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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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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, 1999
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. [ ]
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 Stockholders, which will be filed
on or before April 30, 2000, are incorporated by reference in Part III, Items
10-13 of this Form 10-K. Except with respect to information specifically
incorporated by reference in this Form 10-K, the Proxy Statement is not deemed
to be filed as a part hereof.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 3, 2000, was approximately $8 million based upon the
closing price of such shares on such date on the NASDAQ Stock Market's National
Market. As of March 3, 2000, there were 6,403,683 shares of outstanding Common
Stock.
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COAST DENTAL SERVICES, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business........................................................................ 3
Item 2. Properties...................................................................... 7
Item 3. Legal Proceedings............................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders............................. 7
PART II
Item 5. Market of Registrant's Common Equity and related Stockholder Matters............ 7
Item 6. Selected Financial Data......................................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... 10
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...................... 17
Item 8. Financial Statements and Supplementary Data..................................... 19
Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................... 34
PART III
Item 10. Directors and Officers of the Registrant........................................ 34
Item 11. Executive Compensation.......................................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and Management.................. 34
Item 13. Certain Relationships and Related Transactions.................................. 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 34
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INTRODUCTION
Unless the context otherwise requires, references in this document to
"Coast Dental" or the "Company" refer to Coast Dental Services, Inc. and its
predecessor; "Dental Centers" refer to dental offices managed or to be managed
by the Company pursuant to a services and support agreement; "Coast Florida,
P.A.", "Coast Dental Services, P.A.", "Coast Dental of Georgia, P.C.", "Coast
Dental Services of Tennessee P.C." and "Adam Diasti, D.D.S. & Associates, P.C."
refer to the Florida, Georgia, Tennessee and Virginia professional associations,
respectively, which employ the dentists and hygienists providing dental services
at the Dental Centers pursuant to a services and support agreement with the
Company; "Coast P.A." refers collectively to the Coast Florida P.A., Coast
Dental Services, P.A., Coast Dental of Georgia, P.C., Coast Dental Services of
Tennessee, P.C., Adam Diasti, D.D.S. & Associates, P.C. and any professional
association or corporation, with which the Company has entered, or may enter,
into a services and support agreement ("Services and Support Agreement");
"internally developed Dental Centers" refers to Dental Centers which are
initially opened, developed and managed by the Company pursuant to a Services
and Support Agreement with the Coast P.A.; "acquired Dental Centers" refers to
Dental Centers resulting from the acquisition of an existing dental facility by
the Company, combined with the acquisition by the Coast P.A. of the existing
dental practice located at that facility; "Coast Dentists" refers to the
licensed dentists employed by the Coast P.A. who provide dental services at the
Dental Centers; and "Coast Dental Network" refers collectively to the Dental
Centers and the Coast Dentists.
PART I
ITEM 1. BUSINESS
GENERAL
Coast Dental Services, Inc. (the "Company") was incorporated in August
1992 as Sunshine Health Services, Inc., a Florida corporation, and changed its
name to Coast Dental, Inc. in August 1994. Effective March 31, 1996, Coast
Dental, Inc. was merged into Coast Dental Services, Inc., a Delaware
corporation, for the purpose of reincorporating the Company in the State of
Delaware and changing its corporate name. The Company obtains its revenue from
Coast P.A. for providing management services and support to the general
dentistry practices at the Dental Centers.
As of December 31, 1999, the Company provided management services to
130 Dental Centers located in Florida, Georgia, Tennessee and Virginia. Of the
130 Dental Centers, 61 were internally developed and 69 were acquired by the
Company. As of December 31, 1999, 129 Coast Dentists were employed by the Coast
P.A., serving approximately 700,000 patients.
The Company's goal is to develop a leadership position in the
management of general dentistry practices throughout Florida, Georgia,
Tennessee, Virginia and 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 strategically opportunistic 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 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.
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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 130 Dental Centers currently
managed by the Company, 61 were internally developed and 69 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, 25 in 1998 and
17 in 1999 in Florida, Georgia and Tennessee. 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. During 1999, the Company and the Coast
P.A. added 11 acquired Dental Centers in Virginia. The purchase price of these
acquired Dental Centers was $2.1 million consisting of $1.2 million in cash and
$.9 million in promissory notes and certain assumed liabilities. Additionally in
1999, the Company consolidated one of its acquired Dental Centers into existing
Dental Centers.
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 stockholder, director and executive officer of the Company. See
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Item 10 "Directors and Executive Officers of the Registrant."
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, which consists of all the independent outside directors of
the Company. See Notes 2 and 12 to the Financial Statements for further
information.
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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 stockholders or
members are licensed dentists. Georgia dentists must maintain patient records
that document the course of treatment and may not waive co-payment or bill a
third party for more than the usual fee. The Company does not employ dentists or
dental hygienists and does not exercise control over any prohibited areas. While
Dr. Adam Diasti, a sole stockholder of Coast P.A., is also a major stockholder,
director and officer of the Company, he acts independently when making decisions
in these areas on behalf of the Coast P.A. and the Company has no control over
his decisions in these areas.
Some states, including Florida and Georgia, also prohibit
non-professional corporations from owning, maintaining or operating an office
for the practice of dentistry. These laws have generally been construed to
permit arrangements under which the dentists are not employed by or otherwise
controlled as to clinical matters by the party supplying facilities and
non-professional services. Florida law specifically requires that dentists or
their professional corporations maintain complete care, custody and control of
all equipment and materials used in the practice of dentistry. The Services and
Support Agreements between the Company and the Coast P.A. expressly 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 determination in applying the Florida fee-splitting law,
that under certain circumstances, a management fee based upon a percentage of
revenue will be found by them to be illegal. The Florida Board of Medicine,
however, does not have jurisdiction over dentistry.
Many states, including Florida, prohibit dentists from using
advertising which includes any name other than their own, or from advertising in
any manner that is likely to lead a person to believe that a non-dentist is
engaged in the practice of dentistry. The Services and Support 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.
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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 Coast P.A., which represented 14.2%, 18.8% and 22.5% of total
revenue to the Coast P.A. for the years ended December 31, 1997, 1998 and 1999,
respectively. In addition, the growth of the Company's operations has also
served to mitigate the effects of seasonality.
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, 1999, the Company had approximately 776 full-time
and part-time employees, of which approximately 60 were employed at the
Company's headquarters and 716 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.
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ITEM 2. PROPERTIES
The Company presently leases an average of 2,100 square feet of office
space for each of the Dental Centers. The typical lease for office space is for
a term of approximately five years and generally provides for renewal options
for additional years. The Company estimates that the renewal options will be
exercised and the average lease term will be ten years. The average rental
payments for a leased Dental Center are approximately $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.................. 15
West Central Florida............... 25
Central Florida.................... 24
Northeast Florida.................. 11
Northwest Florida.................. 12
Atlanta, Georgia................... 23
Nashville, Tennessee............... 9
Virginia........................... 11
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings other than routine
litigation arising in the ordinary course of business. The Company does not
believe that the results of such litigation, even if the outcome were
unfavorable to the Company, would have a material effect on its financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Common Stock of the Company is quoted on the National Association
of Securities Dealers Automated Quotation System ("Nasdaq"). The Common Stock of
the Company has been trading publicly under the symbol CDEN on the Nasdaq since
the Company's initial public offering on February 11, 1997. The following table
sets forth the high and low closing sale price of the Company's Common Stock as
reported by Nasdaq for the periods indicated:
YEAR HIGH LOW
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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
1999 First Quarter 10.250 6.031
Second Quarter 7.375 4.500
Third Quarter 5.375 3.063
Fourth Quarter 4.063 2.313
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The bid prices reported for these periods reflect inter-dealer prices,
without retail markup, markdown or commissions, and may not represent actual
transactions.
The closing bid price per share as of March 3, 2000 was $2.063 and
there were approximately 79 stockholders of record as of that date. The number
of record holders was determined from the records of the Company's transfer
agent and does not include beneficial owners of Common Stock whose shares are
held in the names of various securities brokers, dealers and registered clearing
agencies.
Except for an S Corporation distribution (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.
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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, 1995, 1996, 1997, 1998 and
1999 and the balance sheet data as of December 31, 1995, 1996, 1997, 1998 and
1999 are derived from the Financial Statements of the Company which have been
audited by Deloitte & Touche, LLP, independent accountants. The following data
should be read in conjunction with the Financial Statements of the Company and
the related notes thereto and Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DECEMBER 31,
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1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA FOR THE YEAR:
Net Revenue...................................... $3,325 $8,128 $20,035 $34,540 $44,598
Income (loss) before effect of a change
in accounting principle..................... 225 1,403 3,409 4,171 656
Cumulative effect of a change in accounting
principle................................... -- -- -- 634 --
Net Income (loss)................................ 225 1,403 3,409 3,537 656
Pro forma net income (loss)(1)................... 135 856 3,267 3,537 656
Basic Earnings per common share:
Income before cumulative effect of a change in
accounting principle(1)..................... -- -- $.57 $.55 $.10
Cumulative effect of a change in accounting
principle(2)................................ -- -- -- $(.08) --
Net income (loss)(2)............................. -- -- $.57 $.47 $.10
Pro forma net income (loss)(2)................... -- -- $.55 $.41 $.10
Diluted Earnings per common share:
Income before cumulative effect of a change
in accounting principle(2).................. -- -- $.56 $.54 $.10
Cumulative effect of a change in accounting
principles (2)................................... -- -- -- $(.08) --
Net income(loss)(2).............................. -- -- $.56 $.46 $.10
Pro forma net income (loss)(2)................... -- -- $.54 $.46 $.10
Weighted average shares outstanding:
Basic(2)......................................... -- -- 5,935 7,615 6,906
Diluted(2)....................................... -- -- 6,051 7,718 6,906
BALANCE SHEET DATA AT YEAR END:
Total Assets..................................... $1,198 $7,969 $64,836 $71,502 $64,657
Long-term debt including current maturities...... $608 $4,649 $1,495 $2,920 $1,853
(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 1995 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, 1998 and 1999.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
A. OVERVIEW
The Company opened its first Dental Center in May 1992 and since then,
has added 60 internally developed and 69 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, Tennessee and Virginia. As of December 31, 1999, 129 Coast Dentists
were employed by the Coast P.A., serving approximately 700,000 patients. In the
near future, the Company plans to grow by utilizing existing excess capacity.
Once the excess capacity is optimized, the Company expects to expand the Coast
Dental Network in new and existing markets through the addition of internally
developed and strategically opportunistic acquired Dental Centers.
Pursuant to the Services and Support Agreements with the Coast P.A., the
Company provides management services and support to facilitate the development
and growth of Dental Centers. Operating expenses at the Dental Centers, with the
exception of compensation paid to the Coast Dentists and dental hygienists, are
expenses of the Company and are recognized as incurred. The services and support
fees paid to the Company by the Coast P.A. have historically ranged from 65% to
76% of the Dental Centers' gross revenue, net of refunds and discounts. The
Company is dependent upon the future success of the Coast P.A. and the ability
of the Coast P.A. to grow with the Company. The services and support fees
between the parties may be revised from time to time based upon negotiations
between the Audit Committee and the Coast P.A. The Company pays, out of the
services and support fee, all of the operating and non-operating expenses
incurred by the Coast P.A. at the Dental Centers, except for the salaries and
benefits of the Coast Dentists and dental hygienists. For the period June 1,
1997 through January 31, 1999, the Company paid the Coast P.A. the sum of
$50,000 in connection with each internally developed Dental Center it committed
to open, in consideration for the Coast P.A.'s agreement to expand the Services
and Support Agreements to include the new internally developed Dental Centers.
Effective February 1, 1999, the Services and Support Agreements were modified to
discontinue the payment of this fee, and the services and support fees were
adjusted to 73% of the Dental Centers' gross revenue. See Notes 2 and 12 to the
Financial Statements for further information. The Audit Committee approved a
further adjustment to the services and support fees beginning in January 2000,
to 67% in connection with the Coast P.A.s anticipated roll out of a new
compensation plan for Coast Dentists, which will be staged throughout the year.
As a result of the adjustment, the service and support fees are expected to
average between 66% and 72% over the next several years.
RECENT DEVELOPMENTS
Recognizing the changes to its business caused by shifts in the dental
practice management sector and its own growth, the Company recently announced
several operational initiatives aimed at strengthening and improving performance
in 2000 and beyond. The Company believes these steps are crucial to maximizing
long-term shareholder value. First, the Company is curtailing the number of new
Dental Center openings. This reduced growth plan is designed to enable the
Company to fully optimize the opportunities in its existing Dental Centers.
Another strategic decision was made to dramatically reduce the amount spent on
television advertising. The Company is shifting some of the marketing focus
internally to patient and employee relations, internal promotions, and patient
referrals.
The Company has also begun implementing an automated, centralized
appointment confirmation system. This system will enable the Dental Center staff
to more efficiently utilize their time by advantageously applying technology to
confirm patient appointments and reduce appointment cancellations and "no
shows."
The Company's operations team expanded its Regional Vice President
level of management to four (4) and also increased staffing in the recruiting
department to four (4) professional recruiters. The Company believes the
addition of its Regional Vice Presidents will ensure the operations team is able
to more effectively and proactively meet the needs of the Dental Centers.
Likewise, the recruiting staff was enhanced to better handle the anticipated
need for additional affiliated dental professionals.
10
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The Company's affiliated Coast P.A.s have developed in cooperation with
the Company a new professional compensation plan. This plan is designed to
provide incentive based compensation to the dental professionals by aligning
compensation with the performance of the Dental Center. Compensation for all
dentists will be based on individual performance, and for managing dentists,
compensation will also depend, in part, on the financial results of the
individual Dental Center in which the professional performs services. While the
Company believes this form of compensation by the Coast P.A.s should serve to
improve the Company's revenue and bottom line performance in the longer-term,
the Company and the affiliated P.A.s have re-negotiated the management fee in
the short-term to provide the P.A.s with the ability to properly implement this
new plan. The implementation will be staged throughout 2000 and, as such the
management fee has been adjusted to 67% for the year.
IMPORTANT TRENDS AND DATA
The Company took a very significant step beginning in 1998, shifting
from an acquisition model to a development model. At that time, management
determined that it would go in a different direction, and a plan of opening
internally developed Dental Centers from scratch was adopted. The Company has
since placed less emphasis on acquiring Dental Centers. While the ramp-up of
these brand new Dental Centers has been slower than anticipated, which has
negatively impacted its financial performance, management is nonetheless excited
by recent trends. Overall, the Company's acquired Dental Centers have averaged
annualized gross revenue of $550,000 per Dental Center compared to $850,000 for
the Company's mature internally developed Dental Centers (opened for more than
sixty months). Additionally, internally developed Dental Centers open between
two (2) and three (3) years average $500,000 per year in gross revenue;
internally developed Dental Centers open between one (1) and two (2) years
average $370,000 per year in gross revenue and internally developed Dental
Centers open less than one (1) year average $113,000 per year in average gross
revenue. The average annualized gross revenue for Dental Centers open three (3)
years or less is $270,000 per year. Currently, the Company manages 61 internally
developed Dental Centers less than 36 months old which exemplifies the internal
growth opportunity associated with the de novo model with minimal additional
capital investment. The Company believes that as a result of its cost effective
growth, principally through the development model, cash position, and relatively
debt free balance sheet, it is in the financial position to slow down external
growth in 2000, and to achieve long term growth in a more cost effective and
productive manner.
The Company opened nine internally developed Dental Centers in 1997, 25
in 1998 and 17 in 1999 in Florida, Georgia and Tennessee. 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 in years prior to 1999, 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 include the new internally developed Dental Centers. At internally
developed Dental Centers, profitability to the Company has been attained within
the first twelve months after opening. The Company's growth strategy, in
addition to principally focusing on existing Dental Centers, will continue to
include the addition of internally developed Dental Centers and when
strategically opportunistic, acquisitions. Management believes that while the
strategy of focusing on existing and adding internally developed Dental Centers
is expected to result in slightly lower targeted revenue and operating margins
in the short run, it is an effective use of its working capital and provides for
low cost expansion and long-term stockholder value.
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 1997, the additional net revenue earned by the
Company would have been $3.8 million for 1997.
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 1997, the additional net revenue
earned by the Company would have been $9.8 million and $5.2 million for 1997 and
1998, respectively. During 1998, the Company consolidated two of its acquired
Dental Centers into one Dental Center.
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During 1999, the Company and Coast P.A. added 11 acquired Dental
Centers located in Virginia. The purchase price for these acquired Dental
Centers was $2.1 million, consisting primarily of $1.2 million in cash and $.9
million in promissory notes and certain assumed liabilities. On a pro forma
basis, had these acquisitions occurred at the beginning of 1997, the additional
net revenue earned by the Company would have been $0.8 million, $1.0 million and
$0.4 million for 1997, 1998 and 1999, respectively. During 1999, the Company
consolidated one of its acquired Dental Centers into existing Dental Centers.
The effect on net income and earnings per share, had all acquisitions
occurred, on January 1, 1997, would have been insignificant for all periods
presented.
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,
-------------------------
1997 1998 1999
---- ---- ----
Self-pay 36% 31% 33%
HMOs 43 50 55
Private insurers 19 18 12
Medicaid 2 1 0
Total 100% 100% 100%
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,
--------------------------------
1997 1998 1999
----- ----- -----
Net revenue............................................ 100.0% 100.0% 100.0%
----- ----- -----
Dental Center expenses:
Staff salaries.................................... 31.1 32.7 37.6
Dental supplies and lab fees...................... 14.2 14.2 15.7
Advertising....................................... 5.9 5.9 6.6
Rent.............................................. 10.6 12.1 15.2
Depreciation...................................... 2.7 3.6 5.5
Other............................................. 2.2 2.9 2.9
----- ----- -----
Total Dental Center expenses.................... 66.7 71.4 83.5
----- ----- -----
Gross profit.................................... 33.3 28.6 16.5
General and Administrative............................. 9.3 8.8 12.6
Development Costs...................................... -- 5.3 --
Depreciation and amortization.......................... 1.9 2.0 2.9
----- ----- -----
Operating profit.................................. 22.1 12.5 1.0
Interest income (expense).............................. 3.5 4.8 1.3
----- ----- -----
Income before income tax expense....................... 25.6 17.3 2.3
Income tax expense..................................... 8.6 5.2 0.9
----- ----- -----
Income before cumulative effect of a change in
Accounting principle.............................. 17.0 12.1 1.4
Cumulative effect of a change in accounting
Principle......................................... -- 1.9 --
----- ----- -----
Net income............................................. 17.0 10.2 1.4
===== ===== =====
Pro forma income tax expense........................... 0.7 -- --
----- ----- -----
Pro forma net income................................... 16.3% 10.2% 1.4%
===== ===== =====
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YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net Revenue. Net revenue increased 29.1% from $34.5 million for the
year ended December 31, 1998 to $44.6 million for the year ended December 31,
1999. This increase was primarily due to the increase in net revenue
attributable to the 54 comparable Dental Centers (Dental Centers that were open
throughout the periods being compared), the 22 acquired Dental Centers in 1998,
the 25 internally developed Dental Centers in 1998, the 11 acquired Dental
Centers in 1999 (including the one consolidated acquired Dental Center) and the
17 internally developed Dental Centers in 1999. Increases in net revenue are
primarily driven by increases in patient visits. Patient visits increased 35.2%
from 445,945 for the year ended December 31, 1998 to 602,736 for the year ended
December 31, 1999.
Staff Salaries. Staff salaries increased 48.3% from $11.3 million for
the year ended December 31, 1998 to $16.8 million for the year ended December
31, 1999. This increase in staff salaries was primarily caused by an increase in
Dental Center regional management and Dental Center staffing due to the addition
of the 11 acquired and 17 internally developed Dental Centers. In addition, the
second year impact of the 22 acquired and 25 internally developed Dental Centers
opened in 1998 also contributed to the increase. While an internally developed
Dental Center can operate with a relatively limited dental staff in the early
stages of its development, the services of a dentist, dental hygienist, dental
assistants and front desk manager are still necessary. As a result, staff
salaries as a percentage of net revenue will typically be higher in the first
six months of operation until patient visits increase. In addition, for acquired
Dental Centers, staff salaries as a percentage of net revenue will typically be
higher in the first three to six months following an acquisition as the Company
implements the Coast Operating Model to increase productivity and efficiency.
Staff salaries include the compensation paid to regional management and
administrative staff at each Dental Center, including dental assistants, office
managers, sterilization technicians and front desk managers.
Dental Supplies and Lab Fees. Dental supplies and lab fees increased
41.9% from $4.9 million for the year ended December 31, 1998 to $7.0 million for
the year ended December 31, 1999. This increase was caused by the increase in
patient visits and dental services provided at the 130 Dental Centers. Dental
supplies and lab fees as a percent of net revenue will typically be higher in
the first three to six months following an acquisition as the Company implements
the Coast Operating Model to increase productivity and efficiency.
Advertising. Advertising expense increased 43.9% from $2.1 million for
the year ended December 31, 1998 to $3.0 million for the year ended December 31,
1999. This increase was caused primarily by implementation of a more aggressive
advertising program, including television, in markets where internally developed
Dental Centers were open. The Company entered into the television advertising
arena on a test basis during the third quarter of 1998 and on a company-wide
basis during the fourth quarter of 1998. The television campaign remained in
effect during all of 1999.
Rent. Rent expense increased 62.1% from $4.2 million for the year
ended December 31, 1998 to $6.8 million for the year ended December 31, 1999.
This increase was caused primarily by the addition of the 11 acquired and 17
internally developed Dental Centers in 1999, as well as the full year impact of
the 22 acquired and 25 internally developed Dental Centers in 1998.
Depreciation. Depreciation expense at the Dental Centers increased
96.1% from $1.3 million for the year ended December 31, 1998 to $2.5 million for
the year ended December 31, 1999. The increase was primarily associated with the
increase in fixed assets from the 11 acquired and 17 internally developed Dental
Centers and the increased depreciation in year two of the 22 acquired and 25
internally developed Dental centers added during 1998.
Other Expenses. Other expenses increased 35.5% from $1.0 million for
the year ended December 31, 1998 to $1.3 million for the year ended December 31,
1999. This increase was caused primarily by increases in insurance costs, credit
card discounts and other costs associated with the growth of the business
General and Administrative Expenses. General and administrative
expenses increased 84.0% from $3.1 million for the year ended December 31, 1998
to $5.6 million for the year ended December 31, 1999. This increase was caused
primarily by the increase in corporate administrative salaries, professional
fees, rent and insurance costs due to the growth of the Company. In addition,
the Company incurred certain one time charges related to the resignation of
certain officers of the Company, a change in the vacation policy for all
employees and the write-off of costs associated with certain contemplated
transactions which will not be consummated. General and administrative expenses
primarily consist of expenses incurred at the corporate office.
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Development Costs. Development costs decreased $1.8 million for the
year ended December 31, 1999 in comparison to the prior year. This decrease was
caused by the recognition of all such costs in 1998, as per the Company's early
adoption of AICPA Statement of Position No. 98-5, Reporting on the Costs of
Start-Up Activities ("SOP 98-5") effective January 1, 1998. SOP 98-5 requires
all costs associated with the development of internally developed Dental Centers
be expensed as incurred. See Notes 2 and 12 to the Financial Statements for
further information.
Depreciation and amortization. Depreciation and amortization expenses
increased 90.2% from $.7 million for the year ended December 31, 1998 to $1.3
million for the year ended December 31, 1999. This increase was caused primarily
by the expansion of the corporate headquarters infrastructure and the
amortization of Service and Support Agreements and other acquired intangible
assets.
Interest Income, Net. Interest income, net, decreased 63.6% from $1.6
million for the year ended December 31, 1998 to $.6 million for the year ended
December 31, 1999. This decrease was caused primarily by a decrease of the
Company's invested cash balances. This decline was partially offset by a
reduction of interest paid due to the repayment of notes payable issued as part
of the consideration for certain acquisitions.
Income Taxes. Income taxes decreased 78.1% from $1.8 million for the
year ended December 31, 1998 to $.4 million for the year ended December 31,
1999. This decrease was primarily attributable to the reduced level of earnings
by the Company during 1999 as compared to 1998. The effective tax rate increased
from 28.7% for the year ended December 31, 1998 to 37.4% for the year ended
December 31, 1999. The increase was primarily caused by the full year tax impact
of certain permanent differences arriving from an acquisition during the latter
part of 1998.
Cumulative effect of a change in accounting principle. Development costs
paid to Coast P.A. beginning in June 1997 related to the expansion of dental
offices into new and existing markets. These cost had been accounted for as
deferred development costs. In 1998, the Company adopted SOP 98-5, changed its
accounting to charge such costs to expense as incurred, and recorded the
cumulative effect on retained earnings as of January 1, 1998 of approximately
$1.0 million ($.6 million net of tax). No such cumulative effect was required in
1999.
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 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.
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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
corporate status. The Company was an S Corporation until February 11, 1997 and,
therefore, income taxes were paid by the individual stockholders. 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).
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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 Bank of America,
N.A. d/b/a Nations Bank, N.A. f/k/a Barnett Bank of Florida, which provides an
aggregate of $20.0 million for general working capital needs and expansion of
Dental Centers. As of March 3, 2000, the Company had available the entire $20.0
million for borrowing.
The Company has approximately $8.0 million in available-for-sale
investments which are invested in tax-free municipal bonds with effective yields
ranging between 2.2% to 5.4%. 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 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.
During 1999, the company and the Coast P.A. added 11 acquired Dental
Centers in Virginia. The purchase price for these acquired Dental Centers was
$2.1 million, consisting of $1.2 million in cash and $.9 million in promissory
notes and certain assumed liabilities. Had these acquisitions occurred at the
beginning of 1997, the additional net revenue earned by the Company would have
been $0.8 million, $1.0 million and $0.4 million for 1997, 1998 and 1999,
respectively. Additionally during 1999, the Company consolidated one of its
acquired Dental Centers into existing Dental Centers.
The effect on net income and earnings per share, had all acquisitions
occurred on January 1, 1997, would have been insignificant for all periods
presented.
The Company added nine internally developed Dental Centers in 1997, 25
in 1998 and 17 in 1999 in Florida, Georgia and Tennessee, at an average cost of
approximately $225,000, which includes the cost of equipment, leasehold
improvements and working capital. See Notes 2 and 12 to the Financial Statements
for further information.
The cost of an acquired Dental Center is typically based upon a
negotiated percentage of the Dental Center's historical gross revenue. Acquired
Dental Centers typically generate sufficient cash flow to fund their operations.
The Company plans to finance the addition of internally developed and
strategically opportunistic acquired Dental Centers for the foreseeable future
principally through existing cash and expected cash flow from operations.
On March 6, 1998, the Company announced that it had reached an
agreement with Mid Coast Dental Services, Inc., a Virginia corporation ("MCDS")
to provide financing for the development of Dental Centers in Virginia. The
Company utilized a small portion of its cash reserves to build, equip and lease
fully equipped Dental Centers to MCDS. The Company's loans to MCDS were on a
senior secured basis with interest and rentals providing income to the Company.
In exchange for providing financing for the building and acquisition of Dental
Centers, the Company received an option to acquire MCDS beginning on December
31, 1999. The purchase price under the option agreement was to be based on an
agreed upon formula which approximated the fair value of MCDS. Effective April
1, 1999, the Company exercised this option and acquired nine Dental Centers from
MCDS. The total purchase price was $1.4 million, consisting of $.8 million in
cash and $.6 million in promissory notes and certain assumed liabilities. See
Note 8-Related Party Transactions in the Notes to Financial Statements for
further information.
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To date, the Company has experienced no material failures or problems
with its computer systems, computer applications or non-information systems
related to its computer equipment being unable to recognize the two digits 00 as
the year 2000, as opposed to 1900 or any other date related events. The costs
associated with the year 2000 issue have been immaterial. While the Company does
not anticipate any future material problems to arise as a result of the year
2000 issue, it will continue to monitor the situation.
On February 10, 1999, the Company announced that its Board of Directors
authorized the repurchase of up to 500,000 shares of its outstanding common
stock. On March 25, 1999, the Company announced that its Board of Directors
authorized the increase of the previously announced share repurchase program
from 500,000 to 1,500,000 shares. The Company will repurchase for cash these
shares in the open market or in privately negotiated transactions, from time to
time, subject to market conditions. The repurchase program began promptly and
will continue until such time as the Company has acquired all of the shares
authorized for repurchase, unless sooner terminated by the Board of Directors.
No shares will be repurchased from the Company's officers or directors. The
Company has canceled these shares. As of March 3, 2000, the Company has
repurchased 1,331,800 shares for approximately $6.9 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 2001. 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 through
the focus on existing Dental Centers in accordance with the
Company's growth strategy and the impact on short term revenue
and operating margins;
(ii) our liquidity and capital resources;
(iii) our financing opportunities and plans;
(iv) our future performance and operating results;
(v) the change in the Coast P.A. Dentist compensation plan; and
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Investors and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors. The factors that might cause such differences include, among others,
the following:
(i) any material inability to successfully and fully optimize the
opportunities at existing Dental Centers;
(ii) any material inability to successfully identify, consummate
and integrate 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 costs associated with increased growth at existing Dental
Centers 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 and the impact of such
professional association compensation plan;
(ix) any inability to meet or exceed analysts expectations in any
future period;
(x) any inability to achieve additional revenue or earnings from
the 61 internally developed Dental Centers open less than 36
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
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COAST DENTAL SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report..................................................... 20
Balance Sheets................................................................... 21
Statements of Income and Comprehensive Income.................................... 22
Statements of Stockholders' Equity............................................... 23
Statements of Cash Flows......................................................... 24
Notes to Financial Statements.................................................... 25
19
20
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, 1998 and 1999, and the related statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1999. 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, 1998 and 1999 and the results of operations and its cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
Deloitte & Touche, LLP
Certified Public Accountants
Tampa, Florida
March 3, 2000
20
21
COAST DENTAL SERVICES, INC.
BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
1998 1999
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents.................................................. $13,581,798 $ 1,019,618
Available-for-sale investments............................................. 13,785,320 8,126,505
Management fee receivable from Coast P.A................................... 5,235,035 9,864,060
Note receivable from Coast P.A., non-interest bearing...................... 529,218 529,218
Supplies, inventory and small tools........................................ 2,481,552 3,596,614
Prepaid expenses and other assets.......................................... 1,096,871 539,008
Deferred tax asset......................................................... 560,871 --
----------- -----------
Total current assets.................................................... 37,270,665 23,675,023
Property and equipment, net..................................................... 16,297,559 20,657,147
Non-compete agreements, net of amortization $332,235
and $455,708, respectively................................................. 818,440 687,487
Dental services agreements, net of amortization of $619,233
and $1,503,012, respectively............................................... 15,870,936 17,791,326
Other assets.................................................................... 1,244,175 1,846,113
----------- -----------
Total assets............................................................... $71,501,775 $64,657,096
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $2,320,536 $2,105,807
Other accrued expenses..................................................... 1,172,100 1,524,474
Current maturities of debt and capital lease obligations................... 1,284,060 642,029
----------- -----------
Total current liabilities.................................................. 4,776,696 4,272,310
Long-term debt and capital lease obligations, excluding current maturities...... 1,635,703 1,211,086
Deferred tax liability.......................................................... -- 180,092
----------- -----------
Total liabilities.......................................................... 6,412,399 5,663,488
Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares authorized,
none issued............................................................. -- --
Common stock, $.001 par value; 50,000,000 share authorized,
7,621,758 and 6,402,958 shares issued and 7,618,184 and
6,399,384 shares outstanding, respectively.............................. 7,622 6,404
Additional paid-in capital................................................. 59,997,034 54,427,749
Retained earnings.......................................................... 6,603,397 6,195,430
Unrealized gain/(loss) on securities held for sale......................... -- (106,393)
----------- -----------
66,608,053 60,523,190
Less: Stock option receivable from Coast P.A............................... 1,429,928 1,440,833
Treasury stock, 3,574 and 3,574 shares, respectively................. 88,749 88,749
----------- -----------
Total stockholders' equity................................................. 65,089,376 58,993,608
----------- -----------
Total liabilities and stockholders' equity................................. $71,501,775 $64,657,096
=========== ===========
See Notes to Financial Statements.
21
22
COAST DENTAL SERVICES, INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
- ---------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1998 1999
- ---------------------------------------------------------------------------------------------------------------------------
Net Revenue ................................................ $20,034,536 $34,539,837 $44,597,715
Dental Center expenses:
Staff salaries ........................................ 6,228,923 11,302,530 16,762,218
Dental supplies and lab fees .......................... 2,844,118 4,915,558 6,975,182
Advertising ........................................... 1,191,888 2,053,969 2,955,959
Rent .................................................. 2,115,890 4,179,571 6,775,521
Depreciation .......................................... 545,859 1,258,212 2,466,744
Other ................................................. 433,168 950,695 1,288,417
----------- ----------- -----------
Total Dental Center expenses ........................ 13,359,846 24,660,535 37,224,041
----------- ----------- -----------
Gross profit ............................................... 6,674,690 9,879,302 7,373,674
General and administrative expenses ........................ 1,870,847 3,056,477 5,622,786
Development costs .......................................... -- 1,821,515 --
Depreciation and amortization .............................. 384,550 683,950 1,300,690
----------- ----------- -----------
Operating profit ........................................... 4,419,293 4,317,360 450,198
Interest income, net ....................................... 704,807 1,643,754 597,605
----------- ----------- -----------
Income before income taxes ................................. 5,124,100 5,961,114 1,047,803
Income tax expense .................................... 1,715,218 1,789,857 391,478
----------- ----------- -----------
Income before cumulative effect of a change in
accounting principle .................................. 3,408,882 4,171,257 656,325
Cumulative effect of a change in accounting principle,
net of income tax of $382,403 ......................... -- 633,813 --
----------- ----------- -----------
Net income ................................................. 3,408,882 3,537,444 656,325
----------- -----------
Unrealized loss on available-for-sale investments .......... -- -- 106,393
----------- ----------- -----------
Comprehensive income ....................................... 3,408,882 $ 3,537,444 $ 549,932
----------- =========== ===========
Pro forma income tax expenses .............................. 142,021
-----------
Pro forma net income ....................................... $ 3,266,861
===========
Basic earnings per share:
Income before cumulative effect of a change in
accounting principle .................................. $ .57 $ .55 $ .10
Cumulative effect of a change in accounting principle ...... -- (.08) --
=========== =========== ===========
Net income ................................................. $ .57 $ .47 $ .10
=========== =========== ===========
Pro forma net income ....................................... $ .55 $ .47 $ .10
=========== =========== ===========
Diluted earnings per share:
Income before cumulative effect of a change in
accounting principle .................................. $ .56 $ .54 $ .10
Cumulative effect of a change in accounting principle ...... -- (.08) --
=========== =========== ===========
Net income ................................................. $ .56 $ .46 $ .10
=========== =========== ===========
Pro forma net income ....................................... $ .54 $ .46 $ .10
=========== =========== ===========
Weighted average number of shares outstanding:
Basic ................................................. 5,934,701 7,615,324 6,906,163
=========== =========== ===========
Diluted ............................................... 6,051,011 7,718,198 6,906,163
=========== =========== ===========
See Notes to Financial Statements.
22
23
COAST DENTAL SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
UNREALIZED
GAIN/(LOSS)
ON
SECURITIES STOCK
ADDITIONAL RETAINED TREASURY HELD FOR OPTION
COMMON STOCK PAID-IN-CAPITAL EARNINGS STOCK SALE RECEIVABLE
- ---------------------------------------------------------------------------------------------------------------------------------
Balance on December 31, 1996 ............. $ 3,500 $ 25,174 $ 1,435,477 $ -- $ -- $ --
Net proceeds from issuance of common
stock from initial offering ......... 2,200 15,104,762 -- -- -- --
Net proceeds from issuance of common
stock from secondary offering ...... 1,900 41,909,036 -- -- -- --
Issuance of common stock upon exercise
of stock options .................... 8 60,448 -- -- -- --
Issuance of stock options to Coast P.A ... -- 701,861 -- -- -- (701,861)
Retirement of common stock ............... (8) (1,493) -- -- -- --
Issuance of common stock upon
acquisition ......................... 6 99,994 -- -- -- --
Purchase of common stock ................. -- -- -- (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 -- -- --
Net income from S corporation prior to
February 11, 1997 ................... -- 342,929 (342,929) -- -- --
Distributions to stockholders ............ -- (654,898) -- -- -- --
------- ------------ ----------- ----------- --------- -----------
Balance on December 31, 1997 ............. 7,606 59,023,290 3,065,953 (2,400) -- (701,861)
Issuance of common stock upon exercise
of options .......................... 16 136,069 -- -- -- --
Income tax benefit relating to stock
options exercised ................... -- 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 -- -- --
Purchase of common stock ................. -- -- -- (86,349) -- --
------- ------------ ----------- ----------- --------- -----------
Balance on December 31, 1998 ............. 7,622 59,997,034 6,603,397 (88,749) -- (1,429,928)
Issuance of common stock upon exercise
of options .......................... 1 6,127 -- -- -- --
Issuance of stock options to Coast P.A ... -- 10,905 -- -- -- (10,905)
Gain/(loss) on securities held for sale .. -- -- -- -- (106,393) --
Purchase and retirement of common stock... (1,219) (5,586,317) (1,064,292) -- -- --
Net income for the year ended
December 31, 1999 ................... -- -- 656,325 -- -- --
------- ------------ ----------- ----------- --------- -----------
Balance on December 31, 1999 ............. $ 6,404 $ 54,427,749 $ 6,195,430 $ (88,749) $(106,393) $(1,440,833)
======= ============ =========== =========== ========= ===========
- ----------------------------------------------------------------------
TOTAL
STOCKHOLDERS'
EQUITY
- ----------------------------------------------------------------------
Balance on December 31, 1996 ............. $ 1,464,151
Net proceeds from issuance of common
stock from initial offering ......... 15,106,962
Net proceeds from issuance of common
stock from secondary offering ...... 41,910,936
Issuance of common stock upon exercise
of stock options .................... 60,456
Issuance of stock options to Coast P.A ... --
Retirement of common stock ............... (1,501)
Issuance of common stock upon
acquisition ......................... 100,000
Purchase of common stock ................. (2,400)
Undistributed retained earnings from
S corporation ....................... --
Net income for the year ended
December 31, 1997 ................... 3,408,882
Net income from S corporation prior to
February 11, 1997 ................... --
Distributions to stockholders ............ (654,898)
------------
Balance on December 31, 1997 ............. 61,392,588
Issuance of common stock upon exercise
of options .......................... 136,085
Income tax benefit relating to stock
options exercised ................... 109,608
Issuance of stock options to Coast P.A ... --
Net income for the year ended
December 31, 1998 ................... 3,537,444
Purchase of common stock ................. (86,349)
------------
Balance on December 31, 1998 ............. 65,089,376
Issuance of common stock upon exercise
of options .......................... 6,128
Issuance of stock options to Coast P.A ... --
Gain/(loss) on securities held for sale .. (106,393)
Purchase and retirement of common stock... (6,651,828)
Net income for the year ended
December 31, 1999 ................... 656,325
------------
Balance on December 31, 1999 ............. $ 58,993,608
============
See Notes to Financial Statements.
23
24
COAST DENTAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1997 1998 1999
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 3,408,882 $ 3,537,444 $ 656,325
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of a change in accounting principle ...... -- 633,813 --
Depreciation ............................................... 594,647 1,411,313 2,760,182
Amortization ............................................... 335,762 523,399 1,007,252
Other ...................................................... -- -- (148,750)
Forgiveness of notes receivable from stockholders .......... 177,898 -- --
Deferred income tax expense (benefit) ...................... 176,742 (737,613) 740,963
Changes in operating assets and liabilities:
Increase in management receivable from Coast P.A ........... (1,502,611) (2,817,850) (4,629,025)
(Increase) decrease in note receivable from Coast P.A ...... 224,041 (529,218) --
Increase in supplies inventory and small tools ............. (693,369) (1,681,683) (1,115,062)
(Increase) decrease in prepaid expenses and other assets ... (241,693) (828,618) 557,863
Increase in accounts payable and other accrued expenses .... 685,291 1,849,156 137,645
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ...... 3,165,590 1,360,143 (32,607)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ......................................... (3,417,012) (10,620,879) (6,976,021)
Acquired assets, including intangible assets ................. (7,162,889) (11,084,263) (2,791,688)
Purchase (sale) of available-for-sale investments ............ -- (13,785,320) 5,552,422
Increase in other assets ..................................... (156,760) (106,020) (601,939)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES .................... (10,736,661) (35,596,482) (4,817,226)
------------ ------------ ------------
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 6,128
Purchase of treasury stock ................................... (2,400) (86,349) (6,651,828)
Proceeds from issuance of common stock upon acquisition ...... 100,000 -- --
Proceeds from long term debt ................................. 995,750 2,295,500 374,333
Payments on long term debt ................................... (4,182,198) (630,273) (1,359,484)
Retirement of notes payable .................................. (141,400) --
Payments of capital leases ................................... (111,239) (99,017) (81,496)
Distribution to stockholders ................................. (654,898) -- --
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ...... 53,373,872 1,474,546 (7,712,347)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................ 45,802,801 (32,761,793) (12,562,180)
Cash and cash equivalents at beginning of period ............. 540,790 46,343,591 13,581,798
------------ ------------ ------------
Cash and cash equivalents at end of period ................... $ 46,343,591 $ 13,581,798 $ 1,019,618
============ ============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid for interest ....................................... $ 157,795 $ 116,970 $ 183,941
Cash paid for income tax ..................................... $ 1,450,000 $ 2,427,200 $ 540,080
Non-cash capital lease obligations ........................... $ 143,343 $ -- $ --
Non-cash stock option receivable to Coast P.A ................ $ 701,861 $ 728,067 $ 10,905
See Notes to Financial Statements.
24
25
COAST DENTAL SERVICES, INC.
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 of
Georgia, P.C. ("Coast Georgia P.A.), Coast Dental Services of Tennessee, P.C.
("Coast Tennessee P.A.") and Adam Diasti, D.D.S. & Associates, P.C. ("Coast
Virginia 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 services and support fee. The Coast
P.A. employs its dentists and its dental hygienists and provides all of the
dental services to patients. As of December 31, 1999, the Company operated 130
dental centers in Florida, Georgia, Tennessee and Virginia.
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
71% to 73% as of December 31, 1999. 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 tax free municipal bonds with
effective yields ranging from 2.2% to 5.4%. 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, 1999, the
investments are recorded at the fair market value with an unrealized loss of
$171,602. All of the investments are scheduled to mature during the year 2000.
Comprehensive Income. The Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("Statement 130"),
during Fiscal 1998. Statement 130 establishes standards for the reporting and
display of comprehensive income and its components. Comprehensive income is
defined as the change in equity of a business during a period from transactions
and other events and circumstances from non-owner sources. It includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners. Statement 130 requires that the Company's
change in unrealized gains and losses on equity securities available for sale be
included in comprehensive income. The unrealized loss on securities available
for sale is shown net of tax benefit of $65,209 for the year ended December 31,
1999. The adoption of Statement 130 had no impact on the Company's net income or
stockholders' equity in Fiscal 1997 and Fiscal 1998.
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
26
COAST DENTAL SERVICES, INC.
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 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 cost 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.
Software Development Costs. In March 1998, the AICPA issued Statement
of Position No. 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use ("SOP 98-1"). SOP 98-1 states that for software
obtained or developed for internal use, computer software costs that are
incurred in the preliminary project stage should be expensed as incurred. Costs
to develop internal use computer software during the application development
stage should be capitalized under a fixed-asset model, as long as those costs
meet certain predefined characteristics. SOP 98-1 also provides that these
capitalized development costs should be amortized in a systematic and rational
manner over the estimated useful life of the software. Training and maintenance
costs incurred during the post-implementation operating stage should be expensed
as incurred. This statement is effective for financial statement periods ending
after December 15, 1999. The Company accounts for software development costs in
accordance with SOP 98-1.
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"), and 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. Effective January 31, 1999,
the Company and Coast P.A. discontinued