Coast Dental Services, Inc.
Filed 3/30/01
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period
from________ to _________
Commission File No. 000-21501
COAST DENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-3136131
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2502 ROCKY POINT DRIVE NORTH, SUITE 1000, TAMPA, FLORIDA 33607
(Address of principal executive offices) (Zip Code)
(813)-288-1999
(Registrant's telephone number, including area code)
Securities registered
pursuant to Section 12(b) of the Act:
NONE
Securities registered
pursuant to section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of Class)
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. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be used in connection with the Registrant's 2001 Annual Meeting of
Stockholders, which will be filed on or before April 30, 2001, are incorporated by reference in Part III, Items 10-13 of this Form
10-K. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not
deemed to be filed as a part hereof.
The aggregate market value of the voting stock held by non-affiliates of the Registrant on March 2, 2001, was approximately $4
million based upon the closing price of such shares on such date on the NASDAQ Stock Market's National Market. As of March
2, 2001, there were 6,286,384 shares of outstanding Common Stock.
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COAST DENTAL SERVICES, INC.
2000 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business........................................................................ 3
Item 2. Properties...................................................................... 8
Item 3. Legal Proceedings............................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders............................. 8
PART II
Item 5. Market of Registrant's Common Equity and Related Stockholder Matters............ 8
Item 6. Selected Financial Data......................................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... 10
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...................... 19
Item 8. Financial Statements and Supplementary Data..................................... 22
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................... 39
PART III
Item 10. Directors and Officers of the Registrant........................................ 39
Item 11. Executive Compensation.......................................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and Management.................. 39
Item 13. Certain Relationships and Related Transactions.................................. 39
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 39
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INTRODUCTION
Unless the context otherwise requires, references in this document to "Coast Dental" or the "Company" refer to Coast Dental
Services, Inc., and its predecessor; "Dental Centers" refer to dental offices managed or to be managed by the Company pursuant
to a services and support agreement; "Coast Florida, P.A.", "Coast Dental Services, P.A.", "Coast Dental of Georgia, P.C.",
"Coast Dental Services of Tennessee P.C." and "Adam Diasti, D.D.S. & Associates, P.C." refer to the Florida, Georgia,
Tennessee and Virginia professional associations, respectively, which employ the dentists and hygienists providing dental services
at the Dental Centers pursuant to a services and support agreement with the Company; "Coast P.A." refers collectively to the
Coast Florida P.A., Coast Dental Services, P.A., Coast Dental Services of Georgia, P.C., Coast Dental Services of Tennessee,
P.C., Adam Diasti, D.D.S. & Associates, P.C. and any professional association or corporation, with which the Company has
entered, or may enter, into a services and support agreement ("Services and Support Agreement"); "internally developed Dental
Centers" refers to Dental Centers which are initially opened, developed and managed by the Company pursuant to a Services and
Support Agreement with the Coast P.A.; "acquired Dental Centers" refers to Dental Centers resulting from the acquisition of an
existing dental facility by the Company, combined with the acquisition by the Coast P.A. of the existing dental practice located at
that facility; "Coast Dentists" refers to the licensed dentists employed by the Coast P.A. who provide dental services at the Dental
Centers; and "Coast Dental Network" refers collectively to the Dental Centers and the Coast Dentists.
PART I
ITEM 1. BUSINESS
GENERAL
Coast Dental Services, Inc. (the "Company") was incorporated in August 1992 as Sunshine Health Services, Inc., a Florida
corporation, and changed its name to Coast Dental, Inc. in August 1994. Effective March 31, 1996, Coast Dental, Inc. was
merged into Coast Dental Services, Inc., a Delaware corporation, for the purpose of reincorporating the Company in the State of
Delaware and changing its corporate name. The Company obtains its revenue from Coast P.A. for providing management
services and support to the general dentistry practices at the Dental Centers. As of December 31, 2000, the Company provided
management services to 124 Dental Centers located in Florida, Georgia, Tennessee and Virginia and 114 Coast Dentists were
employed by the Coast P.A., serving approximately 700,000 patients.
The Company's goal is to develop a leadership position in the management of general dentistry practices throughout Florida,
Georgia, Tennessee, Virginia and in the future, additional select states in the southeastern United States. A uniform operating
model (the "Coast Operating Model") developed by the Company is utilized at the Dental Centers. The key elements of the Coast
Operating Model are: (i) affiliating with general dental providers that focus on the most common, high volume dental products and
procedures which lend themselves to cost-effective delivery; (ii) centralizing management and administrative responsibilities, thus
allowing the Dentists to concentrate on delivering high quality dental care; (iii) facilitating the training of the Dental Center staff,
including Dentists and hygienists, in the most efficient techniques for managing the delivery of high volume, quality dental services;
and (iv) assisting with the implementation of marketing programs designed to meet the needs of each Dental Center. In the near
future, the Company plans to grow by utilizing excess capacity in existing Dental Centers. Once this excess capacity is optimized,
the Company expects to expand the Coast Dental Network in new and existing markets through the addition of internally
developed and strategically opportunistic acquired Dental Centers.
RECENT DEVELOPMENTS
Potential Recapitalization Abandoned
Recently, an offer was presented to the Board of Directors to consider a potential recapitalization transaction with a proposed
corporate redemption of substantially all of the shares representing the unaffiliated public float. An independent committee of the
Board ("independent committee") was formed to consider the offer. The offer was evaluated and given due consideration by the
independent committee. The independent committee hired legal counsel and other advisors and negotiated terms in connection with
the offer which, upon completion, would have provided a premium to current market value for these unaffiliated stockholders and
would have resulted in the company going private.
As of December 31, 2000, the Company had incurred approximately $127,000 related to this potential transaction. This amount is
reflected in the prepaid expenses and other assets and other accrued expenses classifications on the Company's balance sheet at
December 31, 2000.
In late March 2001, this potential transaction was abandoned due to difficulties in obtaining financing necessary to consummate the
potential transaction. The total cost incurred by the Company is expected to be approximately $800,000, including the amounts
recorded on the balance sheet at December 31, 2000, and will be reflected as an expense of the Company during the first quarter
of 2001.
Managed Care Update
During the latter part of 2000, the Coast P.A. began notifying managed care companies that it would continue to provide service to
existing members but would not accept new members to the managed care roster (known as "panels") in any of the offices until
re-negotiations had occurred. A thorough review of utilization data revealed that the majority of
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patient visits consisted of managed care patients, yet the fees earned in connection with this business were below that of
discounted fee-for-service patients. This resulted in in-depth discussions with each of the managed care companies. In some
cases, agreements were reached whereby the panels were reopened. In other situations, agreements could not be reached and the
panels remain closed as discussions continue. At December 31, 2000, the panels had been reopened for two of the more
significant managed care relationships.
One managed care company chose to terminate the agreement with the Coast P.A. effective December 31, 2000, pending a
written request from the Coast P.A. to renew the contract. Upon analysis of the existing business and the revenue and low
margins associated with specific contracts, the Coast P.A. chose not to seek renewal. The loss of this portion of the business
represents estimated annual gross revenue of approximately $7.5 million and net revenue of approximately $5.0 million.
Management believes that higher margin revenues can, over time, be developed at the affected Dental Centers by focusing on
other business opportunities within the current patient mix. Focus will be directed toward attracting fee-for-service, indemnity and
PPO patients to the Dental Centers. Due to the discounting associated with managed care contracts, especially the terminated
contract, management believes that the revenue can be replaced with a smaller number of patient visits. Management recognizes
that the replacement of these patients will take time and is not assured and the loss of this contract represents a risk to near-term
revenue, profitability and cash flow of the Company.
New Dentist Equity Model
Due to issues apparent in the dental practice management sector relative to maximizing dentists' long-term productivity and
commitment to the success of such relationships, the Company has begun to structure with the Coast P.A., a proposed significant
change in the overall Dental Center business model. During the first quarter of 2001 the Coast P.A., with the assistance of the
Company, has developed a Dentist Equity Model (the "Model") whereby a dentist has the opportunity to acquire a 50% ownership
interest in a Dental Center and participate in the potential profits of that Dental Center, which opportunity was unavailable to a
dentist under the current model. The purpose of this change in operating model is to provide affiliated dentists the opportunity to
satisfy certain long-term career goals and thereby curtail the significant retention and motivational concern that the Coast P.A.,
and the industry in general, is facing. Dentist retention has been a concern for the Coast P.A., the Company, and the industry as a
whole, in recent years. Hygienist retention, while once a point of concern as well, has been mitigated by a change in the
compensation structure. Since the date of compensation structure conversion, hygienist retention and productivity has been at an
all-time high for the Coast P.A.
The Company's goal is to finalize arrangements with the Coast P.A. and commence the roll-out of the Model beginning in the
second quarter of 2001. It is expected that certain assets of the Company and the Coast P.A., located at participating Dental
Centers, would be sold in return for cash. The effect of the potential new relationships on the current Services and Support
Agreements are currently under discussion. While the Company is excited about the prospects of moving forward on the Model, it
is important to note that finalization of this general plan is subject to agreement by the Company, the Coast P.A. and the selected
dentists as well as achieving a financing package for dentists to consummate each transaction. The number of Dental Centers that
could be affected is unknown at this time. It is uncertain at this time what ultimate effect the Model would have, if implemented,
on asset mix, liquidity or performance of the Company. The Company expects to incur substantial costs during the first and second
quarters of 2001 for services provided in connection with certain business opportunities that arose or exist, including the
development, structuring, execution and implementation of this Model. If the roll-out of the Model is successful, the Company
expects to improve its liquidity and cash position as well as to create an environment where select Dentists with a meaningful
ownership stake will have a more significant personal and financial interest in the productivity and success of the Dental Center.
Cost Reduction Program Instituted
In agreement with the Coast P.A., the Company has taken steps to reduce costs through reductions in staff, the elimination of
duplicative and unnecessary positions and realignment of compensation structures. These steps were implemented late in 2000 and
early in 2001. The effects of these cost reductions will begin to take effect in the latter part of the first quarter of 2001. The
Company is going to evaluate future performance based on these reductions and, should the Coast P.A.'s production not falter as
a result of these reductions, the Company should realize from those reduced costs, a positive impact on financial performance.
Nasdaq National Market Delisting Threatened
On March 15, 2001, the Company received notification from NASDAQ that its stock had failed to meet the minimum market
value of public float over the past 30 days. Under the rules, the Company has until June 13, 2001, to regain compliance or the Staff
of the NASDAQ will provide the Company with written notification that its securities will be delisted. Absent meeting the criteria
to maintain its listing, the Company has the option to apply for listing of its securities on the NASDAQ SmallCap Market if it
satisfies the requirements for listing on that market or in the alternative listing its securities on the NASD's over-the-counter
bulletin board. The Company will be evaluating its options relative to this notification, and will take actions undetermined as of this
time, prior to June 13, 2001.
ACQUISITIONS AND DEVELOPMENTS OF DENTAL CENTERS
When the Company acquires an existing dental office, the Company acquires the assets to the extent permitted by law. Typically,
the Company acquires the dental office lease as well as all dental and office equipment. The Coast P.A. acquires the patient lists
and related assets, and typically enters into employment agreements with the acquired practice's dentists and hygienists to staff the
Dental Center. When the Company internally develops Dental Centers, the Company
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provides the dental office location and the necessary equipment and support staff while the Coast P.A. provides dentists and
dental hygienists. The patient lists are the property of the Coast P.A.
The Company opened 25 internally developed Dental Centers in 1998, 17 in 1999 and none in 2000. These Dental Centers were
opened in Florida, Georgia, and Tennessee. In 1998, the Company and the Coast P.A. added 22 acquired Dental Centers located
in Florida. The purchase price for these acquired Dental centers was $9.2 million, consisting of $6.9 million in cash and $2.3 million
in promissory notes. During 1998, the Company consolidated two of its acquired Dental Centers into one Dental Center. During
1999, the Company and the Coast P.A. added 11 acquired Dental Centers in Virginia. The purchase price of these acquired
Dental Centers was $2.1 million consisting of $1.2 million in cash and $.9 million in promissory notes and certain assumed
liabilities. Additionally in 1999, the Company consolidated one of its acquired Dental Centers into an existing Dental Center. The
Company did not acquire or open any new Dental Centers during 2000. The Company, did, however, consolidate twelve (12)
existing Dental Centers into six (6) Dental Centers during 2000 to take better advantage of changing patient and population
demographics. The Company also relocated one
(1) Dental Center during 2000. Of the 124 Dental Centers currently managed by the Company, 61 were internally developed and
63 were acquired by the Company.
SERVICES AND OPERATIONS
The Company is primarily responsible for the management and administrative functions of its Dental Centers, but does not provide
dental care. The Company provides financial, accounting, billing, training, marketing assistance and collection services for the
Coast P.A. and employs the Dental Center's management and administrative personnel. The Coast P.A. maintains full control
over the dental practices of the Coast Dentists, employs the Coast Dentists and their hygienists and sets standards of care in order
to promote the provision of quality dental care. The Coast P.A. is also responsible for compliance with state and local regulations
of the practice of dentistry and with license or certification requirements. Each Coast Dentist is responsible for acquiring and
maintaining professional liability insurance.
The Company has entered into Services and Support Agreements with the Coast P.A. pursuant to which the Company is the
exclusive business manager, to the extent allowable by law, of the Dental Centers. As Dental Centers are acquired or internally
developed by the Company and the Coast P.A., the Dental Centers are generally expected to be governed by the existing Services
and Support Agreements, subject to possible future modifications or amendments.
As compensation for its management services under the current Services and Support Agreements, the Coast P.A. pays the
Company a monthly services and support fee based upon a percentage of the gross revenue, net of refunds and discounts, of the
Dental Center. Dental Center expenses paid by the Company from the services and support fee include all operating and
non-operating expenses incurred at the Dental Center except for the salaries and benefits of the Coast Dentists and dental
hygienists. The Company's sole customers are the Coast P.A., each of which are owned, controlled and managed by Dr. Adam
Diasti, a major stockholder, director and executive officer of the Company. See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 10 "Directors and Executive Officers of the Registrant." Modifications,
amendments or revisions to the Services and Support Agreements are approved by the Audit Committee of the Company's Board
of Directors, which consists of all the independent outside directors of the Company. The Company is dependent on the Coast
P.A. and the loss of compensation received from them pursuant to the Services and Support Agreements would have a material
adverse effect on the Company. See Note 2 to the Financial Statements for further information.
The Company plans to continue to use the current form of its Services and Support Agreements to the extent possible as it enters
into new states in the future or into arrangements with other dental practices. However, the terms of future agreements may differ
according to market conditions and the statutory or regulatory requirements of the particular state in which the dental practice is
located.
GOVERNMENTAL AND STATE REGULATIONS
The Company's operations and relationships are subject to a variety of governmental and regulatory requirements relating to the
conduct of its business and business corporations in general. The Company believes that it exercises care in an effort to structure
its 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 the Company
operates will not change significantly and adversely in the future. In general, regulation of health care providers and companies is
increasing.
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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. Florida Law specifically prohibits non-professional corporations from employing dentists and
dental hygienists, exercising control over patient records and making decisions relating to clinical matters, office personnel, hours
of practice, pricing, credit, refunds, warranties and advertising. Under Georgia law, dentists may be employed by corporations only
if the entity is organized as a professional corporation or association whose stockholders or members are licensed dentists. Georgia
dentists must maintain patient records that document the course of treatment and may not waive co-payment or bill a third party
for more than the usual fee. The Company does not employ dentists or dental hygienists and does not exercise control over any
prohibited areas. While Dr. Adam Diasti, a sole stockholder of Coast P.A., is also a major stockholder, director and officer of the
Company, he acts independently when making decisions in these areas on behalf of the Coast P.A. and the Company has no
control over his decisions in these areas.
Some states, including Florida and Georgia, also prohibit non-professional corporations from owning, maintaining or operating an
office for the practice of dentistry. These laws have generally been construed to permit arrangements under which the dentists are
not employed by or otherwise controlled as to clinical matters by the party supplying facilities and non-professional services.
Florida law specifically requires that dentists or their professional corporations maintain complete care, custody and control of all
equipment and materials used in the practice of dentistry. The Services and Support Agreements between the Company and the
Coast P.A. expressly provide that the Company shall not exercise control over any matters that would violate the requirements of
the applicable state law.
Many states also prohibit "fee-splitting" by dentists with any party except other dentists in the same professional corporation or
practice entity. In most cases, these laws have been construed as applying to the practice of paying a portion of a fee to another
person for referring a patient or otherwise generating business, and not to prohibit payment of reasonable compensation for
facilities and services (other than the generation of referrals), even if the payment is based on a percentage of the practice's
revenues. The Florida fee-splitting law prohibits paying or receiving any commission, bonus, kickback or rebate, or engaging in any
split-fee arrangement in any form with a dentist for patient referrals to dentists or other providers of health care goods and
services. According to Florida court of appeals decision interpreting this law, it does not prohibit a management fee that is based
on a percentage of gross income of a professional practice if the manager does not refer patients to the practice. Regulatory
boards can come to different conclusions than those reached by a judicial body in analyzing laws. For example, the Florida Board
of Medicine has recently made a determination in applying the Florida fee-splitting law, that under certain circumstances, a
management fee based upon a percentage of revenue will be found by them to be illegal. The Florida Board of Medicine,
however, does not have jurisdiction over dentistry.
Many states, including Florida, prohibit dentists from using advertising which includes any name other than their own, or from
advertising in any manner that is likely to lead a person to believe that a non-dentist is engaged in the practice of dentistry. The
Services and Support Agreements provide that all advertising shall conform to these requirements. Florida law also requires all
advertising to identify the Florida dentist who assumes total responsibility for the advertisement and may not include the name of a
person who is not either actually involved in the practice of dentistry at the advertised location or an owner of the practice being
advertised. Georgia law requires that advertising must contain the name of at least one dentist practicing at the location unless the
Georgia Board of Dentistry has approved the use of a trade name.
These laws have civil and criminal penalties and have been subject to limited judicial and regulatory interpretation. They are
enforced by regulatory agencies that are vested with broad discretion in interpreting their meaning. The Company's agreements
and activities have not been examined by federal or state authorities under these laws and regulations. For these reasons, there
can be no assurance that review of the Company's business arrangements or the operation of the Dental Centers will not result in
determinations that adversely affect the Company's operations or that the long-term Services and Support Agreements or certain
of its provisions will not be held invalid and unenforceable.
In addition, these laws and their interpretation vary from state to state. The laws and regulations of certain states into which the
Company may seek to expand in the future and may require the Company to change the form of relationships entered into with
dentists in a manner that restricts the Company's operations in those states.
The Company believes that health care regulations will continue to change, and as a result, the Company regularly monitors
developments in health care law. The Company expects to modify its agreements and operations from time to time, if necessary,
as the business and regulatory environment change. However, there can be no assurance that any such changes will not adversely
affect the ability of the Company to operate as it currently does or to remain profitable in doing so.
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COMPETITION
The Company is aware of several other companies which are actively engaged in the consolidation of existing dental practices and
providing management services to dental practices, some of which may have longer operating histories than the Company. The
Company assumes that additional companies with similar objectives may enter the Company's markets and compete with the
Company. The primary basis of competition between dental practice management companies include, but are not limited to
availability and cost of financing growth, extent of working capital, liquidity, the extent of the dental care network, management
expertise and experience, sophistication of management information systems, the elements of its operating system, the relative
motivation and productivity of affiliated dentists, the availability and profitability of managed care business and practice
management, and opportunity for career enhancement agreements.
The business of providing dental practice management services is highly competitive in each of the markets in which the Dental
Centers operate. The primary basis of competition within the dental services industry are price of services, marketing exposure,
convenience of location and traffic flow of location, hours of operation, reputation, managed care contracts, quality of care and
appearance and usefulness of facility and equipment. Coast Dentists compete with other dentists who maintain group practices or
operate in multiple offices. Many of those dentists have more established practices in their markets.
SEASONALITY
The Company has traditionally experienced its highest volume of patient visits during the first and last quarters of the year and its
lowest volume of patient visits in the summer. Individual Dental Centers typically experience increased patient visits during the
period from October through March, when the population of Florida increases for the winter, and decreased patient visits during
the summer months. Seasonality for the period since January 1, 1995, has been mitigated by the increase in monthly capitation
revenue from managed care contracts to the Coast P.A., which represented 18.8%, 22.5% and 24.9% of total revenue to the
Coast P.A. for the years ended December 31, 1998, 1999, and 2000 respectively. The Company expects that capitation, as a
percent of total revenue will decline in 2001 as a result of the negotiations discussed previously in the Recent Developments
section. In addition, the growth of the Company's operations has also served to mitigate the effects of seasonality. It is anticipated
that the seasonality will be more evident in the future as new Dental Center growth is slowed down and negotiations with
managed care companies, as previously discussed, result in the cancellation or modification of certain contracts.
During 2000, the Company began discussions with each of the managed care companies with which it does business. As of March
2, 2001, these discussions have resulted in continued (and improved) relationships with two companies and the loss of one such
contract. In addition, the rates with the remainder of the managed care companies has remained stable while the addition of
members to the rosters of these companies has been frozen.
SERVICE MARKS
The Company believes its service marks are important to the Company. The Company has registered the service marks "Coast
Dental" and the Company logo with the United States Patent and Trademarks Office.
EMPLOYEES
As of December 31, 2000, the Company had approximately 715 full-time and part-time employees, of which approximately 57
were employed at the Company's headquarters and 658 employed at the Dental Centers. None of the Company's employees are
employed under a collective bargaining agreement. The number of people employed by the Company has declined from the level
maintained in 1999. The reduction was part of a cost reduction plan to maintain the proper level of costs associated with the level
of revenue achieved. The Company believes that its relationship with its employees is good.
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ITEM 2. PROPERTIES
The Company presently leases an average of 2,100 square feet of office space for each of the Dental Centers. The typical lease
for office space is for a term of approximately five years and generally provides for renewal options for additional years. The
Company estimates that the renewal options will be exercised and the average lease term will be ten years. The average rental
payments for a leased Dental Center are approximately $3,100 per month. The Company plans to continue to lease rather than
purchase space for the Dental Centers to preserve the Company's available capital.
The Company leases 10,000 square feet of office space in Tampa, Florida for its corporate headquarters. This lease is for a term
of five years and expires January 31, 2003.
The Company anticipates no future problems in renewing or obtaining suitable leases for its principal properties. The Company
believes that its principal leased properties are adequate for the purposes for which they are used and are suitably maintained for
such purposes. The Company will enter into new leases when it determines to open new Dental Centers.
CURRENT LOCATIONS NUMBER OF LOCATIONS
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Southwest Florida ................................ 14
West Central Florida ............................. 24
Central Florida .................................. 22
Northeast Florida ................................ 10
Northwest Florida ................................ 12
Atlanta, Georgia ................................. 23
Nashville, Tennessee ............................. 8
Virginia ......................................... 11
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings other than routine litigation arising in the ordinary course of business. The
Company does not believe that the results of such litigation, even if the outcome were unfavorable to the Company, would have a
material adverse effect on its financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Common Stock of the Company is quoted on the National Association of Securities Dealers Automated Quotation System
("Nasdaq"). The Common Stock of the Company has been trading publicly under the symbol CDEN on the Nasdaq since the
Company's initial public offering on February 11, 1997. The following table sets forth the high and low closing sale price of the
Company's Common Stock as reported by Nasdaq for the periods indicated:
YEAR HIGH LOW
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1999 First Quarter $10.25 $6.031
Second Quarter 7.375 4.500
Third Quarter 5.375 3.063
Fourth Quarter 4.063 2.313
2000 First Quarter 2.875 2.063
Second Quarter 2.313 1.719
Third Quarter 1.969 1.438
Fourth Quarter 1.938 1.125
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The bid prices reported for these periods reflect inter-dealer prices, without retail markup, markdown or commissions, and may not
represent actual transactions.
The closing bid price per share as of March 2, 2001 was $1.16 and there were approximately 59 stockholders of record as of that
date. The number of record holders was determined from the records of the Company's transfer agent and does not include
beneficial owners of Common Stock whose shares are held in the names of various securities brokers, dealers and registered
clearing agencies.
Except for an S Corporation distribution during 1996, the Company has never paid cash dividends on its Common Stock. The
Company presently intends to retain all future earnings for the operation and expansion of its business and, accordingly, the
Company does not anticipate that any dividends will be declared or paid on the Common Stock for the foreseeable future. In
addition, the Company's existing bank credit facility restricts the Company's ability to declare or pay cash dividends on its common
stock. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent
upon the Company's financial condition, results of operations, capital requirements and such other factors as the Board of
Directors deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data with respect to the Company's statements of income (loss) for the years ended December
31, 1996, 1997, 1998, 1999 and 2000 and the balance sheet data as of December 31, 1996, 1997, 1998, 1999 and 2000 are derived
from the Financial Statements of the Company which have been audited by Deloitte & Touche, LLP, independent accountants.
The following data should be read in conjunction with the Financial Statements of the Company and the related notes thereto and
Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations."
DECEMBER 31,
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1996 1997 1998 1999 2000
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA FOR THE YEAR:
Net revenue ..................................................... $8,128 $20,035 $34,540 $44,598 $45,826
Income (loss) before cumulative effect of a change
in accounting principle .................................... 1,403 3,409 4,171 656 (1,264)
Cumulative effect of a change in accounting principle ........... -- -- 634 -- --
Net income (loss) ............................................... 1,403 3,409 3,537 656 (1,264)
Pro forma net income (loss)(1) .................................. 856 3,267 3,537 656 (1,264)
Basic earnings (loss) per common share:
Income (loss) before cumulative effect of a change in
accounting principle(2) .................................... -- $ .57 $ .55 $ .10 $ (.20)
Cumulative effect of a change in accounting principle(2) ........ -- -- $ (.08) -- --
Net income (loss)(2) ............................................ -- $ .57 $ .47 $ .10 $ (.20)
Pro forma net income (loss)(1)(2) ............................... -- $ .55 $ .47 $ .10 $ (.20)
Diluted earnings (loss) per common share:
Income (loss) before cumulative effect of a change in
accounting principle(2) .................................... -- $ .56 $ .54 $ .10 $ (.20)
Cumulative effect of a change in accounting principle(2) ........ -- -- $ (.08) -- --
Net income(loss)(2) ............................................. -- $ .56 $ .46 $ .10 $ (.20)
Pro forma net income (loss)(1)(2) ............................... -- $ .54 $ .46 $ .10 $ (.20)
Weighted average shares outstanding:
Basic(2) ........................................................ -- 5,935 7,615 6,906 6,293
Diluted(2) ...................................................... -- 6,051 7,718 6,906 6,293
BALANCE SHEET DATA AT YEAR END:
Total assets .................................................... $7,969 $64,836 $71,502 $64,657 $64,204
Long-term debt including current maturities ..................... $4,649 $ 1,495 $ 2,920 $ 1,853 $ 2,214
(1) Pro forma adjusted to reflect a 39% income tax rate as if the Company were taxed for the entire year as a C Corporation for
1996 and 1997.
(2) The Company's initial public offering of stock was on February 11, 1997, accordingly, earnings per share and average share
data are only provided for the years ended December 31, 1997, 1998, 1999 and 2000.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
A. OVERVIEW
The Company opened its first Dental Center in May 1992 and since then, has added 60 internally developed and 63 acquired
Dental Centers net of consolidations. The Company derives its revenue through fees earned from the Coast P.A. for providing
management services and support at the Dental Centers, located in Florida, Georgia, Tennessee and Virginia. As of December 31,
2000, 114 Coast Dentists were employed by the Coast P.A., serving approximately 700,000 patients. In the near future, the
Company plans to grow by utilizing existing excess capacity. Once the excess capacity is optimized, the Company expects to
expand the Coast Dental Network in new and existing markets through the addition of internally developed and strategically
opportunistic acquired Dental Centers.
Pursuant to the Services and Support Agreements with the Coast P.A., the Company provides management services and support
to facilitate the development and growth of Dental Centers. Operating expenses at the Dental Centers, with the exception of
compensation paid to the Coast Dentists and dental hygienists, are expenses of the Company and are recognized as incurred. The
services and support fees paid to the Company by the Coast P.A. have historically ranged from 65% to 76% of the Dental
Centers' gross revenue, net of refunds and discounts. The Company is dependent upon the future success of the Coast P.A. and
the ability of the Coast P.A. to grow with the Company. The services and support fees between the parties may be revised from
time to time based upon negotiations between the Audit Committee and the Coast P.A. The Company pays, out of the services
and support fee, all of the operating and non-operating expenses incurred by the Coast P.A. at the Dental Centers, except for the
salaries and benefits of the Coast Dentists and dental hygienists. For the period June 1, 1997, through January 31, 1999, the
Company paid the Coast P.A. the sum of $50,000 in connection with each internally developed Dental Center it committed to
open, in consideration for the Coast P.A.'s agreement to expand the Services and Support Agreements to include the new
internally developed Dental Centers. Effective February 1, 1999, the Services and Support Agreements were modified to
discontinue the payment of this fee, and the services and support fees were adjusted to 73% of the Dental Centers' gross revenue.
The Audit Committee approved a further adjustment to the services and support fees beginning in January 1, 2000, to 67%. The
service and support fees are expected to average between 66% and 72% over the next several years. See Note 2 to the Financial
Statements for further information.
RECENT DEVELOPMENTS
Potential Recapitalization Abandoned
Recently, an offer was presented to the Board of Directors to consider a potential recapitalization transaction, with a proposed
corporate redemption of substantially all of the shares representing the unaffiliated public float. An independent committee of the
Board ("independent committee") was formed to consider the offer. The offer was evaluated and given due consideration by the
independent committee. The independent committee hired legal counsel and other advisors and negotiated terms in connection with
the offer which, upon completion, would have provided a premium to current market value for these unaffiliated stockholders and
it would have resulted in the Company going private.
As of December 31, 2000, the Company had incurred approximately $127,000 related to this potential transaction. This amount is
reflected in the prepaid expenses and other assets and other accrued expenses classifications on the Company's balance sheet at
December 31, 2000.
In late March 2001, this potential transaction was abandoned due to difficulties in obtaining financing necessary to consummate the
potential transaction. The total cost incurred by the Company is expected to be approximately $800,000, including the amounts
recorded on the balance sheet at December 31, 2000, and will be reflected as an expense of the Company during the first quarter
of 2001.
Managed Care Update
During the latter part of 2000, the Coast P.A. began notifying managed care companies that it would continue to provide service to
existing members but would not accept new members to the managed care roster (known as "panels") in any of the offices until
re-negotiations had occurred. A thorough review of utilization data revealed that the majority of patient visits consisted of managed
care patients, yet the fees earned in connection with this business were below that of discounted fee-for-service patients. This
resulted in in-depth discussions with each of the managed care companies. In some cases, agreements were reached whereby the
panels were reopened. In other situations, agreements could not be reached and the panels remain closed as discussions continue.
At December 31, 2000, the panels had been reopened for two of the more significant managed care relationships.
One managed care company chose to terminate the agreement with the Coast P.A. effective December 31, 2000, pending a
written request from the Coast P.A. to renew the contract. Upon analysis of the existing business and the revenue and low
margins associated with specific contracts, the Coast P.A. chose not to seek renewal. The loss of this portion of the business
represents estimated annual gross revenue of approximately $7.5 million and net revenue of approximately $5.0 million.
Management believes that higher margin revenues can, over time, be developed at the affected Dental Centers by focusing on
other business opportunities within the current patient mix. Focus will be directed toward attracting fee-for-service, indemnity and
PPO patients to the Dental Centers. Due to the discounting associated with managed care contracts, especially the terminated
contract, management believes that the revenue can be replaced with a smaller number of patient visits. Management recognizes
that the replacement of these patients will take time and is not assured and the loss of this contract represents a risk to near-term
revenue, profitability and cash flow of the Company.
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New Dentist Equity Model
Due to issues apparent in the dental practice management sector relative to maximizing dentists' long-term productivity and
commitment to the success of such relationships, the Company has begun to structure with the Coast P.A., a proposed significant
change in the overall Dental Center business model. During the first quarter of 2001, the Coast P.A., with the assistance of the
Company, has developed a Dentist Equity Model (the "Model") whereby a dentist has the opportunity to acquire a 50% ownership
interest in a Dental Center and participate in the potential profits of that Dental Center, which opportunity was unavailable to a
dentist under the current model. The purpose of this change in operating model is to provide affiliated dentists the opportunity to
satisfy certain long-term career goals and thereby curtail the significant retention and motivational concern that the Coast P.A.,
and the industry in general, is facing. Dentist retention has been a concern for the Coast P.A., the Company, and the industry as a
whole, in recent years. Hygienist retention, while once a point of concern as well, has been mitigated by a change in the
compensation structure. Since the date of compensation structure conversion, hygienist retention and productivity has been at an
all-time high for the Coast P.A.
The Company's goal is to finalize arrangements with the Coast P.A. and commence the roll-out of the Model beginning in the
second quarter of 2001. It is expected that certain assets of the Company and the Coast P.A., located at participating Dental
Centers, would be sold in return for cash. The effect of the potential new relationships on the current Services and Support
Agreements are currently under discussion. While the Company is excited about the prospects of moving forward on the Model, it
is important to note that finalization of this general plan is subject to agreement by the Company, the Coast P.A. and the selected
dentists as well as achieving a financing package for dentists to consummate each transaction. The number of Dental Centers that
could be affected is unknown at this time. It is uncertain at this time what ultimate effect the Model would have, if implemented,
on asset mix, liquidity or performance of the Company. The Company expects to incur substantial costs during the first and second
quarters of 2001 for services provided in connection with certain business opportunities that arose or exist, including the
development, structuring, execution and implementation of this Model. If the roll-out of the Model is successful, the Company
expects to improve its liquidity and cash position as well as to create an environment where select Dentists with a meaningful
ownership stake will have a more significant personal and financial interest in the productivity and success of the Dental Center.
Cost Reduction Program Instituted
In agreement with the Coast P.A., the Company has taken steps to reduce costs through reductions in staff, the elimination of
duplicative and unnecessary positions and realignment of compensation structures. These steps were implemented late in 2000 and
early in 2001. The effects of these cost reductions will begin to take effect in the latter part of the first quarter of 2001. The
Company is going to evaluate future performance based on these reductions and, should the Coast P.A.'s production not falter as
a result of these reductions, the Company should realize, from those reduced costs, a positive impact on financial performance.
Nasdaq National Market Delisting Threatened
On March 15, 2001, the Company received notification from NASDAQ that its stock had failed to meet the minimum market
value of public float over the past 30 days. Under the rules, the Company has until June 13, 2001, to regain compliance or the Staff
of the NASDAQ will provide the Company with written notification that its securities will be delisted. Absent meeting the criteria
to maintain its listing, the Company has the option to apply for listing of its securities on the NASDAQ SmallCap Market if it
satisfies the requirements for listing on that market or in the alternative listing its securities on the NASD's over-the-counter
bulletin board. The Company will be evaluating its options relative to this notification, and will take actions undetermined as of this
time, prior to June 13, 2001.
GROWTH INFORMATION
The Company took a very significant step beginning in 1998, shifting from an acquisition model to a development model. At that
time, management determined that it would go in a different direction, and a plan of opening internally developed Dental Centers
from scratch was adopted. The Company has since placed less emphasis on acquiring Dental Centers. While the ramp-up of these
brand new Dental Centers has been slower than anticipated, which has negatively impacted its financial performance,
management is committed to this strategy and continues to believe it is the best long range strategy. Overall, the Company's
acquired Dental Centers have averaged annualized gross revenue of $550,000 per Dental Center compared to $850,000 for the
Company's mature internally developed Dental Centers (opened for more than sixty months). Only eleven (11) Dental Centers
meet the characteristics of a mature Dental Center. Additionally, internally developed Dental Centers open between two (2) and
three
(3) years average $500,000 per year in gross revenue; internally developed Dental Centers open between one (1) and two (2)
years average $370,000 per year in gross revenue and internally developed Dental Centers open less than one (1) year average
$113,000 per year in average gross revenue. The average annualized gross revenue for Dental Centers open three (3) years or
less is $270,000 per year. Currently, the Company manages 61 internally developed Dental Centers less than 36 months old which
exemplifies the internal growth opportunity associated with the de novo model with minimal additional capital investment. The
Company believes that as a result of its cost effective growth, principally through the development model, cash position, and
relatively debt free balance sheet, it is in the financial position to maintain a reduced level of external growth in 2001, and to
achieve long term growth in a more cost effective and productive manner.
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The Company opened 25 internally developed Dental Centers in 1998 and 17 in 1999 in Florida, Georgia and Tennessee. The
Company did not open any internally developed Dental Centers in 2000. The average cost to the Company of an internally
developed Dental Center has been approximately $225,000, which includes the cost of equipment, leasehold improvements,
working capital and in years prior to 1999, an agreed upon $50,000 payment (per Dental Center, see Note 2 to the Financial
Statements) to the Coast P.A. to open the additional Dental Centers thus expanding the Services and Support Agreements to
include the new internally developed Dental Centers. The Company anticipates opening a minimal number of new Dental Centers
during 2001.
During 1998, the Company and the Coast P.A. added 22 acquired Dental Centers located in Florida and Tennessee. The purchase
price for these acquired Dental Centers was $9.2 million, consisting primarily of $6.9 million in cash and $2.3 million in promissory
notes. During 1998, the Company consolidated two of its acquired Dental Centers into one Dental Center.
During 1999, the Company and Coast P.A. added 11 acquired Dental Centers located in Virginia. The purchase price for these
acquired Dental Centers was $2.1 million, consisting primarily of $1.2 million in cash and $.9 million in promissory notes and
certain assumed liabilities. During 1999, the Company consolidated one of its acquired Dental Centers into existing Dental Centers.
The Company and Coast P.A. added no additional acquired Dental Centers during 2000.
The Coast P.A. derives the majority of its revenue from a combination of sources, including fees paid by private patients,
indemnity insurance reimbursements and capitation payments from managed care companies.
The following table outlines the historical payor mix for the Coast P.A.'s revenue for the periods presented, which is not
necessarily indicative of the Company's expected future performance (see Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent Developments):
YEARS ENDED DECEMBER 31,
----------------------------
1998 1999 2000
---- ---- ----
Self-pay ................................... 31% 33% 25%
HMOs ....................................... 50 55 57
Private insurers ........................... 18 12 18
Medicaid ................................... 0 1 0
--- --- ---
Total ................................. 100% 100% 100%
=== === ===
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B. RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net revenue (consisting of management fees derived pursuant to the Services
and Support Agreements), certain items in the Company's statements of operations for the years indicated. The performance of
the Company during these years are not indicative of future financial results or conditions (See Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent Developments).
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1999 2000
----- ----- -----
Net revenue ........................................... 100.0% 100.0% 100.0%
Dental Center expenses:
Staff salaries ................................... 32.7 37.6 42.0
Dental supplies and lab fees ..................... 14.2 15.6 18.4
Advertising ...................................... 5.9 6.6 4.0
Rent ............................................. 12.1 15.2 15.8
Depreciation ..................................... 3.6 5.5 6.8
Other ............................................ 2.9 2.9 3.4
----- ----- -----
Total Dental Center expenses ................... 71.4 83.5 90.4
----- ----- -----
Gross profit ................................... 28.6 16.5 9.6
General and administrative ............................ 8.8 12.6 11.9
Development costs ..................................... 5.3 -- --
Depreciation and amortization ......................... 2.0 2.9 2.8
----- ----- -----
Operating profit ................................. 12.5 1.0 (5.1)
Interest income, net .................................. 4.8 1.3 0.7
----- ----- -----
Income before income tax expense (benefit) ............ 17.3 2.3 (4.4)
Income tax expense (benefit) .......................... 2.52 0.9 (1.8)
----- ----- -----
Income before cumulative effect of a change in
accounting principle ............................. 12.1 1.4 (2.6)
Cumulative effect of a change in accounting
principle ........................................ 1.9 -- --
----- ----- -----
Net income ............................................ 10.2% 1.4% (2.6)%
===== ===== =====
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YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net Revenue. Net revenue increased 2.8% from $44.6 million for the year ended December 31, 1999, to $45.8 million for the year
ended December 31, 2000. Gross revenue increased 12.0% to approximately $68.4 million in 2000. The increase in revenue is
attributable to management's focus on the improvement in productivity and the number of patient visits. Patient visits increased by
12.0% from 602,736 in 1999 to 674,920 in 2000. The difference in the percentages of increase for Net Revenue and Gross
Revenue is due to the change in the management fee effective January 1, 2000. The Company and the Coast P.A. recognize that
there is a downward pressure on the average patient transaction. This downward pressure has been created over time by an
increased concentration of managed care patients and the drive by the Coast P.A. to provide service to a greater number of
patients. To counteract this pressure, the Coast P.A. has begun to hold and continues to hold, discussions with managed care
companies. The purpose of these discussions is to increase the revenue derived from managed care patients and to find the proper
balance between these and other types of patients.
Staff Salaries. Staff salaries increased 14.9% from $16.8 million for the year ended December 31, 1999, to $19.3 million for the
year ended December 31, 2000. This increase in staff salaries was caused, in part, by annual increases and in part by an increase
in Dental Center regional management and Dental Center staffing. During 1999, the Company introduced a new level of
management. The Regional Vice President of Operations position was created midway through the year. As of December 31,
1999, three such positions had been filled. One for half the year and the remaining two for the fourth quarter. As of December 31,
1999, one such position was vacant. Early in 2000, the fourth position was filled and all four positions remained filled throughout
2000. While no new Dental Centers were added during 2000, the Company continued to staff existing Dental Centers in
anticipation of increased patient visits. This additional staffing also contributed to the increased level of Dental Center salaries.
However, in the last quarter of 2000 and early 2001, the Company reduced Dental Center staffing, which is expected to have a
positive effect on the overall costs related to staffing in 2001.
Dental Supplies and Lab Fees. Dental supplies and lab fees increased 21.1%, from $7.0 million for the year ended December 31,
1999, to $8.4 million for the year ended December 31, 2000. This increase was caused by the increase in patient visits and dental
services provided at the 124 Dental Centers. This increase is due, in part, to the introduction of new affiliated Dentists to the Coast
Operating Model, as well as the addition of several new products to the formulary. The Company continuously strives to research
and analyze new products as a means of providing the highest quality products and services to patients. Often times, these
products carry a higher cost initially, however they generally tend to be more efficient and effective for the affiliated dentists and
patients, respectively.
Advertising. Advertising expense decreased 38.2% from $3.0 million for the year ended December 31, 1999, to $1.8 million for the
year ended December 31, 2000. This decrease is due to the Company's decision, effective January 1, 2000, to curtail the use of
television advertising as a means of attracting customers. The Company entered into the television advertising arena on a test
basis during the third quarter of 1998 and on a company-wide basis during the fourth quarter of 1998. The television campaign
remained in effect during all of 1999.
Rent. Rent expense increased 6.9% from $6.8 million for the year ended December 31, 1999, to $7.2 million for the year ended
December 31, 2000. This increase was caused primarily by the full year impact of the 11 acquired and 17 internally developed
Dental Centers added in 1999. Minor amounts of increased rent have been incurred for relocated Dental Centers and Dental
Centers where lease options have been accepted and additional space added to allow for expansion. The latter situation has only
been executed for Dental Centers where the location is suitable to the business, growth is strongly anticipated, but the existing
capacity is not adequate. Generally, these expansion situations relate to other, smaller Dental Centers.
Depreciation. Depreciation expense at the Dental Centers increased 27.2% from $2.5 million for the year ended December 31,
1999, to $3.1 million for the year ended December 31, 2000. The increase was primarily associated with the full year depreciation
impact from the 11 acquired and 17 internally developed Dental Centers added during 1999. In addition, a portion of the increase
relates to additional equipment added to Dental Centers during 2000 to allow them to meet patient volume demands and additional
equipment and leasehold improvements associated with relocation, expansions, and remodels during 2000. Generally, Dental
Center consolidations require little or no additional capital expenditures when the remaining location is suitable to properly handle
the increased patient volume.
Other Expenses. Other expenses increased 22.3% from $1.3 million for the year ended December 31, 1999, to $1.6 million for the
year ended December 31, 2000. This increase was caused primarily by increases in insurance costs, credit card discounts and
other costs associated with the growth of the business.
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General and Administrative Expenses. General and administrative expenses decreased 3.3% from $5.6 million for the year ended
December 31, 1999, to $5.4 million for the year ended December 31, 2000. This decrease was due to the increased focus on
corporate costs including administrative salaries, professional fees, rent and insurance costs. In addition, certain staff reductions
were made during December 2000. The impact of these reductions is not expected until 2001. During 1999, the Company
recognized certain one-time charges related to the resignation of certain officers which was included in general and administrative
expenses. There was no such recognition in 2000. This also contributed to the decline from the year ended December 31, 1999.
Depreciation and Amortization. Depreciation and amortization expenses decreased 0.9% from December 31, 1999. The cost
approximated $1.3 million for both the year ended December 31, 1999, and December 31, 2000.
Interest Income, Net. Interest income, net, decreased 48.2% from $0.6 million for the year ended December 31, 1999, to $0.3
million for the year ended December 31, 2000. This decrease was caused primarily by a decrease of the Company's invested cash
balances. This decline was partially offset by a reduction of interest paid due to the repayment of notes payable issued as part of
the consideration for certain acquisitions.
Income Taxes. Income taxes decreased 307.5% from the year ended December 31, 1999. For the year ended December 31,
1999, the Company incurred income tax expense of approximately $0.4 million compared to an income tax benefit of
approximately $0.8 million for the year ended December 31, 2000. This decrease was primarily attributable to the reduced level of
earnings by the Company during 2000 as compared to 1999. The effective tax rate increased from 37.4% for the year ended
December 31, 1999, to 39.1% for the year ended December 31, 2000.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net Revenue. Net revenue increased 29.1%, from $34.5 million for the year ended December 31, 1998, to $44.6 million for the
year ended December 31, 1999. This increase was primarily due to the increase in net revenue attributable to the 54 comparable
Dental Centers (Dental Centers that were open throughout the periods being compared), the 22 acquired Dental Centers in 1998,
the 25 internally developed Dental Centers in 1998, the 11 acquired Dental Centers in 1999 (including the one consolidated
acquired Dental Center) and the 17 internally developed Dental Centers in 1999. Increases in net revenue are primarily driven by
increases in patient visits. Patient visits increased 35.2%, from 445,945 for the year ended December 31, 1998, to 602,736 for the
year ended December 31, 1999.
Staff Salaries. Staff salaries increased 48.3% from $11.3 million for the year ended December 31, 1998, to $16.8 million for the
year ended December 31, 1999. This increase in staff salaries was primarily caused by an increase in Dental Center regional
management and Dental Center staffing due to the addition of the 11 acquired and 17 internally developed Dental Centers. In
addition, the second year impact of the 22 acquired and 25 internally developed Dental Centers opened in 1998 also contributed to
the increase. While an internally developed Dental Center can operate with a relatively limited dental staff in the early stages of its
development, the services of a dentist, dental hygienist, dental assistants and front desk manager are still necessary. As a result,
staff salaries as a percentage of net revenue will typically be higher in the first six months of operation until patient visits increase.
In addition, for acquired Dental Centers, staff salaries as a percentage of net revenue will typically be higher in the first three to
six months following an acquisition as the Company implements the Coast Operating Model to increase productivity and
efficiency. Staff salaries include the compensation paid to regional management and administrative staff at each Dental Center,
including dental assistants, office managers, sterilization technicians and front desk managers.
Dental Supplies and Lab Fees. Dental supplies and lab fees increased 41.9%, from $4.9 million for the year ended December 31,
1998, to $7.0 million for the year ended December 31, 1999. This increase was caused by the increase in patient visits and dental
services provided at the 130 Dental Centers. Dental supplies and lab fees as a percent of net revenue will typically be higher in the
first three to six months following an acquisition as the Company implements the Coast Operating Model to increase productivity
and efficiency.
Advertising. Advertising expense increased 43.9% from $2.1 million for the year ended December 31, 1998, to $3.0 million for the
year ended December 31, 1999. This increase was caused primarily by implementation of a more aggressive advertising program,
including television, in markets where internally developed Dental Centers were open. The Company entered into the television
advertising arena on a test basis during the third quarter of 1998 and on a company-wide basis during the fourth quarter of 1998.
The television campaign remained in effect during all of 1999.
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Rent. Rent expense increased 62.1% from $4.2 million for the year ended December 31, 1998, to $6.8 million for the year ended
December 31, 1999. This increase was caused primarily by the addition of the 11 acquired and 17 internally developed Dental
Centers in 1999, as well as the full year impact of the 22 acquired and 25 internally developed Dental Centers in 1998.
Depreciation. Depreciation expense at the Dental Centers increased 96.1% from $1.3 million for the year ended December 31,
1998, to $2.5 million for the year ended December 31, 1999. The increase was primarily associated with the increase in fixed
assets from the 11 acquired and 17 internally developed Dental Centers and the increased depreciation in year two of the 22
acquired and 25 internally developed Dental centers added during 1998.
Other Expenses. Other expenses increased 35.5% from $1.0 million for the year ended December 31, 1998, to $1.3 million for the
year ended December 31, 1999. This increase was caused primarily by increases in insurance costs, credit card discounts and
other costs associated with the growth of the business.
General and Administrative Expenses. General and administrative expenses increased 84.0% from $3.1 million for the year ended
December 31, 1998, to $5.6 million for the year ended December 31, 1999. This increase was caused primarily by the increase in
corporate administrative salaries, professional fees, rent and insurance costs due to the growth of the Company. In addition, the
Company incurred certain one time charges related to the resignation of certain officers of the Company, a change in the vacation
policy for all employees and the write-off of costs associated with certain contemplated transactions which will not be
consummated. General and administrative expenses primarily consist of expenses incurred at the corporate office.
Development Costs. Development costs decreased $1.8 million for the year ended December 31, 1999, in comparison to the prior
year. This decrease was caused by the recognition of all such costs in 1998, as per the Company's early adoption of AICPA
Statement of Position No. 98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5") effective January 1, 1998. SOP 98-5
requires all costs associated with the development of internally developed Dental Centers be expensed as incurred. See Notes 2
and 12 to the Financial Statements for further information.
Depreciation and Amortization. Depreciation and amortization expenses increased 90.2% from $.7 million for the year ended
December 31, 1998, to $1.3 million for the year ended December 31, 1999. This increase was caused primarily by the expansion
of the corporate headquarters infrastructure and the amortization of Service and Support Agreements and other acquired
intangible assets.
Interest Income, Net. Interest income, net, decreased 63.6% from $1.6 million for the year ended December 31, 1998, to $.6
million for the year ended December 31, 1999. This decrease was caused primarily by a decrease of the Company's invested cash
balances. This decline was partially offset by a reduction of interest paid due to the repayment of notes payable issued as part of
the consideration for certain acquisitions.
Income Taxes. Income taxes decreased 78.1% from $1.8 million for the year ended December 31, 1998, to $.4 million for the year
ended December 31, 1999. This decrease was primarily attributable to the reduced level of earnings by the Company during 1999
as compared to 1998. The effective tax rate increased from 28.7% for the year ended December 31, 1998 to 37.4% for the year
ended December 31, 1999. The increase was primarily caused by the full year tax impact of certain permanent differences
arriving from an acquisition during the latter part of 1998.
Cumulative Effect of a Change in Accounting Principle. Development costs paid to Coast P.A., beginning in June 1997 related to
the expansion of dental offices into new and existing markets. These costs had been accounted for as deferred development costs.
In 1998, the Company adopted SOP 98-5, changed its accounting to charge such costs to expense as incurred, and recorded the
cumulative effect on retained earnings as of January 1, 1998, of approximately $1.0 million ($.6 million net of tax). No such
cumulative effect was required in 1999.
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C. LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company had cash and cash equivalents of $2.5 million. The Company also had approximately $5.4
million in available-for-sale investments which are invested in tax-free instruments with interest rates ranging between 4.0% to
5.0%. Since the investments have ratings ranging from A1 to AAA, the Company believes that these investments have a low
market risk and can easily be converted to cash, if needed. Cash provided by operating activities for the year ended December 31,
2000, totaled $3.2 million.
The Company has a revolving credit facility with Bank of America, N.A. d/b/a Nations Bank, N.A. f/k/a Barnett Bank of Florida,
which provides an aggregate of $20.0 million for general working capital needs and expansion of Dental Centers. The Credit
Facility is a revolver, maturing November 4, 2002, with interest at LIBOR plus a margin percentage ranging from 1.25% to 1.75%.
The margin percentage, as well as certain performance covenants, are based upon funded debt to EBITDA ratios. As of
December 31, 2000, the Company had drawn $1.0 million. At December 31, 2000, the Company was in compliance with all
covenants associated with this facility. However, the funds available under the facility have significantly been reduced as a result
of the Company's reduced cash position and recent performance. At December 31, 2000, the Company estimates that it could
draw an additional $3.4 million on this facility and remain in compliance with required financial and performance covenants. The
Company expects to reduce the amount of its facility in the near future to save on costs associated with maintaining the same.
Available-for-sale securities are stated at fair value with unrealized gains and losses included in comprehensive income. The
amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization
is included in interest income. Realized gains and losses, if any, would be included in the Statement of Income. The cost of
securities sold is based on the specific identification method. As of December 31, 2000, the investments are recorded at the fair
market value with an unrealized loss of $132,779. At December 31, 2000, the Company's position in debt related securities had
been completely eliminated. The remainder of the available for-sale portfolio consisted of equity securities which carry an inherent
market value risk.
During 2000, the Company incurred approximately $4.1 million in capital expenditures, primarily related to the renovation,
relocation and consolidation of existing Dental Centers. The Company expects that capital expenditures during 2001 will
approximate $1.0 million. As such, the Company expects that it will generate positive cash flow for the year.
Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("Statement
133") is effective for all fiscal years beginning after June 15, 2000. Statement 133, as amended, establishes accounting and
reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for
hedging activities. Under Statement 133, certain contracts that were not formerly considered derivatives may now meet the
definition of a derivative. The company will adopt Statement 133 effective January 1, 2001. The adoption of Statement 133 will not
have a significant impact on the financial position, results of operations, or cash flows of the Company.
During 1998, the Company and the Coast P.A. added 22 acquired Dental Centers located in Florida and Tennessee. The purchase
price for these acquired Dental Centers was $9.2 million, consisting of $6.9 million in cash and $2.3 million in promissory notes.
Had these acquisitions occurred at the beginning of 1996, the additional net revenue earned by the Company would have been $9.8
million, $9.8 million and $5.2 million for 1996, 1997 and 1998, respectively. During 1998, the Company consolidated two of its
acquired Dental Centers into one Dental Center.
During 1999, the company and the Coast P.A. added 11 acquired Dental Centers in Virginia. The purchase price for these
acquired Dental Centers was $2.1 million, consisting of $1.2 million in cash and $.9 million in promissory notes and certain
assumed liabilities. Had these acquisitions occurred at the beginning of 1997, the additional net revenue earned by the Company
would have been $0.8 million, $1.0 million and $0.4 million for 1997, 1998 and 1999, respectively. Additionally during 1999, the
Company consolidated one of its acquired Dental Centers into existing Dental Centers.
The Company added nine internally developed Dental Centers in 1997, 25 in 1998 and 17 in 1999 in Florida, Georgia and
Tennessee, at an average cost of approximately $225,000, which includes the cost of equipment, leasehold improvements and
working capital. See Note 2 to the Financial Statements for further information.
The cost of an acquired Dental Center is typically based upon a negotiated percentage of the Dental Center's historical gross
revenue. Acquired Dental Centers typically generate sufficient cash flow to fund their operations. The Company plans to finance
the addition of internally developed and strategically opportunistic acquired Dental Centers for the foreseeable future principally
through existing cash and expected cash flow from operations.
17
18
On March 6, 1998, the Company announced that it had reached an agreement with Mid Coast Dental Services, Inc., a Virginia
corporation ("MCDS") to provide financing for the development of Dental Centers in Virginia. The Company utilized a small
portion of its cash reserves to build, equip and lease fully equipped Dental Centers to MCDS. The Company's loans to MCDS
were on a senior secured basis with interest and rentals providing income to the Company. In exchange for providing financing for
the building and acquisition of Dental Centers, the Company received an option to acquire MCDS beginning on December 31,
1999. The purchase price under the option agreement was to be based on an agreed upon formula which approximated the fair
value of MCDS. Effective April 1, 1999, the Company exercised this option and acquired nine Dental Centers from MCDS. The
total purchase price was $1.4 million, consisting of $.8 million in cash and $.6 million in promissory notes and certain assumed
liabilities. See Note 8-Related Party Transactions in the Notes to Financial Statements for further information.
On February 10, 1999, the Company announced that its Board of Directors authorized the repurchase of up to 500,000 shares of
its outstanding common stock. On March 25, 1999, the Company announced that its Board of Directors authorized the increase of
the previously announced share repurchase program from 500,000 to 1,500,000 shares. The Company will repurchase for cash
these shares in the open market or in privately negotiated transactions, from time to time, subject to market conditions. The
repurchase program began promptly and will continue until such time as the Company has acquired all of the shares authorized for
repurchase, unless sooner terminated by the Board of Directors. No shares will be repurchased from the Company's officers or
directors. The Company has canceled these shares. As of December 31, 2000, the Company has repurchased 1,331,800 shares
for approximately $6.9 million. Additional repurchases of stock would further reduce cash levels.
Based upon the Company's anticipated capital needs for operations of its business, general corporate purposes, the addition of
Dental Centers, repayment of certain debts and share repurchases, management believes that the combination of the funds
expected to be available under the Company's current cash reserves, revolving line of credit and expected cash flow from
operations should be sufficient to meet the Company's funding requirements to conduct its operations and for further
implementation of its growth strategy and current plans through at least 2001. Thereafter, it is anticipated by the Company that
future acquisitions and expansion will be funded primarily with available cash on hand, expected cash flow from operations and
anticipated borrowings under the revolving line of credit. Additionally, the Company could finance growth and future operations
through other credit sources to the extent they become available, and where desirable or necessary, through funding from the sale
of debt or equity securities to the extent such funding is available. Additionally, to the extent the Company's joint Dentist Equity
Model initiative with the Coast P.A., is successful, significant additional cash could become available to the Company through the
proceeds from the sale of certain of its assets at Dental Centers to Dentists and through payment of the Coast P.A. receivables
by the Coast P.A. through its sale of certain Coast P.A. assets to the Dentists. However, there can be no assurance at this time
that such initiative will be successful.
In the event the Company continues to operate at losses and incurs negative future cash flows, the Company could face future
liquidity and working capital problems which could adversely impact growth strategy and future operations. These problems could
be enhanced in the event the Company is unable to utilize its credit facility, particularly given the improbability of achieving, in the
foreseeable future, any or acceptable additional public financing and perhaps private financing, under current market and sector
conditions.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation, Section C. Liquidity and
Capital Resources for further information.
The Company has only a minimal amount of long-term debt, and expects to finance future capital needs through available capital,
anticipated future earnings, if obtained, and bank lines of credit. The Company's exposure to market risk for changes in interest
rates is primarily in its investment portfolio. The Company, pursuant to investing guidelines, mitigates exposure by limiting maturity,
placing investments with high credit quality issuers and limiting the amount of credit exposure to any one issuer. During the year
ended December 31, 2000, the Company earned investment income of approximately $276,000. If interest rates had been 1%
lower than they were during the year, investment income would have been approximately $50,000 lower. The market risks
associated with the investment portfolio exposure have not changed materially during the year.
SPECIAL NOTICE REGARDING FORWARD LOOKING STATEMENTS
This Form 10-K annual report, press releases and certain information provided periodically in writing or orally by the Company's
officers or its agents may contain statements which constitute "forward-looking statements" within the meaning of Section 27A of
the Securities Act, as amended and Section 21E of the Securities Exchange Act of 1934. The terms "Coast Dental Services,"
"Company," "we," "our" and "us" refer to Coast Dental Services, Inc. The words "expect," "believe," "goal," "plan," "intend,"
"estimate" and similar expressions and variations thereof, if used, are intended to specifically identify forward-looking statements.
Those statements appear in a number of places in this Form 10-K and in other places, particularly, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and include statements regarding the intent, belief or current
expectations of the company, its directors or its officers with respect to, among other things:
(i) the successful expansion of the Coast Dental Network through the focus on existing Dental Centers in accordance with the
Company's growth strategy;
(ii) our anticipated future cash flows
(iii) our liquidity and capital resources;
(iv) our financing opportunities and plans;
(v) our future performance and operating results;
(vi) the Company's future management fee; and
(vii) the potential effect of the introduction of the Dentist Equity Model.
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20
Investors and prospective investors are cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors. The factors that might cause such differences include, among others, the
following:
(i) any material inability to successfully and fully optimize the opportunities at existing Dental Centers;
(ii) any material inability to successfully identify, consummate and integrate any future acquisitions at reasonable and anticipated
costs;
(iii) continued reductions in the Company's liquidity and working capital;
(iv) any adverse effect or limitations caused by any governmental regulations or actions;
(v) any continued losses, or any future ability to access current financing or to obtain acceptable financing, where desirable in the
future, in connection with our operating plans;
(vi) any increased competition in business and in acquisitions;
(vii) any negative results recognized with a change from the Company's previous principal supplier of dental products and supplies;
(viii) any continued difficulty to successfully conduct our business in newer markets and concentrate in existing geographic
markets;
(ix) effect of reduced cash position and losses on our ability to access borrowings in current credit facility;
(x) any adverse impacts on our revenue or operating margins due to the costs associated with increased growth at existing Dental
Centers or from managed care business having lower margins;
(xi) the continued relationship with and success of our professional association customers and their continued ability to grow in
conjunction with our growth and the impact of such professional association compensation plan;
(xii) expected future reduction of credit facility and current reduced accessibility to current facility;
(xiii) any inability to meet or exceed analysts expectations in any future period;
(xiv) any inability to achieve additional revenue or earnings from the internally developed Dental Centers or new or combined
internally developed Dental Centers;
(xv) any material decrease in the services and support fees negotiated between the audit committee and the Coast P.A.;
(xvi) unanticipated costs and expenses resulting from our focus on internal efficiencies which impact margins;
(xvii) any slow down in the number of patients or the services performed by Dentists which impacts revenue;
(xviii) any material decrease in the number of Dentists available to service patients, would adversely affect productivity and impact
overall revenue;
(xix) resulting costs and any negatives incurred with implementing the Dental Equity Model;
(xx) any inability of the Coast P.A. to incentivize, motivate, retain and attract dentists;
(xxi) any future inability to substantially achieve the successful implementation of the Dental Equity Model;
(xxii) the impact of the Coast P.A.'s revised compensation plan on the performance of the Coast P.A.;
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(xxiii) the combined decline of public market interest in the Company's business sector and the Company's stock;
(xxiv) the likely loss of the Company's listing under the Nasdaq National Market;
(xxv) general economic and market conditions and combined general downturn in economy;
(xxvi) impact of recent loss of managed care business and any inability to replace with higher margin business; and
(xxvii) inability to generate positive cash flows and continuation of or increased negative cash flow.
(xxviii) the potential impact of negative market influences on the Company's portfolio of investments that are classified as
held-for-sale;
(xxix) inability to improve dentist retention at the Coast P.A.
(xxx) continued decline of patient visits.
We undertake no obligation to publicly update or revise the forward looking statements made in this Form 10-K to reflect events or
circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events.
21
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Item 8. Financial Statements and Supplementary Data
COAST DENTAL SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report........................................ 23
Balance Sheets...................................................... 24
Statements of Income (Loss) and Comprehensive Income (Loss)......... 25
Statements of Stockholders' Equity.................................. 26
Statements of Cash Flows............................................ 27
Notes to Financial Statements....................................... 28
22
23
INDEPENDENT AUDITORS' REPORT
Coast Dental Services, Inc.
Board of Directors
We have audited the accompanying balance sheets of Coast Dental Services, Inc. (the "Company") as of December 31, 1999 and
2000, and the related statements of income (loss) and comprehensive income (loss), stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2000. 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 in accordance with auditing standards generally accepted in the United States of America. Those
standards 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. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Coast Dental Services, Inc.
as of December 31, 1999 and 2000, and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Certified Public Accountants
Tampa, Florida
March 2, 2001
(March 15, 2001 as to Note 12)
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COAST DENTAL SERVICES, INC.
BALANCE SHEETS
DECEMBER 31,
1999 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 1,019,618 $ 2,453,614
Available-for-sale investments ................................................. 8,126,505 5,353,381
Management fee receivable from Coast P.A ....................................... 9,864,060 10,451,761
Note receivable from Coast P.A., non-interest bearing .......................... 529,218 229,218
Supplies, inventory and small tools ............................................ 3,596,614 3,793,409
Prepaid expenses and other assets .............................................. 539,008 705,957
Deferred tax asset ............................................................. -- 184,655
------------ ------------
Total current assets ........................................................ 23,675,023 23,171,995
Property and equipment, net ......................................................... 20,657,147 21,082,037
Non-compete agreements, net of amortization $455,558
and $579,030, respectively ..................................................... 687,487 532,220
Dental services agreements, net of amortization of $1,438,161
and $2,211,156, respectively ................................................... 17,791,326 17,143,459
Other assets ........................................................................ 1,846,113 2,274,481
------------ ------------
Total assets ................................................................... $ 64,657,096 $ 64,204,192
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................... $ 2,105,807 $ 3,014,053
Other accrued expenses ......................................................... 1,524,474 1,519,153
Current maturities of debt and capital lease obligations ....................... 642,029 1,863,495
------------ ------------
Total current liabilities ................................................... 4,272,310 6,396,701
Long-term debt and capital lease obligations, excluding current maturities .......... 1,211,086 350,065
Deferred tax liability .............................................................. 180,092 --
------------ ------------
Total liabilities ........................................................... 5,663,488 6,746,766
------------ ------------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares authorized,
none issued ................................................................. -- --
Common stock, $.001 par value; 50,000,000 share authorized,
6,402,958 and 6,289,958 shares issued and 6,399,384 and
6,286,384 shares outstanding, respectively .................................. 6,404 6,291
Additional paid-in capital ..................................................... 54,427,749 54,991,320
Retained earnings .............................................................. 6,195,430 4,926,261
Unrealized loss on securities held for sale .................................... (106,393) (82,323)
------------ ------------
60,523,190 59,841,549
Less: Stock option receivable from Coast P.A ................................ (1,440,833) (2,295,374)
Treasury stock, 3,574 and 3,574 shares, respectively .................. (88,749) (88,749)
------------ ------------
Total stockholders' equity .................................................. 58,993,608 57,457,426
------------ ------------
Total liabilities and stockholders' equity .................................. $ 64,657,096 $ 64,204,192
============ ============
See Notes to Financial Statements.
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COAST DENTAL SERVICES, INC.
STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31,
------------------------------------------------
1998 1999 2000
------------ ------------ ------------
Net revenue ................................................ $ 34,539,837 $ 44,597,715 $ 45,825,978
------------ ------------ ------------
Dental Center expenses:
Staff salaries ........................................ 11,302,530 16,762,218 19,251,805
Dental supplies and lab fees .......................... 4,915,558 6,975,182 8,449,766
Advertising ........................................... 2,053,969 2,955,959 1,826,490
Rent .................................................. 4,179,571 6,775,521 7,244,695
Depreciation .......................................... 1,258,212 2,466,744 3,137,217
Other ................................................. 950,695 1,288,417 1,576,126
------------ ------------ ------------
Total Dental Center expenses ........................ 24,660,535 37,224,041 41,486,099
------------ ------------ ------------
Gross profit .......................................... 9,879,302 7,373,674 4,339,879
General and administrative expenses ........................ 3,056,477 5,622,786 5,435,995
Development costs .......................................... 1,821,515 -- --
Depreciation and amortization .............................. 683,950 1,300,690 1,289,645
------------ ------------ ------------
Operating profit (loss) ............................... 4,317,360 450,198 (2,385,761)
Interest income, net ....................................... 1,643,754 597,605 309,504
------------ ------------ ------------
Income (loss) before income tax expense (benefit) .......... 5,961,114 1,047,803 (2,076,257)
Income tax expense (benefit) ............................... 1,789,857 391,478 (812,317)
------------ ------------ ------------
Income (loss) before cumulative effect of a change in
accounting principle .................................. 4,171,257 656,325 (1,263,940)
------------ ------------ ------------
Cumulative effect of a change in accounting principle,
net of income tax benefit of $382,403 ................. 633,813 -- --
------------ ------------ ------------
Net income (loss) .......................................... 3,537,444 656,325 (1,263,940)
------------ ------------ ------------
Unrealized (loss)/gain on available-for-sale investments ... -- (106,393) 24,070
------------ ------------ ------------
Comprehensive income (loss) ................................ $ 3,537,444 $ 549,932 $ (1,239,870)
============ ============ ============
Basic earnings (loss) per share:
Income (loss) before cumulative effect of a change in
accounting principle .................................. $ .55 $ .10 $ (.20)
Cumulative effect of a change in accounting principle ...... (.08) -- --
------------ ------------ ------------
Net income (loss) .......................................... $ .47 $ .10 $ (.20)
============ ============ ============
Diluted earnings (loss) per share:
Income (loss) before cumulative effect of a change in
accounting principle .................................. $ .54 $ .10 $ (.20)
Cumulative effect of a change in accounting principle ...... (.08) -- --
------------ ------------ ------------
Net income (loss) .......................................... $ .46 $ .10 $ (.20)
============ ============ ============
Weighted average number of shares outstanding:
Basic ................................................. 7,615,324 6,906,163 6,292,832
============ ============ ============
Diluted ............................................... 7,718,198 6,906,163 6,292,832
============ ============ ============
See Notes to Financial Statements.
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26
COAST DENTAL SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
UNREALIZED
GAIN/(LOSS) ON TOTAL
COMMON ADDITIONAL PAID- RETAINED TREASURY SECURITIES HELD STOCK OPTION STOCKHOLDERS'
STOCK IN CAPITAL EARNINGS STOCK FOR SALE RECEIVABLE EQUITY
-------- ---------------- ------------ ---------- --------------- ------------ ------------
Balance on December 31, 1997 ..... $ 7,606 $ 59,023,290 $ 3,065,953 $ (2,400) $ -- $ (701,861) $ 61,392,588
Issuance of common stock upon
exercise of options .............. 16 136,069 -- -- -- -- 136,085
Income tax benefit relating
to stock options exercised ....... -- 109,608 -- -- -- -- 109,608
Issuance of stock options to Coast
P.A .......................... -- 728,067 -- -- -- (728,067) --
Net income for the year ended
December 31, 1998 ............ -- -- 3,537,444 -- -- -- 3,537,444
Purchase of common stock ......... -- -- -- (86,349) -- -- (86,349)
-------- ------------ ------------ ---------- ---------- ------------ ------------
Balance on December 31, 1998 ..... 7,622 59,997,034 6,603,397 (88,749) -- (1,429,928) 65,089,376
Issuance of common stock upon
exercise of options .......... 1 6,127 -- -- -- -- 6,128
Issuance of stock options to
Coast P.A .................... -- 10,905 -- -- -- (10,905) --
Loss on securities held for
sale ......................... -- -- -- -- (106,393) -- (106,393)
Purchase and retirement of
common stock ................. (1,219) (5,586,317) (1,064,292) -- -- -- (6,651,828)
Net income for the year ended
December 31, 1999 ............ 656,325 656,325
-------- ------------ ------------ ---------- ---------- ------------ ----------
Balance on December 31, 1999 ..... 6,404 54,427,749 6,195,430 (88,749) (106,393) (1,440,833) 58,993,608
Issuance of stock options to Coast
P.A ......................... -- 854,541 -- -- -- (854,541) --
Gain on securities held for
sale ........................ -- -- -- -- 24,070 -- 24,070
Purchase and retirement of
common stock ................ (113) (290,970) (5,229) -- -- -- (296,312)
Net loss for the year ended
December 31, 2000 ........... -- -- (1,263,940) -- -- -- (1,263,940)
-------- ------------ ------------ ---------- ---------- ------------ ------------
Balance on December 31, 2000 ..... $ 6,291 $ 54,991,320 $ 4,926,261 $ (88,749) $ (82,323) $ (2,295,374) $ 57,457,426
======== ============ ============ ========== ========== ============ ============
See Notes to Financial Statements.
26
27
COAST DENTAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------------
1998 1999 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................ $ 3,537,444 $ 656,325 $ (1,263,940)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Cumulative effect of a change in accounting principle ...... 633,813 -- --
Depreciation ............................................... 1,411,313 2,760,182 3,530,394
Amortization ............................................... 523,399 1,007,252 896,468
Other ...................................................... -- (148,750) 196,895
Deferred income tax (benefit) expense ...................... (737,613) 740,963 (364,747)
Changes in operating assets and liabilities:
Increase in management receivable from Coast P.A............ (2,817,850) (4,629,025) (587,701)
(Increase) decrease in note receivable from Coast P.A....... (529,218) -- 300,000
Increase in supplies inventory and small tools ............. (1,681,683) (1,115,062) (196,795)
(Increase) decrease in prepaid expenses and other assets ... (828,618) 557,863 (166,949)
Increase in accounts payable and other accrued expenses .... 1,849,156 137,645 902,926
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ...... 1,360,143