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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-K

(Mark One)

Commission File No. 000-21501

COAST DENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)

(813)-288-1999
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to section 12(g) of the Act:
Common Stock, Par Value $.001 Per Share
(Title of Class)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x       No  o.

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K     o.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant’s definitive Proxy Statement to be used in connection with the Registrant’s 2001 Annual Meeting of Stockholders, which will be filed on or before April 30, 2002, 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 1, 2002, was approximately $2.9 million based upon the closing price of such shares on such date on the NASDAQ Stock Market’s Small Cap Market. As of March 1, 2002, there were 2,091,206 shares of outstanding Common Stock.

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COAST DENTAL SERVICES, INC.
2001 ANNUAL REPORT ON FORM 10-K

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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 Services of Georgia, P.C.”, “Coast Dental Services of Tennessee P.C.” and “Adam Diasti, D.D.S. & Associates, P.C.” refer to the Florida, Georgia, Tennessee and Virginia professional associations, respectively, which employ the dentists and hygienists providing dental services at the Dental Centers pursuant to a services and support agreement with the Company; “Coast P.A.” refers collectively to the Coast Florida P.A., Coast Dental Services, P.A., Coast Dental Services of Georgia, P.C., Coast Dental Services of Tennessee, P.C., Adam Diasti, D.D.S. & Associates, P.C. and any professional association or corporation, with which the Company has entered, or may enter, into a services and support agreement (“Services and Support Agreement”); “internally developed Dental Centers” refers to Dental Centers which are initially opened, developed and managed by the Company pursuant to a Services and Support Agreement with the Coast P.A.; “acquired Dental Centers” refers to Dental Centers resulting from the acquisition of an existing dental facility by the Company, combined with the acquisition by the Coast P.A., of the existing dental practice located at that facility; “Coast Dentists” refers to the licensed dentists employed by the Coast P.A. who provide dental services at the Dental Centers; and “Coast Dental Network” refers collectively to the Dental Centers and the Coast Dentists.

PART I

Item 1. Business

General

     Coast Dental Services, Inc. (the “Company”) is a leading provider of management services and support to general dentistry practices. 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 laws in 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 the practice of dentistry. Coast P.A. employs the dentists and dental hygienists and controls the clinical decision-making at the Dental Centers. The Company obtains its revenue in the form of a service fee for the provision of management services to the Coast P.A. at the Dental Centers. As of December 31, 2001, the Company provided management services to 118 Dental Centers located in Florida, Georgia, Tennessee and Virginia. The Coast P.A. employed 146 Coast Dentists at December 31, 2001 and provided dental services to approximately 700,000 patients during 2001.

Recent Developments

General Update

     During 2001, the Company and the Coast P.A. embarked upon several new initiatives, some of which are described in more detail later in this section, to help return the Company to profitability and to better position the Company if this turnaround is achieved. As noted in previous filings, there is excess capacity in existing Dental Centers, which the Coast P.A. believes it can best utilize by increasing the number of dental professionals in these Dental Centers. During the year, the Coast P.A. has made significant progress toward increasing the number of dental professionals, increasing the number of days each week that Dental Centers serve patients and increasing the number of hours each day that Dental Centers are open. Each of these accomplishments improves the Company’s ability to increase net revenue, leverage the fixed costs associated with each Dental Center and improve profitability. The Company has assisted the Coast P.A. in focusing its advertising approach to attract higher margin fee-for-service and private insurance business to replace the lower margin managed care business it elected to de-emphasize and grow net revenue. In addition to shifting the advertising and marketing approach, the Company has worked with the Coast P.A. on the development and implementation of its own, branded discount plan, Coast Smile Plus. The purpose of this plan is to attract patients that do not have dental insurance and develop a loyalty by offering a discount from full fee-for-service pricing which is comparable to private insurance pricing. As described later in this section,

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the Company and the Coast P.A. have arranged for a national financial institution to provide financing to patients of the Coast P.A. who meet the credit issuers criteria for lending. As also described later in this section, the Company and the Coast P.A. have made significant progress in the rollout of the Dentist Equity Model. In the first two months of 2002, these initiatives have had a favorable impact on the net revenue of the Company due to a marked improvement in the Coast P.A.’s level of productivity. Net revenues for the two months ended February 2002 averaged $4.5 million per month (unaudited) as compared to the average of $3.6 million per month for the comparable period in 2001 or a 23% increase. Earnings before interest, income taxes, depreciation, amortization and dental center closing and impairment charges (EBITDA) for the two months ended February 2002 was $1.0 million (unaudited) compared to $0.3 million for the comparable period in 2001.

Capacity Utilization

     In an effort to utilize its excess capacity, increase gross revenues and improve profitability, commencing in July 2001 the Coast P.A. hired 39 (net) dentists in the second half of 2001, increasing the number of Coast Dentists from 107 at June 30, 2001 to 146 at December 31, 2001, representing an increase of 36%. The average Coast P.A. gross revenues per month has correspondingly increased from approximately $5.1 million in the month of June 2001 to approximately $6.5 million in the month of February 2002, representing an increase of 29%.

     The increase in net revenues to the Company from more dentists along with a change in the payor mix toward higher margin fee-for-service and private insurance business and away from managed care business has also increased the Company’s profitability. As stated previously, EBITDA for the two months ended February 2002 is approximately $1.0 million (unaudited) compared to $0.3 million for the comparable period in 2001. In the period from December 2000 to February 2002, the payor mix has been successfully shifted from 57% managed care to 33% managed care. For the month ended February 28, 2002, 67% of the Coast P.A.’s gross revenues are derived from fee-for-service and private insurance business, up significantly from 43% as of December 2000.

Patient Financing Program

     In late January 2002, a private label, Coast Dental revolving credit program sponsored by a national financial institution became available to patients of the Coast P.A. who meet certain minimum credit standards. The Company believes that this program will increase incremental revenues because it provides an additional payment option to patients of the Coast P.A. who otherwise might avoid or delay the Coast P.A. treatment plan, or accept a lower cost or less effective treatment due to the lack of ability to pay for the preferred treatment at the time the service is rendered. In addition, the Company believes this program will assist the Coast P.A. in reducing its exposure to future patient accounts receivable and help to improve overall cash flow. There are a few basic financing options available to patients at all times, with promotional-type credit deals added several times during the year. In addition, the Company is working with the national financial institution to develop and implement a pre-approved credit program that will reduce patient wait time in the office while credit lines are approved. The early results of this program have been very positive. During the first eight weeks of the program, patients using this financing option have charged approximately $1,000,000 of gross revenue. The average patient transaction utilizing the financing program has been approximately 6.5 times higher than the overall average patient transaction.

Coast Smile Plus Membership and Discount Plan

     The Coast P.A. implemented a membership and discount plan called Coast Smile Plus in 2001. Patients joining the membership plan can access a reduced fee schedule. The pricing of the fee schedule offered to members is discounted from fee-for-service pricing but is competitive with the pricing collected from private insurance payors and higher than pricing from managed care payors. The goal of this membership program is to build loyalty and generate repeat business for the Dental Centers. Also effective February 2002, membership fees and all dental services purchased by Coast Smile Plus members can be charged on the Coast Dental patient financing program. In 2001, this membership and discount program was piloted and memberships were sold passively through point-of-sale marketing in the Dental Centers. Without any external marketing programs, approximately 19,700 memberships were generated in 2001. The Coast P.A. generated $3.3 million in gross revenue from Coast Smile Plus members or 5% of its 2001 gross revenue. In 2002, the Company and the Coast P.A. are implementing an initiative to market the Coast Smile Plus membership and discount plan to large organizations, large employers and traditional distribution channels for supplemental insurance and discount medical programs. The Company is optimistic that this initiative will expand the Coast P.A.’s patient list, further diversify its payor mix with business that has higher margins than managed care payors and generate a new cash flow stream.

Dental Center Closings

     The Company continuously evaluates the performance of its Dental Centers. In the fourth quarter of 2001, the Company closed eight (8) previously acquired Dental Centers that were under-performing, five (5) of which had lease expirations in the near future. In connection with these closures, the Company recognized a non-cash charge of approximately $2.75 million in the fourth quarter of 2001. Prior to the impact of this non-cash charge, these eight (8) Dental Centers, in 2001, had combined gross losses of approximately $365,000. The Company believes that closing these Dental Centers will improve the overall financial performance of the Company in 2002 and beyond while allowing management to focus its efforts on improving the performance at Dental Centers that remain open.

Managed Care Update

     During the latter part of 2000, the Coast P.A. began notifying managed care companies that it would continue to provide service to existing members but would not accept new members to the managed care roster (known as “panels”) in any of its Dental Centers until re-negotiations had occurred. A thorough review of utilization data revealed that the majority of patient visits consisted of managed care patients, yet the fees earned in connection with this business were below that of discounted fee-for-service patients. This resulted in in-depth discussions with each of the managed care companies. In some cases, agreements were reached whereby the panels were reopened. In other situations, agreements could not be reached and the panels remained closed as discussions continued or the contracts were terminated.

     Since December 31, 2000, agreements have been terminated with 11 managed care companies. Two of these companies were more significant to the Coast P.A.’s operation while the remainder were smaller and less significant. The gross revenue lost to the Coast P.A. as a result of these terminations was approximately $13.9 million, which represents approximately $9.3 million in net revenue to the Company. The Company continues to believe that, over time, this lower margin business can be completely replaced with higher margin fee-for-service and indemnity business provided the proper focus is placed on marketing and patient financing programs to attract these types of patients and provide the source of payment they desire. Management believes that net revenue lost from these managed care contracts can be replaced with a smaller number of patients, but recognizes that this replacement will take time, is not assured and has and will continue to represent a risk to revenue, profitability and cash flow of the Company. In 2001, this managed care business began to be replaced as fee-for-service and private insurance gross revenues of Coast P.A. increased approximately $10.5 million (an approximate 23% increase in non-managed care production), which represented a net revenue increase to the Company of approximately $7.0 million.

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Dentist Equity Model

     Due to issues apparent in the dental practice management sector relative to maximizing dentists’ long-term productivity and commitment to the success of such relationships, the Company has structured, with the Coast P.A., a significant change in the overall Dental Center business model. The Coast P.A., with the assistance of the Company, developed a dentist equity model (the “Equity Model”) whereby a dentist has the opportunity to acquire a 25% to 50% ownership interest in a Dental Center and participate in the potential profits of that Dental Center. This opportunity was previously unavailable to a Coast Dentist. The purpose of this change in operating model is to provide affiliated dentists the opportunity to satisfy certain long-term career goals and thereby address the retention and motivational concern that the Coast P.A., and the dental practice management industry in general, is facing. Hygienist retention, while once a point of concern as well, has been mitigated for the Coast P.A. by a change in the compensation structure. Since the date of compensation structure conversion, hygienist retention and productivity has been at an all-time high for the Coast P.A.

     During the third quarter of 2001, the Coast P.A., with the assistance of the Company, began the rollout of the Equity Model. Under the Equity Model, a dentist has the opportunity to acquire up to a 50% ownership interest in a Dental Center and participate in the potential profits of that Dental Center. The dentist acquires an ownership interest in certain of the assets of the Dental Center and finances all or a portion of the purchase price with a secured note payable. The general terms of the notes are seven years at 10% interest with an interest only period designed to provide each selected dentist with a period of time during which the revenues of the Dental Center can be improved and the cost structure can be optimized. The resulting Dental Centers will continue to operate under the existing Services and Support Agreement with the Company. Continued rollout of the Equity Model is dependent upon reaching agreements with selected dentists, and there can be no assurance that any such agreements can be reached. The additional number of Dental Centers that will be affected is unknown and it is uncertain, at this time, what ultimate effect the Equity Model, if implemented, will have on the Company’s overall asset mix, liquidity or performance. If the implementation is successful, the Company expects to improve its liquidity and cash position, in the long term, as well as to create an environment where select dentists with a meaningful ownership interest will have a more significant personal and financial interest in the productivity and success of the Dental Center. Correspondingly, until anticipated growth occurs at these Dental Centers, cash flows of the Company in currently profitable Dental Centers can initially decline. As of December 31, 2001, ten (10) Dental Centers were converted to the Equity Model and, as of March 1, 2002, three (3) additional Dental Centers were converted.

     Through March 1, 2002, three (3) additional Dental Centers have been converted to the Equity Model, increasing the number of Dental Centers operating under the Equity Model to 13. In the seven month period from August 1, 2001 to March 1, 2002, the Company and the Coast P.A. have converted 11% of the Dental Centers to the Equity Model. The Company expects to convert several more Dental Centers to the Equity Model during the remainder of 2002.

     To date, the Company has experienced a favorable impact from the implementation of the Equity Model. The Company’s gross profit percentage for the 13 Dental Centers that have been converted through March 1, 2002 is approximately twice the gross profit percentage of the Company as a whole. This reflects both increases in net revenues and the controlling of variable costs at the Dental Centers.

     During 2001 and through March 1, 2002, the sale of interests in the Dental Centers was structured as a sale of a portion of the tangible and intangible assets of each Dental Center. The Company owns the tangible assets and the Coast P.A. owns the intangible assets. For each interest sold, the Company sold a portion of the Dental Center’s tangible assets to the dentist and a portion to the Coast P.A. The Coast P.A. sold a portion of its intangible Dental Center assets to the dentist. The Coast P.A. and the dentist then contributed their respective tangible and intangible assets to a newly formed professional association.

     During 2001, the Company sold the tangible assets at their net book value, which approximated market value, totaling approximately $833,000 and recognized no gain or loss on the transactions. The Company received proceeds totaling approximately $833,000 in the form of cash ($29,000), notes receivable from dentists (approximately $224,000) and a management fee receivable from the Coast P.A. (approximately $580,000). Subsequently, the Coast P.A. assigned its notes receivable of approximately $700,000 (arising from the dentists for the purchase of the Coast P.A.’s intangible assets) to the Company in exchange for a $700,000 reduction to the management fee receivable from the Coast P.A. Accordingly, the Company is the beneficiary of notes receivable totaling approximately $924,000 from these transactions. The short- term notes receivable totaling approximately $65,000 are at 10% for periods of three to five months and require monthly payments of principal and interest. The long-term portion of the notes receivable totaling $859,000 is at 10% with a term of seven years, with the first year requiring monthly payments of interest only. After the initial year of the term, payments of principal and interest are required monthly.

     From January 1, 2002 through March 1, 2002, the Company sold the tangible assets at their net book value, which approximated market value, totaling approximately $305,000 and recognized no gain or loss on the transactions. The Company received proceeds totaling approximately $305,000 in the form of notes receivable from dentists (approximately $76,000) and a management fee receivable from the Coast P.A. (approximately $229,000). Subsequently, the Coast P.A. assigned its notes receivable of approximately $149,000 (arising from the dentists for the purchase of the Coast P.A.’s intangible assets) to the Company in exchange for an approximate $149,000 reduction to the management fee receivable from the Coast P.A. Accordingly, the Company is the beneficiary of notes receivable totaling approximately $225,000 from these transactions. The short-term notes receivable totaling $22,500 are at 10% for periods of three to five months and require monthly payments of principal and interest. The long-term portion of the notes receivable totaling $202,500 is at 10% with a term of seven years, with the first year requiring monthly payments of interest only. After the initial year of the term, payments of principal and interest are required monthly.

New Nasdaq Small Cap Market Listing

     On July 17, 2001, the Company moved the listing of its common stock from NASDAQ’s National Market and began trading on NASDAQ’s Small Cap Market.

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Potential Recapitalization Abandoned

     Late in 2000, an offer was presented to the Board of Directors to consider a potential recapitalization transaction with a proposed corporate redemption of substantially all of the shares representing the unaffiliated public float. An independent committee of the Board (“independent committee”) was formed to consider the offer. The offer was evaluated and given due consideration by the independent committee. The independent committee hired legal counsel and other advisors and negotiated terms in connection with the offer which, upon completion, would have provided a premium to current market value for these unaffiliated stockholders and would have resulted in the Company going private.

     In late March, 2001, this proposed transaction was abandoned due to difficulties in obtaining financing necessary to consummate the potential transaction. The total cost incurred by the Company was approximately $800,000, approximately $670,000 of which was recorded as an expense to the Company during the first quarter of 2001 (the remainder was reflected in the 2000 financial statements).

Acquisitions and Developments of Dental Centers

     When the Company acquires an existing Dental Center, the Company acquires the assets to the extent permitted by law. Typically, the Company acquires the Dental Center 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 Dental Center’s dentists and hygienists to staff the Dental Center. When the Company internally develops Dental Centers, the Company provides the Dental Center location and the necessary equipment and support staff while the Coast P.A. provides dentists and dental hygienists. The patient lists are the property of the Coast P.A.

     The Company opened 17 internally developed Dental Centers in 1999, none in 2000 and 2 in 2001. These Dental Centers were opened in Florida, Georgia, and Tennessee. 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 $0.9 million in promissory notes and certain assumed liabilities. Additionally in 1999, the Company consolidated one previously acquired Dental Center into an existing Dental Center. The Company did not acquire any new Dental Centers during 2000 or 2001. The Company, did, however, consolidate twelve (12) existing Dental Centers into six (6) Dental Centers during 2000 to take better advantage of market demographics. The Company also relocated one (1) Dental Center during 2000. During 2001, the Company added two (2) internally developed Dental Centers, one in the Atlanta, GA market and one in the Nashville, TN market. During the fourth quarter of 2001, the Company made the decision to close eight (8) previously acquired Dental Centers. In each of these situations, the surrounding market demographics had evolved to the extent that it had become increasingly difficult to effectively attract dental professionals and patients. A non-cash charge of approximately $2.75 million was recognized in the fourth quarter of 2001 for these Dental Center closings to provide for the related asset impairments and remaining lease and facilities commitments. Of the 118 Dental Centers currently managed by the Company, 63 were internally developed and 55 were acquired by the Company.

Services and Operations

     The Company is primarily responsible for the management and administrative functions of its Dental Centers, but does not provide dental care. The Company provides financial, accounting, billing, training, marketing assistance and collection services to 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.

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     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 Company earns a monthly services and support fee based upon a percentage of the gross revenue, net of refunds, adjustments and discounts, of the Dental Center. Dental Center expenses paid by the Company from the services and support fee include all operating and non-operating expenses incurred at the Dental Center except for the salaries and benefits of the Coast Dentists and dental hygienists. The Company’s sole customers are the Coast P.A., each of which are owned, controlled and managed by Dr. Adam Diasti, a major stockholder, director and executive officer of the Company. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 10 “Directors and Executive Officers of the Registrant.” Modifications, amendments or revisions to the Services and Support Agreements are approved by the Audit Committee of the Company’s Board of Directors, which consists of all the independent outside directors of the Company. The Company is dependent on revenue from the Coast P.A. and the loss of compensation received from them pursuant to the Services and Support Agreements would have a material adverse effect on the Company. See Note 2 to the Financial Statements for further information.

     The Company plans to continue to use the current form of its Services and Support Agreements to the extent possible as it enters into new states in the future or into arrangements with other dental practices. However, the terms of future agreements may differ according to market conditions and the statutory or regulatory requirements of the particular state in which the dental practice is located.

Governmental and State Regulations

     The Company’s operations and relationships are subject to a variety of governmental and regulatory requirements relating to the conduct of its business and business corporations in general. The Company believes that it exercises care in an effort to structure its practices and arrangements with dental practices to comply with relevant federal and state law and believes that such arrangements and practices comply in all material respects with all applicable statutes and regulations. The health care industry and dental practices are highly regulated, and there can be no assurance that the regulatory environment in which the Company operates will not change significantly and adversely in the future. In general, regulation of health care providers and companies is increasing.

     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 a corporation 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, Georgia, Tennessee and Virginia, also prohibit non-professional corporations from owning, maintaining or operating an office for the practice of dentistry. These laws have generally been construed to permit arrangements under which the dentists are not employed by or otherwise controlled as to clinical matters by the party supplying facilities and non-professional services. Florida law specifically requires that dentists or their professional corporations maintain complete care, custody and control of all equipment and materials used in the practice of dentistry. The Services and Support Agreements between the Company and the Coast P.A. expressly provide that the Company shall not exercise control over any matters that would violate the requirements of the applicable state law.

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     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. While the Florida Board of Medicine does not have jurisdiction over dentistry, there can be no assurance that the Florida Board of Dentistry will not adopt a similar result.

     Many states, including Florida, Georgia, Tennessee and Virginia, prohibit dentists from using advertising which includes any name other than their own, or from advertising in any manner that is likely to lead a person to believe that a non-dentist is engaged in the practice of dentistry. The Services and Support Agreements provide that all advertising shall conform to these requirements. Florida law also requires all advertising to identify the Florida dentist who assumes total responsibility for the advertisement and may not include the name of a person who is not either actually involved in the practice of dentistry at the advertised location or an owner of the practice being advertised. Georgia law requires that advertising must contain the name of at least one dentist practicing at the location unless the Georgia Board of Dentistry has approved the use of a trade name. Virginia law does not allow the use of a trade name at all.

     These laws have civil and criminal penalties and have been subject to limited judicial and regulatory interpretation. They are enforced by regulatory agencies that are vested with broad discretion in interpreting their meaning. The Company’s agreements and activities have not been examined by federal or state authorities under these laws and regulations. For these reasons, there can be no assurance that review of the Company’s business arrangements or the operation of the Dental Centers will not result in determinations that adversely affect the Company’s operations or that the long-term Services and Support Agreements or certain of its provisions will not be held invalid and unenforceable.

     In addition, these laws and their interpretation vary from state to state. The laws and regulations of certain states into which the Company may seek to expand in the future may require the Company to change the form of relationships entered into with dentists in a manner that restricts the Company’s operations in those states.

     The Company believes that health care regulations will continue to change, and as a result, the Company regularly monitors developments in health care law. The Company expects to modify its agreements and operations from time to time, if necessary, as the business and regulatory environment change. However, there can be no assurance that any such changes will not adversely affect the ability of the Company to operate as it currently does or to remain profitable in doing so.

Competition

     The Company is aware of several other companies that are actively engaged in the consolidation of existing dental practices and providing management services to dental practices, some of which may have longer operating histories than the Company. The Company assumes that additional companies with similar objectives may enter the Company’s markets and compete with the Company. The primary basis of competition between dental practice management companies include, but are not limited to availability and cost of financing growth, extent of working capital, liquidity, the extent of the dental care network, management expertise and experience, sophistication of management information systems, the elements of its operating system, the relative motivation and productivity of affiliated dentists, the availability and profitability of managed care business and practice management, and opportunity for career enhancement agreements.

     The business of providing dental practice management services is highly competitive in each of the markets in which the Dental Centers operate. The primary basis of competition within the dental services industry are price of services, marketing exposure, convenience of location and traffic flow of location, hours of operation, reputation, managed care contracts, quality of care and appearance and usefulness of facility and equipment. Coast Dentists compete with other

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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 in fee-for-service business is partially mitigated by capitation revenue from managed care contracts, which is earned on an equal pro-rata basis over the year, and by the increased percentage of business performed in the markets served outside of Florida. For the years ended December 31, 1999, 2000 and 2001, capitation revenue from managed care contracts represented 22.5%, 24.9% and 16.2%, respectively, of total revenue to the Coast PA. Dental Centers located outside of Florida provided 19.0%, 22.3% and 22.8% of total revenue to the Coast P.A. for the years ended December 31, 1999, 2000 and 2001, respectively. The Company expects that capitation, as a percent of total revenue, will continue to decline in 2002 as a result of the negotiations and terminations of certain managed care contracts as previously discussed. The Company also expects, however, that certain factors will continue to mitigate this seasonality including growth in the markets served outside of Florida, Coast Smile Plus (discount fee plan) membership programs and patient financing programs.

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, 2001, the Company had approximately 585 full-time and part-time employees, of which approximately 63 were employed at the Company’s headquarters and 522 were employed at the Dental Centers. None of the Company’s employees are represented by a collective bargaining agreement. The number of people employed by the Company has declined from the levels maintained in 1999 and 2000. The reduction was part of a cost reduction plan to maintain the proper level of costs associated with the level of revenue achieved.

Item 2. Properties

     The Company presently leases an average of 2,100 square feet of office space for each of the Dental Centers. The typical lease for office space is for a term of approximately five years and generally provides for renewal options for additional years. The Company estimates that the renewal options will be exercised and the average lease term will be ten years. The average rental payments for a leased Dental Center are approximately $3,100 per month. The Company plans to continue to lease rather than purchase space for the Dental Centers to preserve the Company’s available capital.

     The Company leases 10,000 square feet of office space in Tampa, Florida for its corporate headquarters. This lease is for a term of five years and expires January 31, 2003.

     The Company anticipates that it can successfully renew or obtain suitable new leases for its Dental Centers, but there can be no assurance that this will be the case. The Company believes that its leased properties are adequate for the purposes for which they are used and are suitably maintained for such purposes. The Company will enter into new leases when it determines to open new Dental Centers.

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Item 3. Legal Proceedings

     The Company is a party to a number of legal proceedings or other claims arising from the ordinary course of business, including two employee compensation-related matters. With respect to the two employee compensation-related matters, there is potential for class action status and the Company is unable to predict the outcome of the pending suits and claims beyond a range. The ultimate outcome of these particular matters could have a material adverse impact on the financial position and results of operations of the Company. The Company has accrued amounts it believes are appropriate at the present time with respect to its legal proceedings based upon discussions with its legal counsel and the nature and present status of such proceedings. The Company intends to vigorously defend its positions.

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. Effective July 17, 2001, the Company completed a one-for-three reverse split of its common stock and began trading on the NASDAQ Small Cap Market. 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 (note that a one-for-three reverse stock split of the Company’s common stock was effective July 17, 2001 and all information prior to this date has been adjusted to give effect to this reverse stock split):

     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 1, 2002 was $2.80 and there were approximately 28 stockholders of record as of that date. The number of record holders was determined from the records of the Company’s transfer agent and does not include beneficial owners of Common Stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies.

     Except for an S Corporation distribution during 1996, the Company has never paid cash dividends on its Common Stock. The Company presently intends to retain all future earnings for the operation and expansion of its business and, accordingly, the Company does not anticipate that any dividends will be declared or paid on the Common Stock for the

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foreseeable future. In addition, the Company’s existing bank credit facility restricts the Company’s ability to declare or pay cash dividends on its common stock. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon the Company’s financial condition, results of operations, capital requirements and such other factors as the Board of Directors deem relevant.

Item 6. Selected Financial Data

     The following selected financial data with respect to the Company’s statements of income (loss) and comprehensive income (loss) for the years ended December 31, 1997, 1998, 1999, 2000 and 2001 and the balance sheet data as of December 31, 1997, 1998, 1999, 2000 and 2001 are derived from the Financial Statements of the Company which have been audited by Deloitte & Touche LLP, independent auditors. 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.”

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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 63 internally developed and 55 acquired Dental Centers, net of consolidations and closings. 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, 2001, 146 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 incurred by the Dental Centers, with the exception of compensation and benefits to the Coast Dentists and dental hygienists, are expenses of the Company. The services and support fees earned by the Company from the Coast P.A. have historically ranged from 65% to 76% of the Dental Centers’ gross revenue, net of refunds, adjustments 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 have been and may be revised from time to time based upon negotiations between the Company and the Coast P.A. Amendments to the Service and Support Agreements are approved by the Company’s Audit Committee, which is comprised of independent directors. Effective February 1, 1999, the services and support fees were adjusted to 73% of the Dental Centers’ gross revenue. The Audit Committee approved a further adjustment to the services and support fees beginning in January 1, 2000, to 67% of the Dental Centers’ gross revenue. The service and support fee was 67% for the entire year in both 2000 and 2001.

Recent Developments

General Update

     During 2001, the Company and the Coast P.A. embarked upon several new initiatives, some of which are described in more detail later in this section, to help return the Company to profitability and to better position the Company if this turnaround is achieved. As noted in previous filings, there is excess capacity in existing Dental Centers, which the Coast P.A. believes it can best utilize by increasing the number of dental professionals in these Dental Centers. During the year, the Coast P.A. has made significant progress toward increasing the number of dental professionals, increasing the number of days each week that Dental Centers serve patients and increasing the number of hours each day that Dental Centers are open. Each of these accomplishments improves the Company’s ability to increase net revenue, leverage the fixed costs associated with each Dental Center and improve profitability. The Company has assisted the Coast P.A. in focusing its advertising approach to attract higher margin fee-for-service and private insurance business to replace the lower margin managed care business it elected to de-emphasize and grow net revenue. In addition to shifting the advertising and marketing approach, the Company has worked with the Coast P.A. on the development and implementation of its own, branded discount plan, Coast Smile Plus. The purpose of this plan is to attract patients that do not have dental insurance and develop a loyalty by offering a discount from full fee-for-service pricing which is comparable to private insurance pricing. As described later in this section, the Company and the Coast P.A. have arranged for a national financial institution to provide financing to patients of the Coast P.A. who meet the financial institution’s criteria for lending. As also described later in this section, the Company and the Coast P.A. have made significant progress in the rollout of the Dentist Equity Model. In the first two months of 2002, these initiatives have had a favorable impact on the net revenue of the Company due to a marked improvement in the Coast P.A.’s level of productivity. Net revenues for the two months ended February 2002 averaged $4.5 million per month (unaudited) as compared to the average of $3.6 million per month for the comparable period in 2001 or a 23% increase. Earnings before interest, income taxes, depreciation, amortization and dental center closing and impairment charges (EBITDA) for the two months ended February 2002 was $1.0 million (unaudited) compared to ($0.3) million for the comparable period in 2001.

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Capacity Utilization

     In an effort to utilize its excess capacity, increase gross revenues and improve profitability, commencing in July 2001 the Coast P.A. hired 39 (net) dentists in the second half of 2001, increasing the number of Coast Dentists from 107 at June 30, 2001 to 146 at December 31, 2001, representing an increase of 36%. The average Coast P.A. gross revenues per month has correspondingly increased from approximately $5.1 million in the month of June 2001 to approximately $6.5 million in the month of February 2002, representing an increase of 29%.

     The increase in net revenues to the Company from more dentists along with a change in the payor mix toward higher margin fee-for-service and private insurance business and away from managed care business has also increased the Company’s profitability. As stated previously, EBITDA for the two months ended February 2002 is approximately $1.0 million (unaudited) compared to $0.3 million for the comparable period in 2001. In the period from December 2000 to February 2002, the payor mix has been successfully shifted from 57% managed care to 33% managed care. For the month of February 2002, 67% of the Coast P.A.’s gross revenues are derived from fee-for-service and private insurance business, up significantly from 43% as of December 2000.

Patient Financing Program

     In late January 2002, a private label, Coast Dental revolving credit program sponsored by a national financial institution became available to patients of the Coast P.A. who meet certain minimum credit standards. The Company believes that this program will increase incremental revenues because it provides an additional payment option to patients of the Coast P.A. who otherwise might avoid or delay the Coast P.A. treatment plan, or accept a lower cost or less effective treatment due to the lack of ability to pay for the preferred treatment at the time the service is rendered. In addition, the Company believes this program will assist the Coast P.A. in reducing its exposure to future patient accounts receivable and help to improve overall cash flow. There are a few basic financing options available to patients at all times, with promotional-type credit deals added several times during the year. In addition, the Company is working with the national financial institution to develop and implement a pre-approved credit program that will reduce patient wait time in the office while credit lines are approved. The early results of this program have been very positive. During the first eight weeks of the program, patients using this financing option have charged approximately $1,000,000 of gross revenue. The average patient transaction utilizing the financing program has been approximately 6.5 times higher than the overall average patient transaction.

Coast Smile Plus Membership and Discount Plan

     The Coast P.A. implemented a membership and discount plan called Coast Smile Plus in 2001. Patients joining the membership plan can access a reduced fee schedule. The pricing of the fee schedule offered to members is discounted from fee-for-service pricing but is competitive with the pricing collected from private insurance payors and higher than pricing from managed care payors. The goal of this membership program is to build loyalty and generate repeat business for the Dental Centers. Also effective February 2002, membership fees and all dental services purchased by Coast Smile Plus members can be charged on the Coast Dental financing program. In 2001, this membership and discount program was piloted and memberships were sold passively through point-of-sale marketing in the Dental Centers. Without any external marketing programs, approximately 19,700 memberships were generated in 2001. The Coast P.A. generated $3.3 million in gross revenue from Coast Smile Plus members or 5% of its 2001 gross revenue. In 2002, the Company and the Coast P.A. are implementing an initiative to market the Coast Smile Plus membership and discount plan to large organizations, large employers and traditional distribution channels for supplemental insurance and discount medical programs. The Company is optimistic that this initiative will expand the Coast P.A.’s patient list, further diversify its payor mix with business that has higher margins than managed care payors and generate a new cash flow stream.

Dental Center Closings

     The Company continuously evaluates the performance of its Dental Centers. In the fourth quarter of 2001, the Company closed eight (8) previously acquired Dental Centers that were under-performing, five (5) of which had lease expirations in the near future. In connection with these closures, the Company recognized a non-cash charge of approximately $2.75 million in the fourth quarter of 2001. Prior to the impact of this non-cash charge, these eight (8) Dental Centers, in 2001, had combined gross losses of approximately $365,000. The Company believes that closing these Dental Centers will improve the overall financial performance of the Company in 2002 and beyond while allowing management to focus its efforts on improving the performance at Dental Centers that remain open.

Managed Care Update

     During the latter part of 2000, the Coast P.A. began notifying managed care companies that it would continue to provide service to existing members but would not accept new members to the managed care roster (known as “panels”) in any of its Dental Centers until re-negotiations had occurred. A thorough review of utilization data revealed that the majority of patient visits consisted of managed care patients, yet the fees earned in connection with this business were below that of discounted fee-for-service patients. This resulted in in-depth discussions with each of the managed care companies. In some cases, agreements were reached whereby the panels were reopened. In other situations, agreements could not be reached and the panels remained closed as discussions continued or the contracts were terminated.

     Since December 31, 2000, agreements have been terminated with 11 managed care companies. Two of these companies were more significant to the Coast P.A.’s operation while the remainder were smaller and less significant. The gross revenue lost to the Coast P.A. as a result of these terminations was approximately $13.9 million, which represents approximately $9.3 million in net revenue to the Company. The Company continues to believe that, over time, this lower margin business can be completely replaced with higher margin fee-for-service and indemnity business provided the proper focus is placed on marketing and patient financing programs to attract these types of patients and provide the source of payment they desire. Management believes that net revenue lost from these managed care contracts can be replaced with a smaller number of patients, but recognizes that this replacement will take time, is not assured and has and will continue to represent a risk to revenue, profitability and cash flow of the Company. In 2001, this managed care business began to be replaced as fee-for-service and private insurance gross revenues of Coast P.A. increased approximately $10.5 million (an approximate 23% increase in non-managed care production), which represented a net revenue increase to the Company of approximately $7.0 million.

Dentist Equity Model

     Due to issues apparent in the dental practice management sector relative to maximizing dentists’ long-term productivity and commitment to the success of such relationships, the Company has structured, with the Coast P.A., a significant change in the overall Dental Center business model. The Coast P.A., with the assistance of the Company, developed a dentist equity model (the “Equity Model”) whereby a dentist has the opportunity to acquire a 25% to 50% ownership interest in a Dental Center and participate in the potential profits of that Dental Center. This opportunity was previously unavailable to a Coast Dentist. The purpose of this change in operating model is to provide affiliated dentists the opportunity to satisfy certain long-term career goals and thereby address the retention and motivational concern that the Coast P.A., and the dental practice management industry in general, is facing. Hygienist retention, while once a point of

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concern as well, has been mitigated for the Coast P.A. by a change in the compensation structure. Since the date of compensation structure conversion, hygienist retention and productivity has been at an all-time high for the Coast P.A.

     During the third quarter of 2001, the Coast P.A., with the assistance of the Company, began the rollout of the Equity Model. Under the Equity Model, a dentist has the opportunity to acquire up to a 50% ownership interest in a Dental Center and participate in the potential profits of that Dental Center. The dentist acquires an ownership interest in certain of the assets of the Dental Center and finance all or a portion of the purchase price with a secured note payable. The general terms of the notes are seven years at 10% interest with an interest only period designed to provide each selected dentist with a period of time during which the revenues of the Dental Center can be improved and the cost structure can be optimized. The resulting Dental Centers will continue to operate under the existing Services an