging from $24.88 to
$42.75 per share were outstanding during 1997 but are not included in the
computation of 1997 diluted EPS because the options' exercise price was greater
than the average market price of the common shares. The options, which expire
through November 2007, were still outstanding at December 31, 1997.
Additionally, common stock equivalents of 112,937 were excluded as the effect is
anti-dilutive due to the net loss in 1997.
 
     Options to purchase 32,000 shares of common stock ranging from $39.50 to
$42.75 per share were outstanding during 1996 but are not included in the
computation of 1996 diluted EPS because the options' exercise price was greater
than the average market price of the common shares.
 
                                      F-26
<PAGE>   60
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
19. SELECTED QUARTERLY DATA (UNAUDITED)
 
     The following table, which has not been audited by independent accountants,
sets forth summary unaudited quarterly financial information of the Company for
each quarter in 1998 and 1997.
 
     In the opinion of management, such information has been prepared on the
same basis as the audited consolidated financial statements appearing elsewhere
in this annual report and reflects all adjustments necessary for a fair
presentation of such unaudited consolidated quarterly results. The quarterly
results should be read in conjunction with the audited consolidated financial
statements of the Company. Results of operations for any particular quarter are
not necessarily indicative of results of operations for a full year.
 
<TABLE>
<CAPTION>
                                                                1997                                    1998
                                               --------------------------------------   -------------------------------------
                                                 Q1        Q2        Q3         Q4        Q1        Q2        Q3        Q4
                                               -------   -------   -------   --------   -------   -------   -------   -------
                                                                               (IN THOUSANDS)
<S>                                            <C>       <C>       <C>       <C>        <C>       <C>       <C>       <C>
Revenues:
  Subscriber premiums........................  $35,636   $35,852   $35,982   $ 35,926   $35,422   $35,982   $35,425   $35,574
  Affiliated practice revenue................       --        --     3,343      3,774     5,292     5,824     6,092     6,179
  Other revenue..............................    2,199     2,348     1,809      1,857     1,728     1,757     1,989     1,995
                                               -------   -------   -------   --------   -------   -------   -------   -------
        Total revenue........................   37,835    38,200    41,134     41,557    42,442    43,563    43,506    43,748
                                               -------   -------   -------   --------   -------   -------   -------   -------
Expenses:
  Dental care providers' fees and claim
    costs....................................   19,544    19,906    19,849     22,391    19,428    19,505    19,514    20,023
  Commissions................................    3,172     3,192     3,552      3,356     3,265     3,346     3,368     3,499
  Premium taxes..............................      265       256       263        263       261       194       225       208
  General and administrative.................    7,860     7,967    10,231     18,260    12,979    13,555    13,685    13,491
  Depreciation and amortization..............    1,321     1,355     1,553      1,506     1,379     1,475     1,360     1,328
  Goodwill impairment........................       --        --        --     58,953        --        --        --        --
                                               -------   -------   -------   --------   -------   -------   -------   -------
        Total expenses.......................   32,162    32,676    35,448    104,729    37,312    38,075    38,152    38,549
                                               -------   -------   -------   --------   -------   -------   -------   -------
Operating income (loss)......................    5,673     5,524     5,686    (63,172)    5,130     5,488     5,354     5,199
Interest (income) expense, net...............      547       484       704        779       759       914       968       827
Other (income) expense, net..................      (45)      (16)       (5)        68        --        (3)      (12)       15
                                               -------   -------   -------   --------   -------   -------   -------   -------
Income (loss) before pro-visions for income
  taxes......................................    5,171     5,056     4,987    (64,019)    4,371     4,577     4,398     4,357
Income tax provision (benefit)...............    2,332     2,172     2,055     (1,659)    1,878     1,972     1,901     1,862
                                               -------   -------   -------   --------   -------   -------   -------   -------
Net income (loss)............................  $ 2,839   $ 2,884   $ 2,932   $(62,360)  $ 2,493   $ 2,605   $ 2,497   $ 2,495
                                               =======   =======   =======   ========   =======   =======   =======   =======
</TABLE>
 
     The Company experiences no significant seasonality of revenues with respect
to its revenue. However, because the enrollment of new groups and changes in
membership are typically concentrated in the first quarter of each year, the
Company generally experiences an increase in general and administrative expense
in the preceding fourth quarter resulting from higher staffing levels and
printing and communication costs.
 
20. PENDING RE-CAPITALIZATION TRANSACTION
 
     On July 28, 1998, the Company entered into a merger agreement ("Merger
Agreement") with a newly formed company, TAGTCR Acquisition, Inc. (the
"Acquiror"), which was organized at the direction of Golder, Thoma, Cressey,
Rauner, Inc., TA Associates, Inc. and NMS Capital Partners (the "Equity
Investors"). Under the Merger Agreement, the Company will be re-capitalized and
each outstanding share of the Company's common stock, other than certain shares
held by management and other investors, was to be converted into the right to
receive $18.00 in cash, and the existing funded indebtedness of the Company will
be refinanced (the "Pending Re-capitalization Transaction").
 
     Subsequently, the Acquiror informed the Company it is unlikely that the
Acquiror will be able to obtain financing for the merger at the transaction
price of $18.00 per share. As a result, and following a review and analysis of
relevant factors, the Merger Agreement was amended on January 18, 1999 (the
"Amendment") to, among other things, reduce the cash purchase price to be paid
to the Company's stockholders pursuant to
 
                                      F-27
<PAGE>   61
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
the merger by $3.00 per share, from $18.00 per share to $15.00 per share, and
modify provisions of the Merger Agreement relating to solicitation of other
offers and termination fees.
 
     Specifically, the Amendment eliminates the "no solicitation" covenant in
the Merger Agreement, thus permitting the Company to solicit, respond to and
otherwise engage in negotiations concerning alternative proposals to engage in
business combinations (each, an "Acquisition Proposal"). In this regard, the
Special Committee of the Board of Directors ("Special Committee") continues to
recommend and support the TAGTCR transaction but expects that it will review any
alternative proposals that may arise, although no assurance can be given that
such proposals will be forthcoming. The Amendment also reduces the termination
fee which the Company is obligated to pay the Acquiror in the event it enters
into a transaction resulting from an Acquisition Proposal to the amount of the
out-of-pocket fees and expenses incurred in connection with the transactions
contemplated by the Merger Agreement up to a maximum of $1,500.
 
     The Acquiror has agreed that if it is unable to close the merger due to the
failure to receive financing, the Acquiror will reimburse the Company for its
out-of-pocket fees and expenses incurred in connection with the transactions
contemplated by the Merger Agreement up to a maximum of $1,000. The Company
currently expects to consummate the transaction in the second quarter of 1999,
with closing remaining subject to a number of conditions, including shareholder
and regulatory approval.
 
     During 1998, the Company incurred $1,200 of costs related to its proposed
recapitalization transaction. At December 31, 1998, these costs are included in
the Company's consolidated balance sheet. If the proposed transaction is not
consummated, then these costs will be expensed at that time.
 
21. SEGMENT REPORTING
 
     In 1998, the Company adopted SFAS No. 131. The accounting policies of the
segments are the same as those described in the "Summary of Significant
Accounting Policies", (see Note 2). Segment data includes inter-segment revenues
and expenses. The Company's management evaluates the performance of its segments
and allocates resources to them based on earnings before interest, taxes,
depreciation, and amortization (EBITDA).
 
     The Company is organized primarily on the basis of two business units:
dental benefits (the "Dental Benefits") and dental practice management ("Dental
Practice Mgmt"). The Dental Benefits offers primarily the following dental
benefits: managed care, reduced fee-for-service, network rental and ASO
services. Dental Practice Mgmt offers management services to dental facilities,
as well as rental of equipment and facilities.
 
                                      F-28
<PAGE>   62
                     COMPDENT CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The table below presents information about reported segments for the years
ending December 31:
 
<TABLE>
<CAPTION>
                                                                     DENTAL
                                                          DENTAL    PRACTICE
                                                         BENEFITS     MGMT      TOTAL
                                                         --------   --------   --------
<S>                                                      <C>        <C>        <C>
1998:
  Revenues.............................................  $148,130   $26,823    $174,953
  EBITDA...............................................    24,639     2,949      27,588
 
1997:
  Revenues.............................................  $150,791   $ 7,935    $158,726
  EBITDA...............................................    18,261       860      19,121
</TABLE>
 
     A reconciliation of total segment revenue to total consolidated revenue and
of total segment EBITDA to total consolidated income before income taxes, for
the years ended December 31, 1998 and 1997, is as follows:
 
<TABLE>
<CAPTION>
                                                                1998       1997
                                                              --------   --------
<S>                                                           <C>        <C>
REVENUE
Total segment revenue.......................................  $174,953   $158,726
Elimination inter-segment revenue...........................    (1,694)        (0)
                                                              --------   --------
  Consolidated revenue......................................  $173,259   $158,726
                                                              ========   ========
</TABLE>
 
<TABLE>
<S>                                                           <C>       <C>
EBITDA
Total segment EBITDA........................................  $27,588   $ 19,122
Depreciation and amortization, including goodwill
  impairment................................................   (5,542)   (64,688)
Interest expense............................................   (4,343)    (3,239)
                                                              -------   --------
Consolidated income before taxes............................  $17,703   $(48,805)
                                                              =======   ========
</TABLE>
 
     Dental Practice Mgmt's property and equipment (P&E) was 82% and 56% of
total consolidated P&E as of December 31, 1998 and 1997, respectively. A
reconciliation of total segment P&E to total consolidated P&E, for the years
ended December 31, 1998 and 1997, is as follows:
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                              -------   ------
<S>                                                           <C>       <C>
P&E
Dental benefits.............................................  $ 2,856   $2,747
Dental practice management..................................   13,432    3,545
                                                              -------   ------
Consolidated P&E............................................  $16,288   $6,292
                                                              =======   ======
</TABLE>
 
                                      F-29
<PAGE>   63
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
     In connection with our audit of the consolidated financial statements of
CompDent Corporation and subsidiaries as of December 31, 1998 and 1997, and for
the years then ended, which financial statements are included in the annual
report, we have also audited the financial statement schedules as of December
31, 1998 and 1997 and for the years then ended listed in Item 14 herein.
 
     In our opinion, these financial statement schedules, when considered in
relation to the basic financial statements taken as a whole presents fairly, in
all material respects, the information required to be included therein.
 
                                          PricewaterhouseCoopers LLP
 
Atlanta, Georgia
February 17, 1999, except as to the information presented
in Note 8, for which the date is March 29, 1999
 
                                       S-1
<PAGE>   64
 
                     COMPDENT CORPORATION (PARENT COMPANY)
 
          SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                                 BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                1998       1997
                                                              --------   --------
<S>                                                           <C>        <C>
                                     ASSETS
Current assets:
  Receivable from subsidiary*...............................  $    281   $    252
                                                              --------   --------
          Total current assets..............................       281        252
Investment in subsidiaries*.................................    70,114     60,024
                                                              --------   --------
                                                              $ 70,395   $ 60,276
                                                              ========   ========
 
                              STOCKHOLDERS' EQUITY
Stockholders' equity:
  Preferred stock, .01 par value, 2,000,000 shares, none
     issued at December 31, 1998
  Common stock, $.01 par value 50,000,000 shares authorized
     at December 31, 1998 and 1997; 10,115,189 and
     10,112,629 shares issued and outstanding at December
     31, 1998 and 1997, respectively........................  $    101   $    101
  Additional paid-in capital................................    97,647     97,618
  Retained deficit..........................................   (27,353)   (37,443)
                                                              --------   --------
                                                              $ 70,395   $ 60,276
                                                              ========   ========
</TABLE>
 
---------------
 
* Eliminated in consolidation.
 
                                       S-2
<PAGE>   65
 
                     COMPDENT CORPORATION (PARENT COMPANY)
 
          SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            STATEMENTS OF OPERATIONS
             FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                               1998       1997      1996
                                                              -------   --------   ------
<S>                                                           <C>       <C>        <C>
Equity in net income (loss) of subsidiaries*................  $10,090   $(53,705)  $9,892
                                                              -------   --------   ------
  Net income (loss).........................................  $10,090   $(53,705)  $9,892
                                                              =======   ========   ======
</TABLE>
 
---------------
 
* Eliminated in consolidation.
 
                                       S-3
<PAGE>   66
 
                     COMPDENT CORPORATION (PARENT COMPANY)
 
          SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            STATEMENTS OF CASH FLOWS
             FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                               1998       1997       1996
                                                              -------   --------   --------
<S>                                                           <C>       <C>        <C>
Cash flows from operating activities:
  Net income (loss).........................................  $10,090   $(53,705)  $  9,892
  Adjustments to reconcile net income (loss) to net cash
     (used in) provided by operating activities:
     Equity in net loss (income) of subsidiaries*...........  (10,090)    53,705     (9,892)
     Changes in assets and liabilities:
       Receivable from subsidiary...........................      (29)      (138)    88,025
                                                              -------   --------   --------
          Net cash (used in) provided by operating
            activities......................................      (29)      (138)    88,025
                                                              -------   --------   --------
Cash flows from investing activities:
  Capital contributions to subsidiaries*....................                (519)   (88,139)
                                                                        --------   --------
          Net cash used in investing activities.............                (519)   (88,139)
                                                                        --------   --------
Cash flows from financing activities:
  Retirement of preferred stock.............................
  Proceeds from initial public offering, net of issuance
     costs..................................................
  Proceeds from second public offering, net of issuance
     costs..................................................
  Proceeds from exercise of stock options...................                  21         66
  Proceeds from employee stock purchase plan................       29         53         48
  Tax benefit from exercise of nonqualified options.........                 583
                                                              -------   --------   --------
          Net cash provided by financing activities.........       29        657        114
                                                              -------   --------   --------
          Decrease in cash and cash equivalents.............        0          0          0
Cash and cash equivalents, beginning of year................        0          0          0
                                                              -------   --------   --------
Cash and cash equivalents, end of year......................  $     0   $      0   $      0
                                                              =======   ========   ========
Cash paid during the period for:
  Income taxes..............................................  $ 5,150   $  1,839   $  7,474
                                                              =======   ========   ========
Noncash investing and financing activities:
  Stock issued in business combination......................            $  1,141
                                                                        ========
</TABLE>
 
---------------
 
* Elimination in consolidation.
 
                                       S-4
<PAGE>   67
 
                     COMPDENT CORPORATION (PARENT COMPANY)
 
          SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                     NOTE TO CONDENSED FINANCIAL STATEMENTS
 
     The Company publishes consolidated financial statements that are its
primary financial statements. Therefore, these parent company condensed
financial statements are not intended to be the primary financial statements of
the Company and should be read in conjunction with the consolidated financial
statements and notes thereto of CompDent Corporation.
 
                                       S-5
<PAGE>   68
 
                              COMPDENT CORPORATION
 
        SCHEDULE II -- CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
                       VALUATION AND QUALIFYING ACCOUNTS
                       DECEMBER 31, 1998, 1997, AND 1996
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                   ADDITIONS -   DEDUCTIONS-
                                                      BALANCE AT   CHARGED TO    WRITE-OFFS/   BALANCE AT
                                                      BEGINNING     COSTS AND      CLAIMS        END OF
ACCOUNT                                               OF PERIOD*     EXPENSE        PAID         PERIOD
-------                                               ----------   -----------   -----------   ----------
<S>                                                   <C>          <C>           <C>           <C>
1998:
Allowance for doubtful accounts.....................    $1,188       $  774        $  997        $  965
Dental claims reserves..............................    $1,502       $9,283        $8,937        $1,848
1997:
Allowance for doubtful accounts.....................    $1,005       $  183                      $1,188
Dental claims reserves..............................    $1,421       $8,427        $8,346        $1,502
1996:
Dental claims reserves..............................    $2,437       $5,368        $6,384        $1,421
</TABLE>
 
---------------
 
* 1997 allowance for doubtful accounts initially recorded in relation with the
  Workman, Old Cutler, and Stratman dental practice acquisitions.
 
                                       S-6