Coast Dental Services Inc.
Filed 3/31/99
TABLE OF CONTENTS
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, 1998
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)
Indicated 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 .
--- ---
Indicated 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 5, 1999, was approximately $32 million based upon the
closing price of such shares on such date on the NASDAQ Stock Market's National
Market. As of March 5, 1999, there were 7,622,524 shares of outstanding Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be used in
connection with the Registrant's 1999 Annual Meeting of Shareholders, which
will be filed on or before April 30, 1999, 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.
Coast Dental Services Inc.
(CDEN) NASDAQ
INDEXED 10-K
For the fiscal year ended December 31, 1998
Return to Corporate Window
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Consolidated Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Signatures
Financial Index
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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 Georgia, P.A." and "Coast Tennessee P.A." refer to the Florida,
Georgia and Tennessee 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.A. 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, 1998, the Company provided management services to
104 Dental Centers located in Florida, Georgia and Tennessee. Of the 104 Dental
Centers, 46 were internally developed and 58 were acquired by the Company. As
of December 31, 1998, 107 Coast Dentists were employed by the Coast P.A.,
serving over 600,000 patients.
The Company's goal is to develop a leadership position in the
management of general dentistry practices throughout Florida, Georgia,
Tennessee and the southeastern United States. The Company derives its revenue
through fees earned from the Coast P.A. for providing management services and
support to the Dental Centers. Pursuant to the Services and Support Agreement,
the Company receives a percentage of the Coast P.A.'s gross patient revenue,
net of refunds and discounts. A uniform operating model (the "Coast Operating
Model") developed by the Company is utilized at the Dental Centers to increase
productivity and maintain the low cost delivery of quality general dentistry
services. 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. The
Company plans to expand the Coast Dental Network to maximize economies of scale
in management and administration, material procurement and marketing and to
facilitate contracting with managed care companies. The Company plans to
increase penetration in currently served regions and to expand into new
contiguous markets in the southeastern United States through the addition of
internally developed and acquired Dental Centers.
As the Coast Dental Network has grown, an increasing percentage of the
Coast Dentist's patient revenue has been derived from a growing managed care
patient base. The Company believes that managed care companies are
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presently focused on increasing their revenue and gaining market share by
offering a full range of health insurance options, including dental insurance.
As a result, managed care companies are aggressively seeking to contract with
dental providers that offer extensive regional coverage, have the ability to
deliver dental services at managed care pricing levels, and possess the
necessary management information systems and contract administration expertise.
Accordingly, the Company believes that it is well positioned to gain an
increased share of the managed care market as compared to sole practitioners
and small dental group practices that generally do not have the resources to
develop such capabilities or managed care relationships.
The Company expects to continue to expand into new contiguous markets
in the southeastern United States through the continued addition of internally
developed and acquired Dental Centers. Of the 104 Dental Centers currently
managed by the Company, 46 were internally developed and 58 were acquired by
the Company. 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 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.
ACQUISITIONS AND DEVELOPMENTS
The Company opened two internally developed Dental Centers both in
1992 and 1993, four in 1994, three in 1995, one in 1996, nine in 1997 and 25 in
1998 in Florida and Georgia. During 1996, the Company and the Coast Florida
P.A. added 17 acquired Dental Centers located in Florida. The purchase price
for these acquired Dental Centers was $4.3 million, consisting of $1.2 million
in cash and $3.1 million in promissory notes. During 1997, the Company and the
Coast Florida P.A. added 20 acquired Dental Centers located in Florida. The
purchase price for these acquired Dental Centers was $5.9 million, consisting
of $4.6 million in cash, $1.0 million in promissory notes, $231,000 in assumed
liabilities and $100,000 of the Company's common stock (5,979 shares). 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.
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 Coast P.A. is
owned and managed by Dr. Adam Diasti, a major shareholder, director and
executive officer of the Company. See Item 7 "Management's Discussion and
4
Analysis of Financial Condition and Results of Operations" and Item 10
"Directors and Executive Officers of the Registrant." Any future modifications,
amendments or revisions to the Services and Support Agreements will be approved
in advance by the Audit Committee of the Company's Board of Directors, a
majority of which consist of the independent outside directors of the Company.
See Notes 2 and 12 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 and marketable, as it enters into
new states 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.
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
shareholders 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 shareholder of Coast P.A., is
also a major shareholder, 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 provides
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 preliminary
determination in applying the
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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 Agreement
provides 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 seeks
to expand 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, 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.
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 PPMs are the
extent of the dental care network, management expertise and experience,
sophistication of management information systems, the elements of its operating
system, the availability of managed care business, opportunity for career
enhancement agreements, degrees of control required by the merger and the size
of operations.
The business of providing dental 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
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Coast P.A., which represented 14.2% and 18.8% of total revenue to the Coast
P.A. for the year ended December 31, 1997 and 1998, respectively.
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, 1998, the Company had approximately 569 full-time
and part-time employees, of which approximately 43 were employed at the
Company's headquarters and 526 employed at the Dental Centers. None of the
Company's employees are employed under a collective bargaining agreement. The
Company believes that its relationship with its employees is good.
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 $2,650 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.
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 as it expands.
CURRENT LOCATIONS NUMBER OF LOCATIONS
------------------ -------------------
Southwest Florida................................................................... 13
West Central Florida................................................................ 31
Central Florida..................................................................... 19
Northeast Florida................................................................... 15
Northwest Florida................................................................... 4
Atlanta, Georgia.................................................................... 16
Nashville, Tennessee................................................................ 6
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 effect on its financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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
---- ---- ---
1997 First Quarter (beginning February 11, 1997)............................. $14.750 $ 8.000
Second Quarter.......................................................... 16.875 12.000
Third Quarter........................................................... 30.000 14.000
Fourth Quarter.......................................................... 31.750 20.500
1998 First Quarter........................................................... 29.625 21.875
Second Quarter.......................................................... 27.875 13.188
Third Quarter........................................................... 16.750 8.500
Fourth Quarter.......................................................... 12.750 9.750
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 5, 1999 was $6.625 and
there were approximately 84 shareholders 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 (see Note 11 to the Financial
Statements), 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.
SALES OF UNREGISTERED SECURITIES
The Company issued non-negotiable promissory notes in the aggregate sum
of $2.3 million to 12 sellers during 1998, as part of the purchase price in
connection with the Company's purchase of the allowable assets of certain dental
practices. The Company does not believe that the promissory notes issued in
these transactions are a "security" as defined by Section 2(1) of the Securities
Act. However, in the event the promissory notes are deemed to be a security
these transactions were exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) because they did not involve any public
offering.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data with respect to the Company's
statements of income for the years ended December 31, 1994, 1995, 1996, 1997
and 1998 and the balance sheet data as of December 31, 1994, 1995, 1996, 1997
and 1998 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
8
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,
----------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA FOR THE YEAR:
Net revenue................................................. $1,868 $3,325 $8,128 $20,035 $34,540
Income (loss) before cumulative effect of a change in
accounting principle..................................... (182) 225 1,403 3,409 4,171
Cumulative effect of a change in accounting
principle................................................. -- -- -- -- 634
Net income (loss)........................................... (182) 225 1,403 3,409 3,537
Pro forma net income (loss)(1).............................. (109) 135 856 3,267 3,537
Basic Earnings per common share:
Income before cumulative effect of a change in
accounting principle(2).................................. $ .57 $ .55
Cumulative effect of a change in accounting
principle(2).............................................. $ -- $ .08
Net income (loss)(2)........................................ $ .57 $ .47
Pro forma net income (loss)(2).............................. $ .55 $ .47
Diluted Earnings per common share:
Income before cumulative effect of a change in
accounting principle(2).................................. $ .56 $ .54
Cumulative effect of a change in accounting
principle(2).............................................. $ -- $ .08
Net income (loss)(2)........................................ $ .56 $ .46
Pro forma net income (loss)(2).............................. $ .54 $ .46
Weighted average shares outstanding:
Basic(2).................................................. 5,935 7,615
Diluted(2)................................................ 6,051 7,718
BALANCE SHEET DATA AT YEAR END:
Total assets................................................ $ 914 $1,198 $7,969 $64,836 $71,502
Long-term debt, including current maturities................ 385 608 4,649 1,495 2,920
(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 from 1994 through 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 and 1998.
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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 45 internally developed and 58 acquired Dental Centers. 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 and Tennessee. As of December 31, 1998, 107 Coast Dentists were
employed by the Coast P.A., serving over 600,000 patients. The Company expects
to expand the Coast Dental Network in new and existing markets through the
addition of internally developed and 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 ranged
from 65.0% to 76.0% of the Dental Centers' gross revenue, net of refunds and
discounts since October 1, 1996. As a result of an adjustment in services and
support fees approved by the Audit Committee, beginning in February 1999 the
services and support fees are expected to average between 71.0% to 73.0% over
the next several years. 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. See Notes 2 and 12 to the Financial Statements for
further information.
The Company opened one internally developed Dental Center in 1996, nine
in 1997 and 25 in 1998 in Florida and Georgia. The average cost to the Company
of an internally developed Dental Center has been approximately $225,000, which
included the cost of equipment, leasehold improvements, working capital and an
agreed upon $50,000 payment (per Dental Center, see Notes 2 and 12 to the
Financial Statements) to the Coast P.A. to open the additional Dental Centers
thus expanding the Services and Support Agreements to included the new
internally developed Dental Centers. At internally developed Dental Centers,
profitability to the Company has been attained in an average of three to six
months from opening. The Company's growth strategy will continue to include
acquisitions in select areas, however, the percentage of internally developed
Dental Centers, as a percentage of all Dental Centers, is expected to increase
in 1999. While this strategy is expected to result in slightly lower targeted
revenue and operating margins in the short run, the Company does not expect that
the same would adversely impact its targeted per share income. Management
believes that the strategy of focusing on internally developed Dental Centers is
an effective use of its working capital and provides for low cost expansion.
During 1996, the Company and the Coast Florida P.A. added 17 acquired
Dental Centers located in Florida. The purchase price for these acquired Dental
Centers was $4.3 million, consisting of $1.2 million in cash and $3.1 in
promissory notes. On a pro forma basis, had these acquisitions occurred at the
beginning of 1996, the additional net revenue earned by the Company would have
been $3.8 million.
During 1997, the Company and the Coast Florida P.A. added 20 acquired
Dental Centers located in Florida. The purchase price for these acquired Dental
Centers was $5.9 million, consisting of $4.6 million in cash, $1.0 million in
promissory notes, $231,000 in assumed liabilities and $100,000 of the Company's
common stock (5,979 shares). On a pro forma basis, had these acquisitions
occurred at the beginning of 1996, the additional net revenue earned by the
Company would have been $7.7 million and $3.8 million for 1996 and 1997,
respectively.
10
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. On a pro forma basis, 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.
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 payor mix for the Coast P.A.'s
revenue for the periods presented:
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1997 1998
--------------------------------------------
Self-pay........................................................... 55% 36% 31%
HMOs............................................................... 26 43 50
Private insurers................................................... 17 19 18
Medicaid........................................................... 2 2 1
--- --- ---
Total............................................................ 100% 100% 100%
=== === ===
11
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.
YEARS ENDED DECEMBER 31,
----------------------------------------------
1996 1997 1998
----------------------------------------------
Net revenue............................................................. 100.0% 100.0% 100.0%
Dental Center expenses:
Staff salaries........................................................ 28.6 31.1 32.7
Dental supplies and lab fees.......................................... 14.8 14.2 14.2
Advertising........................................................... 8.3 5.9 5.9
Rent.................................................................. 10.0 10.6 12.1
Depreciation.......................................................... 2.5 2.7 3.6
Other................................................................. 2.9 2.2 2.9
----- ----- -----
Total Dental Center expenses........................................ 67.1 66.7 71.4
----- ----- -----
Gross profit........................................................ 32.9 33.3 28.6
General and administrative.............................................. 11.7 9.3 8.8
Development costs....................................................... -- -- 5.3
Depreciation and amortization........................................... 1.7 1.9 2.0
----- ----- -----
Operating profit.................................................... 19.5 22.1 12.5
Interest income (expense)............................................... (2.3) 3.5 4.8
----- ----- -----
Income before income tax expense........................................ 17.2 25.6 17.3
Income tax expense...................................................... -- 8.6 5.2
----- ----- -----
Income before cumulative effect of a change in accounting
principle............................................................. 17.2 17.0 12.1
Cumulative effect of a change in accounting principle................... -- -- 1.9
----- ----- -----
Net income.............................................................. 17.2 17.0 10.2
===== ===== =====
Pro forma income tax expense............................................ 6.7 0.7 --
----- ----- -----
Pro forma net income.................................................... 10.5% 16.3% 10.2%
===== ===== =====
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Revenue. Net revenue increased 72.4% from $20.0 million for the
year ended December 31, 1997 to $34.5 million for the year ended December 31,
1998. This increase was primarily due to the increase in net revenue
attributable to the 28 comparable Dental Centers (Dental Centers that were open
throughout the periods being compared), the 20 acquired Dental Centers in 1997,
the nine internally developed Dental Centers in 1997, the 22 acquired Dental
Centers in 1998 (including the two consolidated acquired Dental Centers) and the
25 internally developed Dental Centers in 1998. Increases in net revenue are
primarily driven by increases in patient visits. Patient visits increased 92.5%
from 231,681 for the year ended December 31, 1997 to 445,945 for the year ended
December 31, 1998.
Staff Salaries. Staff salaries increased 81.5% from $6.2 million for
the year ended December 31, 1997 to $11.3 million for the year ended December
31, 1998. 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 22 acquired and 25 internally developed Dental Centers. 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 assistant 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 are increased.
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
12
the compensation paid to 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
72.8% from $2.8 million for the year ended December 31, 1997 to $4.9 million
for the year ended December 31, 1998. This increase was caused by the increase
in patient visits and dental services provided at the 104 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 72.3% from $1.2 million for
the year ended December 31, 1997 to $2.1 million for the year ended December 31,
1998. This increase was caused primarily by implementation of a more aggressive
advertising program, including television, in markets where internally developed
Dental Centers were open.
Rent. Rent expense increased 97.5% from $2.1 million for the year ended
December 31, 1997 to $4.2 million for the year ended December 31, 1998. This
increase was caused primarily by the addition of the 22 acquired and 25
internally developed Dental Centers. The 25 internally developed Dental Centers
are typically larger than the ones previously built and aggressive development
along with new market penetration have increased rent expense. The acquired
Dental Centers also typically have a higher rent expense.
Depreciation. Depreciation expense at the Dental Centers increased
130.5% from $.5 million for the year ended December 31, 1997 to $1.3 million
for the year ended December 31, 1998. The increase was primarily associated
with the increase in fixed assets from the 22 acquired and 25 internally
developed Dental Centers.
Other Expenses. Other expenses increased 119.5% from $.4 million for
the year ended December 31, 1997 to $1.0 million for the year ended December
31, 1998. This increase was caused primarily by increases in insurance costs,
credit card discounts and other costs associated with the 22 acquired and 25
internally developed Dental Centers.
General and Administrative Expenses. General and administrative
expenses increased 63.4% from $1.9 million for the year ended December 31, 1997
to $3.1 million for the year ended December 31, 1998. This increase was caused
primarily by the increasing corporate administrative salaries, professional
fees, rent and insurance costs due to the growth of the Company. General and
administrative expenses primarily consist of expenses incurred at the corporate
office.
Development Costs. Development costs increased $1.8 million for the
year ended December 31, 1998 in comparison to the prior year. This increase was
caused primarily by the fee paid to the Coast P.A. in accordance with the
Services and Support Agreement for each of the 35 internally developed Dental
Centers which the Coast P.A. agreed to develop. The Company decided to early
adopt 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 77.9% from $.4 million for the year ended December 31, 1997 to $.7
million for the year ended December 31, 1998. This increase was caused primary
by the expansion of the corporate headquarters and the amortization of service
and support agreements and other intangibles acquired and the write-off of
development costs in connection with the early adoption of Statement of
Position No. 98-5, Reporting on the Costs of Start-up Activities, effective
January 1, 1998.
Interest income, net. Interest income, net increased 133.2% from $.7
million for the year ended December 31, 1997 to $1.6 million for the year ended
December 31, 1998. This increase was caused primarily by an increase of the
Company's invested cash balances and the reduction of interest paid due to the
repayment of notes payable issued as part of the consideration for certain
acquisitions.
Income Taxes. Income taxes increased less than one percent from $1.7
million for the year ended December 31, 1997 to $1.8 million for the year ended
December 31, 1998. This increase was partially attributable to the change in
13
corporate status. The Company was an S Corporation until February 11, 1997 and,
therefore, income taxes were paid by the individual shareholders. The Company
automatically became a C Corporation upon the consummation of its public
offering. See Item 8. Financial Statements and Supplementary Data, Notes to the
Financial Statements, Note 7. The effective tax rate decreased from 36.2% for
the year ended December 31, 1997 to 28.7% for the year ended December 31, 1998.
The decrease was primarily caused by the increase in income from tax-free
investments.
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 were 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).
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Revenue. Net revenue increased 146.5% from $8.1 million for the
year ended December 31, 1996 to $20.0 million for the year ended December 31,
1997. This increase was caused by a 24.8% increase in net revenue attributable
to the 12 comparable Dental Centers (Dental Centers that were open throughout
the periods being compared), the 17 acquired Dental Centers added in 1996, the
20 acquired Dental Centers added in 1997 and the nine internally developed
Dental Centers in 1997. Increases in net revenue are primarily driven by
increases in patient visits. Patient visits increased 129.5% from 100,949 for
the year ended December 31, 1996 to 231,681 for the year ended December 31,
1997.
Staff Salaries. Staff salaries increased 168.0% from $2.3 million for
the year ended December 31, 1996 to $6.2 million for the year ended December
31, 1997. This increase in staff salaries was caused by an increase in salaries
for the 12 comparable Dental Centers, the 17 acquired Dental Centers in 1996,
the 20 acquired Dental Centers in 1997 and the nine internally developed Dental
Centers. Staff salaries include the compensation paid to the administrative
staff at each Dental Center, including the dental assistants, office managers,
sterilization technicians and front desk managers. The increase was caused
primarily by the increase in staffing due to the addition of internally
developed and acquired Dental Centers which was somewhat offset by staff levels
at the 12 comparable Dental Centers remaining relatively constant, while net
revenue increased. 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 assistant 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 are increased. 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 acquisition as the Company implements the Coast
Operating Model to increase productivity and efficiency.
Dental Supplies and Lab Fees. Dental supplies and lab fees increased
136.4% from $1.2 million for the year ended December 31, 1996 to $2.8 million
for the year ended December 31, 1997. This increase was caused by the increase
in patient visits and dental services provided at the 58 Dental Centers. As a
percentage of net revenue, dental supplies and lab fees decreased from 14.8%
for the year ended December 31, 1996 to 14.2% for the year ended December 31,
1997. This decrease was caused primarily by the expansion into new markets and
the changing demographics have caused crowns and dentures as a percentage of
total product mix to decrease. Crowns and dentures result in lab fees not
incurred with other dental products and procedures.
Advertising. Advertising expense increased 76.6% from $.7 million for
the year ended December 31, 1996 to $1.2 million for the year ended December
31, 1997. This increase was caused primarily by implementation of a more
aggressive advertising program during 1997. As a percentage of net revenue,
advertising expense decreased from 8.3% for the year ended December 31, 1996 to
5.9% for the year ended December 31, 1997. This decrease was caused primarily
by an increase in market penetration by comparable Dental Centers while
advertising expenses remained relatively constant for those Centers.
Rent. Rent expense increased 160.3% from $.8 million for the year
ended December 31, 1996 to $2.1
14
million for the year ended December 31, 1997. This increase was caused
primarily by the addition of the nine internally developed Dental Centers and
the 37 acquired Dental Centers. The acquired Dental Centers typically have a
higher rent expense.
Depreciation. Depreciation expense at the Dental Centers increased
167.9% from $.2 million for the year ended December 31, 1996 to $.5 million for
the year ended December 31, 1997. The increase was primarily associated with
the addition of the nine internally developed Dental Centers and the 37
acquired Dental Centers.
Other Expenses. Other expenses increased 85.0% from $.2 million for
the year ended December 31, 1996 to $.4 million for the year ended December 31,
1997. This increase was caused primarily by increases in insurance costs,
credit card discounts and other costs. As a percentage of net revenue, other
expenses decreased from 2.9% for the year ended December 31, 1996 to 2.2% for
the year ended December 31, 1997. This decrease was caused primarily by
increased economies of scale associated with the increasing number of patient
visits.
General and Administrative Expenses. General and administrative
expenses increased 96.9% from $1.0 million for the year ended December 31, 1996
to $1.9 million for the year ended December 31, 1997. This increase was caused
primarily by professional fees increasing due to the change from a private to a
publicly-held company and corporate administrative salaries, rent and insurance
costs due to the growth of the Company. General and administrative expenses
primarily consist of expenses incurred at the corporate office.
Depreciation and amortization. Depreciation and amortization increased
175.9% from $.1 million for the year ended December 31, 1996 to $.4 million for
the year ended December 31, 1997. This increase was caused primarily by the
amortization of service and support agreements and other intangibles acquired.
Income Taxes. Income taxes increased $1.7 million. This increase was
attributable to the change in corporate status. The Company was an S
Corporation until February 11, 1997 and, therefore, income taxes were paid by
the individual shareholders. The Company automatically became a C Corporation
upon the consummation of its public offering. See Item 8. Financial Statements
and Supplementary Data, Notes to the Financial Statements, Note 7.
C. LIQUIDITY AND CAPITAL RESOURCES
On February 11, 1997, the Company completed its initial public
offering of Common Stock. The net proceeds to the Company from the sale of the
2,200,000 shares of Common Stock offered by the Company were approximately
$15.1 million (after deducting underwriting discounts and commissions and
offering expenses). On September 22, 1997, the Company completed its secondary
public offering of Common Stock. The net proceeds to the Company from the sale
of 1,900,000 shares of Common Stock offered by the Company were approximately
$41.9 million (after deducting underwriting discounts and commissions and
offering expenses).
The Company has a revolving credit facility with Nations Bank
(formerly, Barnett Bank of Florida) which provides an aggregate of $15.0
million for general working capital needs and expansion of Dental Centers. As
of March 5, 1999, the Company had available the entire $15.0 million for
borrowing.
The Company has approximately $13.8 million in available-for-sale
investments which are invested in tax-free municipal bonds with interest rates
ranging between 3.85% to 4.9%. 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. See Note 2 to the Financial
Statements for further information.
During 1996, the Company and the Coast Florida P.A. added 17 acquired
Dental Centers located in Florida. The purchase price for these acquired Dental
Centers was $4.3 million, consisting of $1.2 million in cash and $3.1 in
promissory notes. On a pro forma basis, had these acquisitions occurred at the
beginning of 1996, the additional net revenue earned by the Company would have
been $3.8 million.
15
During 1997, the Company and the Coast Florida P.A. added 20 acquired
Dental Centers located in Florida. The purchase price for these acquired Dental
Centers was $5.9 million, consisting of $4.6 million in cash, $1.0 million in
promissory notes, $231,000 in assumed liabilities and $100,000 of the Company's
common stock (5,979 shares). Had these acquisitions occurred at the beginning
of 1996, the additional net revenue earned by the Company would have been $7.7
million and $3.8 million for 1996 and 1997, respectively.
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.
The Company added one internally developed Dental Center in 1996, nine
in 1997 and 25 in 1998 in Florida and Georgia at an average cost of
approximately $225,000, which includes the cost of equipment, leasehold
improvements, working capital and an agreed upon $50,000 payment (per Dental
Center) 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. See Notes 2 and 12 to the Financial Statements for further
information.
The cost of an acquired Dental Center is typically based upon in part 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 acquired
Dental Centers for the foreseeable future principally through existing cash and
expected cash flow from operations.
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 will utilize a small portion of its cash reserves to build, equip and
lease fully equipped Dental Centers to MCDS. The Company's loans to MCDS are 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 is to be based
on an agreed upon formula which is expected to approximate the fair value of
MCDS. See Note 8-Related Party Transactions in the Notes to Financial
Statements for further information.
Many computer systems in use today were designed and developed using
two digits, rather than four, to specify the year. As a result, such systems
will recognize the 00 as 1900 instead of 2000. This could cause many computer
systems, computer applications and non-information systems to fail completely
or to create erroneous results unless corrective measures are taken.
Coast Dental Services, Inc. (the "Company") utilizes software and
related computer technologies essential to its operations that may be affected
by the Year 2000 issue. In 1997, the Company created a Year 2000 committee
tasked with evaluating the year 2000 issue and taking the appropriate actions.
The year 2000 committee has developed and is currently implementing a
comprehensive plan (the "Plan") to make its information technology and
non-information technology systems and applications ("IT Assets") year 2000
ready. The Plan covers the following phases: (i) inventory of all IT Assets,
(ii) assessment of repair or replacement requirements, (iii) testing of IT
Assets to determine correct manipulation of dates and date-related data, (iv)
verification that phases (i) through (iii) were properly completed for all IT
Assets, (v) verification of significant third party year 2000 readiness and
(vi) creation of contingency plans, if necessary, in the event of year 2000
failures.
The first five phases of the Plan have been completed for the majority
of IT Assets that have been internally developed and a significant portion of
the first five phases have been completed for IT Assets that were developed by
third parties. The completion of the first five phases for third party
developed IT Assets is scheduled for September 30, 1999.
16
The Company is currently surveying third parties who provide both
critical IT Assets and non-information technology related goods and services
(e.g. utility companies, supply transportation companies and insurance
companies) to (1) evaluate their year 2000 compliance plans and state of
readiness and (2) determine whether a year 2000 related event will impede the
ability of such third parties to continue to provide such goods and services as
the year 2000 approaches.
The Company has not yet completed phase (vi) of the Plan, but this
phase will be continuously monitored as the Company acquires more information
about the preparations of its third party vendors. Some risks related to the
year 2000 issue are beyond the control of the Company and its third parties.
For example, the Company does not believe that it can develop a contingency
plan which will protect the Company from a possible ripple effect throughout
the entire economy that could be caused by problems of others with the year
2000 issue.
As of December 31, 1998, the costs associated with the year 2000 issue
have been immaterial and the Company estimates that the future costs will not
have a material impact on the Company's financial condition or results of
operations. However, there can be no guarantee that the actual costs won't
differ materially from these estimates. The Company intends to fund from its
operations the costs of implementing the Plan.
Until the Plan can be completed, the Company cannot fully estimate the
risks of its year 2000 issue. To date, the Company has not identified any IT
Assets that present a material risk of not being year 2000 ready or for which a
suitable alternative cannot be implemented. However, as the Plan proceeds into
its final phases, it is possible that the Company may identify IT Assets that do
present a risk of a year 2000 related disruption. It is also possible that such
a disruption could have a material adverse effect on the financial condition and
results of operations. Also, there can be no assurances that third parties will
be year 2000 compliant or that such third parties systems will not fail due to
noncompliance and result in a disruption of service to the Company which could
in turn have a material adverse effect on the Company's operations.
On February 10, 1999, the Company announced that is Board of Directors
authorized the repurchase of up to 500,000 shares of its outstanding common
stock. 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 will begin promptly and will continue for
twelve months, unless sooner terminated by the Board of Directors. No shares
will be repurchased from the Company's officers or directors. The Company
intends to hold the repurchased shares in treasury for general corporate
purposes. 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. As of March 25, 1999, the Company has
repurchased 249,000 shares for approximately $1.7 million.
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 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 2000. Thereafter, it is anticipated by the Company that future
acquisitions and expansion will be funded primarily with cash on hand, cash flow
from operations and borrowings under the revolving line of credit. In the event
the Company expands at a more rapid rate, the Company could finance growth
through other credit sources, and where desirable, funding from the sale of debt
or equity securities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis", Section C. "Liquidity and
Capital Resources".
SPECIAL NOTICE REGARDING FORWARD LOOKING STATEMENTS
This Form 10-K, the annual report, press releases and certain
information provided periodically in writing or orally by the Company's officers
or its agents 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 Cost 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 in new
and existing markets through the focus on the addition of
internally developed and certain select acquired Dental
Centers in accordance with the Company's growth strategy and
the impact on short term revenue and operating margins;
17
(ii) our liquidity and capital resources;
(iii) our financing opportunities and plans;
(iv) our future performance and operating results; and
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 add and integrate
internally develop Dental Centers;
(ii) any material inability to successfully identify, consummate
and integrate acquisitions at reasonable and anticipated
costs;
(iii) any adverse effect or limitations caused by any governmental
regulations or actions;
(iv) any adverse effect on continued positive cash flow or our
ability to obtain acceptable financing in connection with our
growth plans;
(v) any increased competition in business and in acquisitions;
(vi) any inability to successfully conduct our business in new
markets and concentrate in existing geographic markets;
(vii) any adverse impacts on our revenue or operating margins due
to the expected increase of internally developed Dental
Centers, or to costs associated with increased growth or
increased managed care business having lower margins;
(viii) the continued relationship with and success of our
professional association customers and their continued
ability to grow in conjunction with our growth;
(ix) any inability to meet or exceed analysts expectations in any
future period;
(x) any inability to achieve additional revenue or earnings from
32 internally developed Dental Centers open less than 18
months or new internally developed Dental Centers;
(xi) any material decrease in the services and support fees
negotiated between the audit committee and the Coast P.A.;
(xii) unanticipated costs and expenses resulting from our expansion
which impact margins;
(xiii) any slow down in the number of patients or the services
performed by Dentists which impacts revenue;
(xiv) any material decrease in the number of Dentists available to
service patients, would affect productivity and impact
overall revenue; and
(xv) the impact of increased seasonality resulting in a lower
number of patient visits in the Florida market in the summer
months.
We undertake no obligation to publicly update or revise the forward looking
statements made in this Form 10-K or annual report to reflect events or
circumstances after the date of this Form 10-K and annual report or to reflect
the occurrence of unanticipated events.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS:
Back to Table of Contents
19
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, 1997 and 1998, and the related statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1998. 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 generally accepted auditing
standards. 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, 1997 and 1998 and the results of operations and its cash flows for each of
the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the financial statements, in 1998 the Company adopted
AICPA Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities.
Deloitte & Touche LLP
Tampa, Florida
February 19, 1999, except for the fifth paragraph of Note 12
as to which the date is March 25, 1999
20
COAST DENTAL SERVICES, INC.
Return to financial index
BALANCE SHEETS
DECEMBER 31,
--------------------------------------
1997 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents........................................................ $46,343,591 $13,581,798
Available-for-sale investments................................................... -- 13,785,320
Management fee receivable from Coast P.A. ....................................... 2,417,185 5,235,035
Note receivable from Coast P.A., non-interest bearing............................ -- 529,218
Supplies, inventory and small tools.............................................. 799,869 2,481,552
Prepaid expenses and other assets................................................ 268,253 1,096,871
Deferred tax asset............................................................... 18,321 560,871
----------- -----------
Total current assets........................................................... 49,847,219 37,270,665
Property and equipment, net........................................................ 6,047,993 16,297,559
Non-compete agreement, net of amortization of $208,763
and $332,235, respectively....................................................... 949,393 818,440
Dental services agreement, net of amortization of $219,306
and $619,233, respectively....................................................... 6,852,932 15,870,936
Other assets....................................................................... 1,138,155 1,244,175
----------- -----------
Total assets................................................................... $64,835,692 $71,501,775
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 1,053,310 $ 2,320,536
Other accrued expenses........................................................... 699,778 1,172,100
Current maturities of debt and capital lease obligations........................ 454,330 1,284,060
----------- -----------
Total current liabilities...................................................... 2,207,418 4,776,696
Long-term debt and capital lease obligations, excluding current maturities......... 1,040,623 1,635,703
Deferred tax liability............................................................. 195,063 --
----------- -----------
Total liabilities.............................................................. 3,443,104 6,412,399
Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares authorized,
none issued.................................................................... -- --
Common stock, $.001 par value; 50,000,000 shares authorized,
7,605,796 and 7,621,758 shares issued and 7,605,496 and 7,618,184
shares outstanding, respectively............................................... 7,606 7,622
Additional paid-in capital....................................................... 59,023,290 59,997,034
Retained earnings................................................................ 3,065,953 6,603,397
----------- -----------
62,096,849 66,608,053
Less: Stock option receivable from Coast P.A. ................................. 701,861 1,429,928
Treasury stock, 300 and 3,574 shares, respectively....................... 2,400 88,749
----------- -----------
Total stockholders' equity..................................................... 61,392,588 65,089,376
----------- -----------
Total liabilities and stockholders' equity..................................... $64,835,692 $71,501,775
=========== ===========
See Notes to Financial Statements.
21
COAST DENTAL SERVICES, INC.
Return to financial index
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1997 1998
---------- ----------- -----------
Net revenue.............................................. $8,128,148 $20,034,536 $34,539,837
Dental Center expenses:
Staff salaries......................................... 2,324,496 6,228,923 11,302,530
Dental supplies and lab fees........................... 1,202,986 2,844,118 4,915,558
Advertising............................................ 674,918 1,191,888 2,053,969
Rent................................................... 811,210 2,115,890 4,179,571
Depreciation........................................... 203,753 545,859 1,258,212
Other.................................................. 234,130 433,168 950,695
---------- ----------- -----------
Total Dental Center expenses......................... 5,451,493 13,359,846 24,660,535
---------- ----------- -----------
Gross profit......................................... 2,676,655 6,674,690 9,879,302
General and administrative expenses...................... 950,006 1,870,847 3,056,477
Development costs........................................ -- -- 1,821,515
Depreciation and amortization............................ 139,395 384,550 683,950
---------- ----------- -----------
Operating profit..................................... 1,587,254 4,419,293 4,317,360
Interest (expense) income, net........................... (184,290) 704,807 1,643,754
---------- ----------- -----------
Income before income taxes............................... 1,402,964 5,124,100 5,961,114
Income tax expense....................................... -- 1,715,218 1,789,857
---------- ----------- -----------
Income before cumulative effect of a change in
accounting principle................................... 1,402,964 3,408,882 4,171,257
Cumulative effect of a change in accounting
principle, net of income tax of $382,403............... -- -- 633,813
---------- ----------- -----------
Net income............................................... $1,402,964 $ 3,408,882 $ 3,537,444
========== =========== ===========
Pro forma income tax expense............................. 547,156 142,021 --
---------- ----------- -----------
Pro forma net income..................................... $ 855,808 $ 3,266,861 $ 3,537,444
========== =========== ===========
Basic earnings per share:
Income before cumulative effect of a change in
accounting principle................................... $ .57 $ .55
Cumulative effect of a change in accounting
principle.............................................. -- $ .08
----------- -----------
Net income............................................... $ .57 $ .47
=========== ===========
Pro forma net income..................................... $ .55 $ .47
=========== ===========
Diluted earnings per share:
Income before cumulative effect of a change in
accounting principle................................... $ .56 $ .54
Cumulative effect of a change in accounting
principle.............................................. -- $ .08
----------- -----------
Net income............................................... $ .56 $ .46
=========== ===========
Pro forma net income..................................... $ .54 $ .46
=========== ===========
Weighted average number of shares outstanding:
Basic.................................................. 5,934,701 7,615,324
=========== ===========
Diluted................................................ 6,051,011 7,718,198
=========== ===========
See Notes to Financial Statements.
22
COAST DENTAL SERVICES, INC.
Return to financial index
STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL
PAID-IN CAPITAL STOCK TOTAL
COMMON COMMON RETAINED TREASURY OPTION STOCKHOLDERS'
STOCK STOCK EARNINGS STOCK RECEIVABLE EQUITY
------------------------------------------------------------------------------------------------------------------------------------
BALANCE ON DECEMBER 31, 1995........ $ 336 $ 664 $ 173,659 $ -- $ -- $ 174,659
Change in par value of common
stock............................. 3,150 (3,150) -- -- -- --
Issuance of common stock............ 14 27,660 -- -- -- 27,674
Distribution to stockholders........ -- -- (141,146) -- -- (141,146)
Net income for the year ended
December 31, 1996................. -- -- 1,402,964 -- -- 1,402,964
------ ----------- ----------- -------- ----------- -----------
BALANCE ON DECEMBER 31, 1996........ 3,500 25,174 1,435,477 -- -- 1,464,151
Net proceeds from issuance of
common stock from initial
offering.......................... 2,200 15,104,762 -- -- -- 15,106,962
Net proceeds from issuance of
common stock from
secondary offering................ 1,900 41,909,036 -- -- -- 41,910,936
Issuance of common stock upon
exercise of stock options......... 8 60,448 -- -- -- 60,456
Issuance of stock options to Coast
P.A............................... -- 701,861 -- -- (701,861) --
Retirement of common stock.......... (8) (1,493) -- -- -- (1,501)
Issuance of common stock upon
acquisition....................... 6 99,994 -- -- -- 100,000
Purchase of common stock............ -- -- -- (2,400) -- (2,400)
Undistributed retained earnings
from S corporation................ -- 1,435,477 (1,435,477) -- -- --
Net income for the year ended
December 31, 1997................. -- -- 3,408,882 -- -- 3,408,882
Net income from S corporation
prior to February 11, 1997........ -- 342,929 (342,929) -- -- --
Distributions to stockholders....... -- (654,898) -- -- -- (654,898)
------ ----------- ----------- -------- ----------- -----------
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 stock 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
====== =========== =========== ======== =========== ===========
See Notes to Financial Statements.
23
COAST DENTAL SERVICES, INC.
Return to financial index
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1996 1997 1998
----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................ $ 1,402,964 $ 3,408,882 $ 3,537,444
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of a change in accounting principle............... -- -- 633,813
Depreciation........................................................ 238,504 594,647 1,411,313
Amortization........................................................ 101,141 335,762 523,399
Compensation in the form of common stock............................ 27,674 -- --
Forgiveness of notes receivable from stockholders................... -- 177,898 --
Deferred income tax expense (benefit)............................... -- 176,742 (737,613)
Changes in operating assets and liabilities:
Increase in management fee receivable from Coast P.A.............. (688,257) (1,502,611) (2,817,850)
(Increase) decrease in note receivable from Coast P.A............. (354,568) 224,041 (529,218)
Increase in supplies, inventory and small tools................... (65,250) (693,369) (1,681,683)
Increase in prepaid expenses and other assets..................... (23,774) (241,693) (828,618)
Increase in accounts payable and other accrued expenses........... 1,440,965 685,291 1,739,548
----------- ----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES....................... 2,079,399 3,165,590 1,250,535
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................. (466,119) (3,417,012) (10,620,879)
Acquired assets, including intangible assets.......................... (5,158,586) (7,162,889) (11,084,263)
Purchase of available-for-sale investments............................ -- -- (13,785,320)
Increase in other assets.............................................. (3,059) (156,760) (106,020)
------------ ----------- ------------
NET CASH USED IN INVESTING ACTIVITIES........................... (5,627,764) (10,736,661) (35,596,482)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial offering........................................ -- 16,368,000 --
Proceeds from secondary offering...................................... -- 42,655,000 --
Payment of capitalized costs.......................................... -- (1,854,602) --
Proceeds from exercise of stock options............................... -- 60,459 136,085
Tax benefit relating to exercised stock options....................... -- -- 109,608
Purchase of treasury stock............................................ -- (2,400) (86,349)
Proceeds from issuance of common stock upon acquisition............... -- 100,000 --
Proceeds from long-term debt.......................................... 4,418,813 995,750 2,295,500
Payments on long-term debt............................................ (327,213) (4,182,198) (630,273)
Retirement of notes payable........................................... -- -- (141,400)
Payments on capital leases............................................ (50,383) (111,239) (99,017)
Increase in note receivable stockholders.............................. (52,319) -- --
Distributions to stockholders......................................... (141,146) (654,898) --
----------- ----------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES....................... 3,847,752 53,373,872 1,584,154
----------- ----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ 299,387 45,802,801 (32,761,793)
Cash and cash equivalents at beginning of period........................ 241,403 540,790 46,343,591
----------- ----------- ------------
Cash and cash equivalents at end of period.............................. $ 540,790 $46,343,591 $ 13,581,798
=========== =========== ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid for interest................................................ $ 108,460 $ 157,795 $ 116,970
=========== =========== ============
Cash paid for income taxes............................................ $ -- $ 1,450,000 $ 2,427,200
=========== =========== ============
Non-cash capital lease obligations.................................... $ -- $ 143,343 $ --
=========== =========== ============
Non-cash stock option receivable to Coast P.A......................... $ -- $ 701,861 $ 728,067
=========== =========== ============
See Notes to Financial Statements.
24
COAST DENTAL SERVICES, INC.
Return to financial index
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
Coast Dental Services, Inc. (the "Company"), a Delaware corporation,
provides practice management services to the Coast Florida, P.A. and Coast
Dental Services, P.A. (collectively, the "Florida P.A."), Coast Dental Services
of Georgia, P.C. ("Coast Georgia P.A.) and Coast Dental Services of Tennessee,
P.A. ("Coast Tennessee P.A.") (collectively, the "Coast P.A."). The Company has
entered into a services and support agreement with each Coast P.A. (the
"Services and Support Agreements") whereby the Company provides certain
management support services to the Coast P.A. in return for a management fee.
The Coast P.A. employs its dentists and its dental hygienists and provides all
of the dental services to the patients. As of December 31, 1998, the Company
operated 104 dental centers in Florida, Georgia and Tennessee.
The Company provides administrative and technical support for
professional services rendered by the dental professionals under its Services
and Support Agreements and receives management fees from the Coast P.A. The
Company does not employ dentists and hygienists and, accordingly, "Dental
Center-Staff Salaries" presented on the face of the Statements of Income do not
include the salaries of dentists and hygienists. The fee is equal to a defined
percentage of gross patient revenue, net of refunds and discounts, ranging from
65.0% to 76.0%. The costs incurred by the Coast P.A. include primarily salaries
and benefits of dentists and hygienists, interest and bad debts.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying financial statements have been
prepared on the accrual basis of accounting. The Company does not own any
interests in or control the activities of the Coast P.A. Accordingly, the
financial statements of the Coast P.A. are not consolidated with those of the
Company.
Cash Equivalents. The Company considers all highly liquid investments
with an original maturity of 90 days or less to be cash equivalents.
Available-for-sale Investments. The short-term investments owned by
the Company are comprised of available-for-sale securities. Available-for-sale
securities are stated at fair value with unrealized gains and losses included
in the stockholders' equity. 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, 1998, the
investments are recorded at the fair market value with no unrealized or
realized gains (losses). All of the investments are scheduled to mature during
the year 2000.
Management Fee Receivable. The management fee receivable represents
the indebtedness of the Coast P.A. for services and support fees payable to the
Company in accordance with the Services and Support Agreements. Also, the
Company may, from time to time, advance funds under the Services and Support
Agreements for purposes of funding the payment of the Coast P.A.'s expenses or
the Coast P.A.'s acquisitions of existing dental practices.
Supplies, Inventory and Small Tools. Supplies, inventory and small
tools are stated at the lower of first-in, first-out cost or market.
25
COAST DENTAL SERVICES, INC.
Return to financial index
NOTES TO FINANCIAL STATEMENTS-CONTINUED
Property and Equipment, net. Property and equipment are stated at cost.
Equipment held under capital leases is stated at the present value of minimum
lease payments at the inception of the related leases. Depreciation of property
and equipment is calculated using the straight-line method over the estimated
useful lives of the assets ranging from 5 to 15 years. Equipment held under
capital leases and leasehold improvements are amortized on a straight-line basis
over the estimated useful life of the assets. Effective January 1, 1998, the
Company changed the estimated useful life of the leasehold improvements from
five to ten years as the Company estimates that the lease renewal options will
be exercised and the average lease term will be ten years. The effect of the
change was to lower in depreciation expense in 1998 by $205,120 representing an
increase of approximately $.02 in basic and diluted earnings per share.
When assets are retired or otherwise disposed of, the costs and
related accumulated depreciation are removed from the accounts. The difference
between the net book value of the assets and proceeds from disposition is
recognized as a gain or loss. Routine maintenance and repairs are charged to
expense as incurred, while costs of improvements and renewals are capitalized.
Non-Compete Agreements. Costs incurred in connection with the
non-compete agreements are being amortized over their estimated lives of three
to nine years on a straight line basis.
Dental Service Agreements. Costs of acquisitions in excess of the
estimated fair value of property and equipment and any non-compete agreements
are allocated to the dental services agreement because the Company has
effectively acquired the right to manage the practice for the Coast P.A. The
dental services agreement with the Coast P.A. represents the Company's
exclusive right to operate the Dental Centers during the term of the agreement.
The assigned value of the dental services agreement is amortized using the
straight-line method over its estimated life of twenty-five years.
Deferred Development Costs. Development costs paid to Coast P.A.
beginning in June 1997 related to the expansion of dental offices into new and
existing markets were accounted for as deferred development costs and included
in other assets in the accompanying balance sheet. In 1998, the Company adopted
AICPA Statement of Position 98-5, Reporting on the Costs of Start-Up Activities
("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). The effect of
adopting SOP 98-5 was to decrease net income for 1998 by approximately $1.1
million ($.14 per diluted share). Net income for 1997 would have been
approximately $2.8 million ($.46 per diluted share) on a pro forma basis had the
provisions of SOP 98-5 been applied in 1997.
26
COAST DENTAL SERVICES, INC.
Return to financial index
NOTES TO FINANCIAL STATEMENTS-CONTINUED
The Company adopted SOP 98-5 in the fourth quarter of 1998.
Accordingly, the Company's unaudited interim financial information for the
quarters ended March 31, June 30, and September 30, 1998 have been restated to
reflect the change as of January 1, 1998. The following presents the effects of
the change on the 1998 unaudited interim results of operations:
THREE MONTHS ENDED (UNAUDITED)
-----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998
---------- ---------- -------------
Net income as originally reported ................. $1,317,150 $1,217,184 $1,351,104
Effect of adoption of SOP 98-5..................... 344,347 217,527 215,344
---------- ---------- ----------
Income before cumulative effect of a change
in accounting principle.......................... 972,803 999,657 1,135,760
Cumulative effect of a change in accounting
principle........................................ 633,813 -- --
---------- ---------- ----------
Net income as restated............................. $ 338,990 $ 999,657 $1,135,760
========== ========== ==========
Basic earnings per share:
Net income as originally reported ................. $ .17 $ .16 $ .18
Effect of adoption of SOP 98-5..................... .04 .03 .03
---------- ---------- ----------
Income before cumulative effect of a change
in accounting principle.......................... .13 .13 .15
Cumulative effect of a change in accounting
principle........................................ .08 -- --
---------- ---------- ----------
Net income as restated............................. $ .05 $ .13 $ .15
========== ========== ==========
Diluted earnings per share:
Net income as originally reported ................. $ .17 $ .16 $ .18
Effect of adoption of SOP 98-5..................... .04 .03 .03
---------- ---------- ----------
Income before cumulative effect of a change
in accounting principle.......................... .13 .13 .15
Cumulative effect of a change in accounting
principle........................................ .08 -- --
---------- ---------- ----------
Net income as restated............................. $ .05 $ .13 $ .15
========== ========== ==========
Use of estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimated.
Relationship with the Coast P.A. and the Coast Dentists. The Company
receives fees for services provided to the Coast P.A. under its Services and
Support Agreements, but does not employ dentists or hygienists or control the
practices of the Coast Dentists. The Company's revenue is dependent on revenue
generated by the Coast Dentists and, therefore, effective and continued
performance of the Coast Dentists during the term of the Services and Support
Agreements is essential to the Company's long term success. Under the Services
and Support Agreements, the Company receives a monthly fee from the Coast P.A.
currently ranging from 65.0% to 76.0% of the Dental Centers' gross revenue,
net of refunds and discounts. The Company paid all of the operating and
nonoperating expenses incurred at the Dental Centers, except for the salaries
and benefits of the Coast Dentists and hygienists.
27
COAST DENTAL SERVICES, INC.
Return to financial index
NOTES TO FINANCIAL STATEMENTS-CONTINUED
Stock-Based Compensation. In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("Statement 123"), which is effective
for fiscal years beginning after December 15, 1995. Under Statement 123, the
Company may elect to recognize stock-based compensation expense based on the
fair value of the awards or continue to account for stock-based compensation
under Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued
to Employees" and disclose in the financial statements the effects of Statement
123 as if the recognition provisions were adopted. The Company has not adopted
the recognition provisions of Statement 123. The Company has adopted the
recognition provisions of Statement 123 for the Affiliated Professionals Stock
Option Plan for the Coast P.A. The Company recognizes a stock option receivable
from the Coast P.A. when the Coast P.A. purchases stock options at fair value
and the Coast P.A. recognizes the compensation expense.
Fair Value of Financial Instruments. The estimated fair value of
amounts reported in the financial statements has been determined by using
available market information and appropriate valuation methodologies. The
carrying value of all current assets and current liabilities approximates the
fair value because of their short-term nature. The fair value of long-term debt
approximates its carrying value based on market prices.
Pro Forma Income Taxes. The Company was an S Corporation until
February 11, 1997 and, therefore income taxes were paid by the individual
shareholders. The Company automatically became a C Corporation upon the
consummation of its public offering.
The pro forma income tax adjustment represents the additional
provision for federal and state income taxes at the statutory rate in effect
for the periods presented as if the Company had been treated as a C
Corporation.
The Company is required to use Statement of Financial Accounting
Standards No. 109 ("Statement 109"), Accounting for Income Taxes. Under
Statement 109, the asset and liability method is used in accounting for income
taxes. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
are measured using the current enacted tax rates and laws.
Earnings Per Common Share. Statement of Financial Accounting Standards
No. 128, Earnings per Share ("Statement 128") requires that the primary and
fully diluted earnings per share be replaced by basic and diluted earnings per
share, respectively. The basic calculation computes earnings per share based
only on the weighted average number of shares outstanding as compared to
primary earnings per share which included common stock equivalents. The diluted
earnings per share calculation is computed similarly to fully diluted earnings
per share.
The basic earnings per common share is based on the weighted average
number of common shares outstanding during each period adjusted for actual
shares issued during the period.
The diluted earnings per common share is equal to the basic shares
plus the incremental shares outstanding as if all issued options were exercised
as of the end of the period. The number of incremental shares is determined
using the treasury stock methodology described in Statement 128.
Reclassifications. Certain amounts in the 1997 and 1996 financial
statements have been reclassified to conform to the 1998 presentation.
28
COAST DENTAL SERVICES, INC.
Return to financial index
NOTES TO FINANCIAL STATEMENTS-CONTINUED
NOTE 3 - NET REVENUE
The Company has 40-year evergreen dental services agreements with the
Coast P.A. whereby the Company receives fees for services provided to the Coast
P.A. Net revenue represents the aggregate fees charged to the Coast P.A. under
the agreements during the year. Prior to October 1, 1996, the management fee
was based on revenues earned by the Coast P.A. reduced by certain costs
incurred by the Coast P.A. and a negotiated return to the Coast P.A. Patient
Service Revenue earned at the Dental Centers is recorded by the Coast P.A. at
established rates net of refunds and adjustments. The costs incurred by the
Coast P.A. include primarily dentists and hygienist salaries, see Note 1.
All arrangements for fees to date have been agreed between the principal and
sole owner of the Coast P.A., Dr. Adam Diasti, (who is also a major shareholder
and the President of the Company) and the Chief Executive Officer of the
Company, Terek Diasti and approved by the Audit Committee. The factors
considered in setting those fees included the Company's evaluation of the
services it provides, the costs incurred by the Company in connection with
providing the services and the Company's negotiated return, balanced against
the Coast P.A.'s requirement for a retained amount which ensured its financial
viability, contemplated an anticipated long-term relationship with the Company
and reflected the future business opportunity related thereto.
Only the fees earned by the Company for its services to the Coast P.A.
and the actual expenses of the Company are reflected in the financial statements
of the Company. Neither the Coast P.A. nor any of the amounts retained by the
Coast P.A. are reflected in the financial statements of the Company. Prior to
October 1, 1996, the services and support fee paid by the Coast P.A. to the
Company varied, but averaged 78.5% of the Coast P.A.'s gross revenue for the
entire period. The fee was based on revenues earned by the Coast P.A. reduced by
certain costs incurred by the Coast P.A. and an agreed upon payment to the Coast
P.A. Since October 1, 1996, the Company receives a monthly fee from the Coast
P.A. ranging from 65.0% to 76.0% of the Dental Centers' gross revenue, net of
refunds and discounts. Effective, June 1997, the Company agreed to pay the Coast
P.A. the sum of $50,000 in connection with each internally developed Dental
Center opened as inducement to the Coast P.A. to extend the Services and Support
Agreements as each internally developed Dental Center is opened. Any future
changes to the Services and Support Agreements and the related fees must be
approved in advance by the independent outside directors of the Company's Audit
Committee. See Notes 2 and 12 to the Financial Statements for further
information.
NOTE 4 - ACQUISITIONS AND DEVELOPMENTS
The Company and the Coast P.A. periodically have jointly entered into
asset purchase agreements with existing dental practices. In all cases, the
Coast P.A. acquires the patient lists and any other professional assets and the
Company acquires certain tangible assets, principally the dental equipment and
assumes certain liabilities such as the lease agreement for the facility. The
fair value of the patient lists was determined based upon general market
information received from an independent dental practice transition consultant
regarding traditional dental practice acquisitions. In addition to the purchase
price allocations for tangible assets, there are allocations for identifiable
intangible assets and unidentifiable intangible assets. The identifiable
intangible asset allocation relates to non-compete agreements which are
partially allocated to the Company and partially allocated to the Coast P.A. The
total value of the non-compete agreements is based upon arms-length negotiations
between the sellers and the Company and Coast P.A. as buyers. The value of such
acquired identifiable intangible asset is allocated between the Coast P.A. and
the Company. The non-compete protection acquired by the Company typically
relates to agreements between the selling professional association and its
dentist(s) jointly, and the Company, whereby the selling professional
association and its dentist(s) agree not to
