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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

_____________________

FORM 10-K

Commission File No. 000-21501

_____________________

COAST DENTAL SERVICES, INC.

(813)-288-1999

Securities registered pursuant to Section 12(b) of the Act:

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.

     Indicate by check mark whether the registrant is an accelerated filter (as fined in Rule 12b-2 of the Act). Yes o No x.

     The aggregate market value of the voting stock held by non-affiliates of the Registrant on March 1, 2003, was approximately $4.6 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, 2003, there were 2,091,223 shares of outstanding Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant’s definitive Proxy Statement to be used in connection with the Registrant’s 2003 Annual Meeting of Shareholders, which will be filed on or before April 30, 2003, 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.

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COAST DENTAL SERVICES, INC.
2002 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 to which we provide comprehensive business services and support pursuant to services and support agreements; “Coast Florida, P.A.”, “Coast Dental, 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 us; “Coast P.A.” refers collectively to Coast Florida P.A., Coast Dental, 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 we have 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 us pursuant to a Services and Support Agreement with Coast P.A.; “acquired Dental Centers” refers to Dental Centers resulting from the acquisition of an existing dental facility by us, combined with the acquisition by 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. is a leading provider of comprehensive business services and support to general dentistry practices. We were incorporated in August 1992 as Sunshine Health Services, Inc., a Florida corporation, and changed our 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 in the State of Delaware and changing its corporate name. Effective August 30, 2002, we changed our state of incorporation from Delaware to Florida pursuant to a reincorporation proposal approved by our shareholders at the annual meeting held on August 2, 2002.

     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. We obtain our revenue in the form of a service fee from providing comprehensive business services and support to Coast P.A. at the Dental Centers.

     As of December 31, 2002, we provided comprehensive business services and support to 109 Dental Centers located in Florida, Georgia, Tennessee and Virginia. Coast P.A. employed 133 dentists and 114 dental hygienists at December 31, 2002 and provided dental services to approximately 517,000 patients during 2002 and there were approximately 614,000 unique provider visits during 2002.

Recent Developments – Overview

     During 2002 and 2001, Coast Dental and Coast P.A. embarked upon several new initiatives, some of which are described in more detail later in this section, to help return us to profitability and to better position us if this turnaround is achieved. As described in previous filings, there is excess capacity in existing Dental Centers, which Coast P.A. believes it can best utilize by increasing the number of dental professionals in these Dental Centers. During the years 2002 and 2001, Coast P.A. has made 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 our ability to increase net revenue, leverage the fixed costs associated with each Dental Center and improve profitability. We have assisted 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 reduce in scope in late 2000 and grow net revenue. In addition to shifting the advertising and marketing approach, we have worked with 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-

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service pricing which is comparable to private insurance pricing. As described later in this section, Coast Dental and Coast P.A. have arranged for a national financial institution to provide financing to patients of Coast P.A. who meet the credit issuer’s criteria for lending. As also described later in this section, Coast Dental and Coast P.A. have made progress in the rollout of the Dentist Equity Model.

Recent Developments — Self-Tender Offer

     On March 4, 2003, we initiated a self-tender offer (the “Offer”) to purchase all of the outstanding shares of common stock for $4.50 per share. Following completion of the Offer, due to the very small shareholder base and, the infrequent trading activity of our common stock, we intend to delist our common stock from trading on the Nasdaq SmallCap Market and to terminate the registration of our common stock under the Securities Exchange Act of 1934, as amended. If this occurs, we will become a private company and there will be no public market for our common stock. The purpose of the Offer is to provide shareholders with liquidity for the common stock prior to delisting and deregistration for a price that a Special Committee consisting of independent members of the Board of Directors has determined to be fair to Coast Dental’s shareholders other than the Continuing Shareholders (as defined below). Although the Offer is being made to all holders of Coast Dental common stock, Terek Diasti, Chairman of the Board of Directors and Chief Executive Officer of Coast Dental, Adam Diasti, a Director and President of the Company, and the Diasti Family Limited Partnership, (collectively referred to as the “Continuing Shareholders”) who beneficially own approximately 52% of our common stock currently issued and outstanding (including all Company common stock issuable pursuant to currently exercisable stock options) have advised us that they do not intend to tender any of their shares of Coast Dental common stock pursuant to the Offer.

     We plan to finance the Offer through borrowings from the term loan portion of the $4,000,000 Revolving Credit, Term Loan and Security Agreement with Capital Source Finance LLC (“CapitalSource”) which includes a $2,000,000 revolver and a $2,000,000 term loan (the “Term Loan”) and from Coast Dental’s largest shareholder, the Diasti Family Limited Partnership, under an agreement to loan up to $3,400,000 (the “Credit Agreement”). Coast Dental will be the borrower under the Term Loan and the Credit Agreement. We plan to repay the Term Loan and the Credit Agreement when due through internally generated funds.

     The Term Loan provides that CapitalSource will loan us up to $2,000,000 to finance the Offer at an interest rate equal to the prime rate plus 4.75%. The principal of the Term Loan is payable in monthly installments in months seven through twenty-four from the date the funds are borrowed. The Term Loan is secured by a first priority lien on all of our assets and will be guaranteed by the Diasti Family Limited Partnership. We will be required to prepay all or a portion of the Term Loan under certain circumstances. We will be required to meet certain monthly financial covenants for minimum EBITDA (as defined), minimum fixed charge coverage ratio, minimum net leverage, minimum cash collections and minimum liquidity in order to initially borrow and maintain borrowings under the Term Loan. There can be no assurance that we can continue to meet these monthly financial covenants. We are also subject to certain affirmative and negative covenants. Upon borrowing on the Term Loan, we are required to issue warrants to CapitalSource which are immediately exercisable into 1.00% of the Company’s issued and outstanding common stock at a strike price equal to $.01 per Share. We have the option to redeem the warrant upon the conclusion of a successful tender offer.

     The Credit Agreement provides that the Diasti Family Limited Partnership will loan us up to $3,600,000 to finance the Offer at an interest rate of 5.00%. The loan will be due five years from the date the funds are borrowed. The loan is subordinated to the Term Loan and, subject to the prior approval of CapitalSource, will be secured by a second priority lien on all of our assets.

     We do not have any alternative financing arrangements or alternative financing plans in the event it is unable to borrow, for any reason, under the Term Loan or the Credit Agreement.

     As a condition of drawing on the $2 million CapitalSource term loan to finance the Offer, the Diasti Family Limited Partnership and Coast P.A. will guarantee certain of our indebtedness under the $4 million credit facility with CapitalSource.

     We have and will continue to incur substantial costs in connection with the self-tender offer.

Recent Developments — Capacity Utilization

     In an effort to utilize its excess capacity, increase gross revenues and improve profitability, commencing in July 2001, Coast P.A. hired 39 (net) dentists in the second half of 2001, increasing the number of dentists from 107 at June 30, 2001, to 146 at December 31, 2001, representing an increase of 36%. Commencing in July 2001, Coast P.A. hired 15 (net)

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hygienists in the second half of 2001, increasing the number of hygienists from 100 at June 30, 2001 to 115 at December 31, 2001, representing an increase of 15%.

     As of December 31, 2002, Coast P.A. employed 133 dentists or a (net) decrease of 11 dentists over December 31, 2001 reflecting the closing and consolidation of eight (8) Dental Centers and sale of one (1) Dental Center in 2002. As of December 31, 2002, Coast P.A. employed 114 hygienists or a decrease of one (1) hygienist over December 31, 2001.

     Despite the decrease in the number of dentists employed as of December 2002 by Coast P.A., total doctor days for Coast P.A. increased in fiscal year 2002 by 18% from 24,100 to 25,500, reflecting an increase in the number of days the Dental Centers were opened and staffed with dentists. Total hygienist days for Coast P.A. increased in fiscal year 2002 by 20% from 17,300 to 20,800, reflecting an increase in the number of days the Dental Centers were opened and staffed with hygienists.

Recent Developments — Payor Mix

     In the period from December 2000 to December 2002, the payor mix of Coast P.A. has been shifted from 57% managed care to 31% managed care. For the year ended December 31, 2002, 69% of Coast P.A.’s patient revenues were derived from higher margin fee-for-service and private insurance business, up significantly from 43% for the year ended December 2000.

Recent Developments — Patient Financing Program

     In late January 2002, a private label, revolving credit program sponsored by a national financial institution became available to patients of Coast P.A. who meet certain minimum credit standards. We believe that this program will increase incremental revenues because it provides an additional payment option to patients of Coast P.A. who otherwise might avoid or delay dental treatment plans, or accept a lower cost or less effective treatment due to the inability to pay for the preferred treatment at the time the service is rendered. In addition, we believe this program will assist Coast P.A. in reducing its exposure to uncollectible patient accounts receivable and help to improve overall cash flow. There are a few financing options available to patients at all times, with promotional-type financing options available during certain times of the year. This program includes a pre-approved credit program that will reduce patient wait time in the office while credit lines are approved. Our first year results with this program have been positive with patient’s financing approximately $8,600,000 of dental services with Coast P.A. The average patient transaction utilizing the financing program has been approximately 3.75 times higher than the overall average patient transaction.

Recent Developments — 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 4,800 memberships were generated in 2001. Coast P.A. generated $3.3 million in gross revenue from Coast Smile Plus members or 5% of its 2001 gross revenue. In 2002, Coast Dental and Coast P.A. piloted and then withdrew 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. After this pilot, we continue to sell through passive point-of-sale marketing in the Dental Centers. Approximately 8,300 memberships were generated in 2002 and Coast P.A. generated $7.4 million in patient revenue from Coast Smile Plus members or approximately 9% of its 2002 patient revenues. Coast P.A. is optimistic that this membership and discount plan will continue to improve the payor mix.

Recent Developments — Managed Care

     During the latter part of 2000, 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

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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 Coast P.A.’s operation while the remainder were smaller and less significant. The gross revenue lost to 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. Coast P.A. continues to believe that this lower margin business can be replaced over time 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. Coast P.A. believes that revenue lost from these managed care contracts can be replaced over time 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 Coast P.A and consequently, Coast Dental. In 2001 and 2002, Coast P.A. was able to replace some of this lost business. In 2001, Coast P.A. fee-for-service and insurance patient revenues increased approximately $10.5 million (an approximate 23% increase in non-managed care production). In 2002, Coast P.A. fee-for-service and insurance patient revenues increased $19.6 million or 50%. In 2002, Coast P.A. fee-for-service and insurance patient revenues were in excess of $58.5 million and represented 69% of Coast P.A.’s total patient revenues.

Recent Developments — Dentist Equity Model Update

     Due to issues apparent in the dental practice management sector relative to maximizing dentists’ long-term productivity and commitment to the success of such relationship, Coast PA, with our assistance, 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 Coast P.A., and the dental practice management industry in general, is facing.

     During the third quarter of 2001, Coast P.A., with our assistance, began the rollout of the newly developed Dentist Equity Model. These transactions are structured as a sale of intangible and/or tangible assets of each Dental Center. Coast P.A. sells a portion of its intangible Dental Center assets to the dentist acquiring the interest. Coast P.A. and the dentist then contribute their respective tangible and intangible assets to a newly formed professional association. 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 10.0% 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 Equity Doctor Dental Centers continue to operate under the existing Services and Support Agreement with Coast Dental.

     Coast Dental and Coast P.A. consummated the sale of interests in Dental Centers under the Equity Model as follows: ten (10) in 2001 and six (6) in 2002. In fourth quarter 2002, Coast Dental and Coast P.A. divested one Equity Model Dental Center and sold the business and remaining assets to the owner-dentist. In addition, in fourth quarter 2002, Coast Dental, Coast P.A. and four owner-dentists dissolved four of the Equity Model Dental Centers and the dentists remained in the practice and became employees of Coast P.A.

     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 will have on our 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, our cash flows in currently profitable Dental Centers can initially decline.

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     To date, we have experienced a favorable impact from the implementation of the Equity Model. Our gross profit percentage for the eleven (11) Equity Doctor Dental Centers as of December 31, 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.

     See Item 8 — Note 5 to our financial statements for the amount of our assets sold, the proceeds received and the amount of the Equity Doctor Notes Receivable outstanding.

Recent Developments — Dental Center Closings

     Coast Dental and Coast P.A. continuously evaluate the performance of the Dental Centers and dental practices. During 2002 and 2001, decisions were made to close and or consolidate into other locations a total of sixteen (16) Dental Centers and in addition, in 2002, to relocate one Dental Center to a newer and larger facility to support the continued growth of that Dental Center. Locations selected for closure and or consolidation were under-performing and certain of which had lease expirations in the near future. The closings and consolidations and relocations by year were as follows: eight (8) closings and consolidations in 2002 (of which two (2) were in fourth quarter 2002), one (1) relocation in 2002; eight (8) closing and consolidations in 2001– all of which were in fourth quarter 2001.

     We believe that closing these Dental Centers will improve our overall financial performance while allowing management to focus its efforts on improving the performance of the remaining Dental Centers.

Recent Developments — Information Technology Platform

     We are in the early stages of an enhancement in our information technology platform. The new platform is expected to increase efficiencies, lower maintenance costs and provide more timely and comprehensive information to support the Dental Centers. Activities to date have consisted primarily of planning, preliminary technology and software evaluation, and upgrading the telecommunications capabilities and hardware to a private frame relay. We have secured a $1.5 million master lease credit facility from a national lender to finance some of the related hardware and software for this initiative. The majority of the cost of this initiative will be amortized over the lease terms, generally three years, except for certain planning, process change and post-implementation review costs that will be expensed as incurred.

Recent Developments — Training and Development Program

     In June 2002, Coast Dental and Coast P.A. implemented a twelve-month staff training and development program designed to increase the productivity and profitability of the Dental Centers. During 2002, the cost incurred by us for this program was $533,000. Staff training and development costs are expected to be in excess of prior year levels over the first half of 2003 as the new training and development program is continued.

Services and Operations

     We are primarily responsible for the business and administrative functions of the Dental Centers, but do not provide dental care. We provide accounting, information technology, human resource, payroll, training, marketing and collection services for Coast P.A. and employ the Dental Center’s personnel, other than the Dentists and Hygienists. Coast P.A. maintains full control over the dental practices of Coast Dentists, employs Coast Dentists and hygienists and sets standards of care in order to promote the provision of quality dental care. 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.

     We have entered into Services and Support Agreements with Coast P.A. pursuant to which we provide comprehensive business services and support, to the extent allowable by law, for the Dental Centers. As Dental Centers are acquired or internally developed by Coast Dental and 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 our management services under Services and Support Agreements, we earn a monthly services and support fee. Dental Center expenses paid by us from the services and support fee include all operating and non-operating

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expenses incurred at the Dental Center except for the salaries and benefits of Coast Dentists and hygienists. Our sole customers are Coast P.A., each of which are owned, controlled and managed by Adam Diasti, D.D.S., a major stockholder, director and executive officer of Coast Dental. 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. Amendments to the Services and Support Agreements are approved by the Audit Committee of our Board of Directors, which consists of independent directors of Coast Dental. We are dependent on revenue from 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 us. See Notes 1, 4 and 10 to the Financial Statements for further information about the Services and Support Agreement and amendments made in fiscal years 2002 and 2000.

Governmental and State Regulations

     Our operations and relationships are subject to a variety of governmental and regulatory requirements relating to the conduct of our business and business corporations in general. We believe that we exercise care in an effort to structure our 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 we operate 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 or impinge upon the clinical 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, a corporation may employ dentists 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. We do not employ dentists or dental hygienists and do not exercise control over any prohibited areas. While Adam Diasti, D.D.S., the sole stockholder of Coast P.A., is also a major stockholder, director and executive officer of Coast Dental, he acts independently when making decisions in these areas on behalf of Coast P.A. and Coast Dental 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 Coast Dental and Coast P.A. expressly provide that we 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 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.

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     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. Federal or state authorities have not examined the Company’s agreements and activities under these laws and regulations. For these reasons, there can be no assurance that review of our business arrangements or the operation of the Dental Centers will not result in determinations that adversely affect our 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 us to change the form of relationships entered into with dentists in a manner that restricts our operations in those states.

     Congress passed the Health Insurance Portability and Accountability Act, or HIPAA, in 1996. Among other things, HIPAA established several requirements regarding the privacy, security and electronic transmission of health information. The Department of Health and Human Services, or HHS, has issued several regulations. In general, these regulations apply to health care providers, health plans, and health care clearinghouses. Among these requirements, health care providers are required to enter into agreements with their business associates that concern the protection of health information. We are considered under HIPAA to be a business associate of Coast P.A., which is a health care provider.

     Pursuant to HIPAA, HHS issued final privacy regulations establishing comprehensive federal standards relating to the use and disclosure of protected health information. These regulations, among other things, establish limits on the use and release of protected health information, provide for patients’ rights to access, amend, and receive an accounting of the uses and disclosures of protected health information, and require certain safeguards to protect identifiable health information. The federal privacy regulations do not supersede state laws that are more stringent. Thus, we must reconcile both the federal privacy regulations and other state privacy laws that are more stringent than the federal laws. Coast P.A. must be in compliance with the federal privacy regulations by April 14, 2003. We are assisting Coast P.A. in working towards compliance with the federal privacy regulations by that date.

     Like the privacy regulations, the electronic transaction standards are also final. The electronic transaction regulations establish uniform standards relating to data reporting, formatting, and coding that covered entities must use in conducting certain electronic transactions. Upon the compliance date, health care providers and business associates must use these standards when electronically transmitting a covered transaction with health plans or other health care providers. The compliance date for these regulations was October 16, 2002, unless an extension was requested, which automatically extends the compliance date to October 16, 2003. We did file the necessary extension so our compliance date has been extended to October 16, 2003. We have arranged to contract with health care clearinghouses to enable electronic claim on behalf of Coast P.A. to comply with these regulations.

     The HIPAA security regulations were finalized on February 20, 2003. The purpose of the proposed security regulations is to establish a minimum standard for the protection of electronic health information that is stored or transmitted electronically. The regulations provide administrative procedures, physical safeguards, and technical mechanisms that may be implemented to satisfy the regulations. Health care providers are required to comply with the security regulations by April 21, 2005.

     We believe that health care regulations will continue to change, and as a result, we regularly monitors developments in health care law. We expect to modify our 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 our ability to operate as we currently do or to remain profitable in doing so.

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Competition

     We are aware of several other companies that are actively engaged in the consolidation of existing dental practices and providing business services to dental practices, some of which may have longer operating histories than us. We assume that additional companies with similar objectives may enter our markets and compete with us. 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 facilities 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

     We have traditionally experienced our highest volume of patient visits during the first and last quarters of the year and our 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. Dental Centers located outside of Florida provided 24.5%, 22.8%, and 22.3% of total revenue to Coast P.A. for the years ended December 31, 2002, 2001 and 2000, respectively. We also expect that certain factors may mitigate this seasonality including growth in the markets served outside of Florida, Coast Smile Plus (discount fee plan) membership programs and patient financing programs.

     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. For the years ended December 31, 2002, 2001 and 2000, capitation revenue from managed care contracts represented 10.6%, 16.2% and 24.9%, respectively, of total revenue to Coast PA.

Service Marks

     We believe our service marks are important to us. We have registered the trademarks “COAST DENTAL”, “COAST DENTAL and design/logo”, “COAST DENTAL OUR SMILES ARE EVERYWHERE “, “OUR SMILES ARE EVERYWHERE”, “OWN A PRACTICE THAT DOESN’T OWN YOU”, “WE’LL GIVE YOU EVERY REASON TO SMILE” and the Coast Dental logo with the United States Patent and Trademarks Office.

Employees

     As of December 31, 2002, we had approximately 630 full-time and part-time employees, of whom 52 were employed at our headquarters and 578 were employed at the Dental Centers or in regional management. None of our employees are represented by a collective bargaining agreement. The number of people employed by us has increased from the levels maintained in 2001 and 2000. The increase in 2002 was in the Dental Center personnel necessary to accommodate the increased level of business volume per day and the increased number of doctor days and hygienist days at Coast P.A.

Item 2. Properties

     We presently lease 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. We estimate 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. We plan to continue to lease rather than purchase space for the Dental Centers to preserve our available capital.

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     We lease 10,000 square feet of office space in Tampa, Florida for our corporate headquarters. This lease is for a term of three years and expires January 31, 2006.

     We anticipate that we can successfully renew or obtain suitable new leases for our Dental Centers, but there can be no assurance that this will be the case. We believe that our leased properties are adequate for the purposes for which they are used and are suitably maintained for such purposes. We will enter into new leases when we open new Dental Centers.

Item 3. Legal Proceedings

     We are a party to a number of legal and administrative proceedings or other claims arising in the ordinary course of business, including matters related to the dental services provided to patients by Coast P.A. To date, these proceedings have not had a material effect on our financial condition, results of operations or cash flows. However, there can be no assurance that in future periods these proceedings will not have a material adverse effect on our business, financial condition, results of operations or cash flows.

     We previously disclosed in our most recent Form 10-K and Form 10-Q that we are a party to employee related matters two of which are collective action complaints. Settlements have been reached for three such matters with a maximum cost to us totaling $842,000 (including plaintiff’s legal fees and expenses). Through December 31, 2002, payments on these three matters totaling $200,000 have been made and we expect to make the remaining payments in the next two quarters.

     We are a business services company that provides comprehensive business services and support to general dentistry practices and we do not provide or perform dental services. The dental services are provided to patients solely by licensed dentists and dental hygienists employed by Coast P.A. We are named as a party in several professional liability matters brought by patients against Coast P.A. However, we do not expect to have any liability exposure because we do not provide or perform dental services. Furthermore, we have never been found liable in a professional liability lawsuit for dental services provided by a dental professional. However, there can be no assurance that in the future a court of law will not find us liable in a professional liability lawsuit.

     While the outcome of the pending legal and administrative proceedings and other claims cannot be predicted with certainty, management does not expect the pending matters to have a material adverse effect on the financial position, results of operations or cash flows of the Company. We have accrued amounts we believe are appropriate at the present time with respect to the pending and settled legal and administrative proceedings and other claims based upon discussions with legal counsel and the nature and present status of such proceedings. The Company intends to vigorously defend our positions in each of the pending matters.

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Item 4. Submission of Matters to a Vote of Security Holders

     The annual meeting of shareholders was held on August 2, 2002. Each share of Common Stock entitled its holder to one (1) vote on the matters considered by shareholders at the annual meeting. Shareholders present in person, or by proxy, 2,048,430 shares of common stock voted on the matters described below:

	(1)		The shareholders elected Geoffrey Faux to the Board of Directors to hold office until such time as his term expires in 2005 and his successor is elected and qualified or until his earlier resignation, removal from office or death. Mr. Faux received 1,997,589 votes in favor of his re-election and 49,660 shares abstained from voting.
	(2)		The terms of the remaining directors continued following the annual meeting:

	(3)		The shareholders approved a proposal to reincorporate Coast Dental from the State of Delaware to the State of Florida. The proposal received 1,389,470 votes in favor of approval, 35,326 votes against and 3,003 shares abstained from voting.
	(4)		The shareholders approved the proposal to ratify the appointment of Deloitte & Touche LLP as Coast Dental’s independent auditors for the fiscal year 2002. Deloitte & Touche LLP received 2,045,368 votes in favor of their appointment, 2,063 votes against and 999 votes abstained.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Market Information

     The common stock of Coast Dental Services, Inc. is quoted on the National Association of Securities Dealers Automated Quotation System (“NASDAQ”). The common stock of has been trading publicly under the symbol CDEN on the NASDAQ since our initial public offering on February 11, 1997. Effective July 17, 2001, we completed a one-for-three reverse split of our common stock and began trading on the NASDAQ Small Cap Market. The following table sets forth the high and low closing sale price of our common stock as reported by NASDAQ for the periods indicated (note that a one-for-three reverse stock split of our 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 of our common stock as of February 28, 2003 was $4.50 and there were approximately 60 stockholders of record as of that date. The number of record holders was determined from the records of our 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, we have never paid cash dividends on our common stock. We presently intend to retain all future earnings for the operation and expansion of our business and, accordingly, we do not anticipate that any dividends will be declared or paid on the common stock for the foreseeable future. In addition, our credit facility restricts our ability to declare or pay cash dividends on our common stock. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the Board of Directors deem relevant.

Other Information

Reincorporation

     On August 30, 2002, we changed our state of incorporation from Delaware to Florida pursuant to a reincorporation proposal approved by our shareholders at the annual meeting held on August 2, 2002.

Disclosure Regarding Composition of the Audit Committee

     In November 2002, the Board of Directors was expanded from five members to seven members and two independent directors joined the Board – Peter M. Sontag and Richard T. Welch. The composition of the Audit Committee was changed at that time with the members now being Donald R. Millard, Peter M. Sontag and Richard T. Welch with Directors Darrell C. Smith and Geoffrey L. Faux stepping down from the Audit Committee.

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Item 6. Selected Financial Data

     The following selected financial data with respect to our statement of operations and comprehensive income (loss) for the years ended December 31, 2002, 2001, 2000, 1999 and 1998 and the balance sheet data as of December 31, 2002, 2001, 2000, 1999 and 1998 are derived from the Financial Statements of which have been audited by Deloitte & Touche LLP, independent auditors. The following data should be read in conjunction with the Financial Statements and the related Notes to Financial Statements thereto included in Item 8 and with 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

     We opened our first Dental Center in May 1992. As of December 31, 2002, we provide comprehensive business services and support to 109 Dental Centers consisting of 63 internally developed and 46 acquired Dental Centers, net of consolidations and closings. We derive our revenue through fees earned from Coast P.A. for providing comprehensive business services and support at the Dental Centers, located in Florida, Georgia, Tennessee and Virginia. As of December 31, 2002, 133 Coast Dentists and 114 Hygienists were employed by Coast P.A., serving approximately 517,000 patients and there were approximately 614,000 unique provider visits during 2002. Coast P.A. and Coast Dental plans to grow by utilizing existing excess capacity. Once the excess capacity is optimized, Coast P.A. and Coast Dental expect to expand the Coast Dental Network in new and existing markets through the addition of internally developed and strategically opportunistic acquired Dental Centers.

     Relationship with Coast P.A. The entities comprising Coast P.A. are all owned by a related party — Adam Diasti, D.D.S., (who is a Director, President and a majority stockholder of Coast Dental). We have 40-year evergreen dental services agreements (Service and Support Agreements) with each entity comprising Coast P.A. whereby we receive fees for services and support provided to dental practices operated by Coast P.A.

     Coast P.A. employs dentists and dental hygienists and provides all of the dental services to patients. As employer of dentists and dental hygienists, Coast P.A. incurs the cost of dentist and hygienist compensation, benefits, and certain other expenses. Pursuant to the Services and Support Agreements, we earn a service and support fee from Coast P.A. to provide comprehensive business services and support to each Dental Center. In providing these comprehensive business services and support to the Dental Centers, we incur all of the remaining operating expenses incurred by the Dental Centers including employee costs for assistants and office staff, dental supplies and lab fees, occupancy, advertising and Dental Center administrative costs. We do not employ dentists and hygienists and, accordingly, “Dental Center - Salaries and benefits” presented on the Statement of Operations does not include the salaries and benefits of dentists and hygienists. In addition, we acquire the property and equipment, leases the facilities and improves the facilities in order to operate the Dental Centers.

     Dependence on Coast P.A. We receive fees for services and support provided to Coast P.A. under the Services and Support Agreements, but do not employ dentists or hygienists or control the dental practices of Coast P.A. Our net revenue is dependent on gross patient revenue generated by Coast P.A. and, therefore, effective and continued performance of Coast P.A. and its dentists and hygienists during the term of the Services and Support Agreements is essential to our long term success.

     Services and Support Agreement with Coast P.A. We have 40-year evergreen dental services agreements (Services and Support Agreements) with each entity comprising Coast P.A. whereby we receive fees for services and support provided to Coast P.A. Net revenue represents the aggregate fees charged to Coast P.A. under the agreements during the year. Gross patient revenue earned by Coast P.A. at its dental practices is at established rates, net of refunds, adjustments and discounts. The costs incurred by Coast P.A. include primarily dentist and hygienist salaries and benefits. The service and support fee arrangements have been agreed to between the principal and sole owner of Coast P.A., Adam Diasti, D.D.S., (who is a Director, President and a majority stockholder of Coast Dental), and the Chairman of the Board and Chief Executive Officer of Coast Dental, Terek Diasti. The services and support fee agreements and any amendments thereto are approved by the Audit Committee, which is comprised of independent directors. The factors considered in setting those fees, which reflect the fair market value of our services and support, included our evaluation of the services it provides, the costs incurred by us in connection with providing the services and our negotiated return, balanced against Coast P.A.’s requirement for a retained amount which ensures its financial viability, contemplation of a long-term relationship with us and the future business opportunity related thereto.

     Only the service fees earned by us for services and support to Coast P.A. and our actual expenses are reflected in our financial statements. Neither the expenses of Coast P.A. nor any of the patient gross revenues earned by Coast P.A. are reflected in the financial statements.

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     Historically, the service and support fee was based on a percent of the gross patient revenues of Coast P.A. (net of refunds, discounts, and adjustments and inclusive of capitation revenues). Effective February 1, 1999, the service and support fee became 73% of Dental Center gross revenue and effective January 1, 2000, the service and support fee became 67% of Dental Center gross revenue, with an allowable range of 66% to 72%. The percentage was unchanged in 2001, and through May 31, 2002.

     Effective June 1, 2002, Coast Dental and Coast P.A. amended the Services and Support Agreement to change the methodology for determining the monthly services and support fee earned and to provide for Coast P.A. to grant us a secured interest in Coast P.A.’s trade accounts receivable for payment of services and support fees. These changes were precipitated by the favorable impact on financial performance of Dental Centers converted to the recently implemented Equity Model, which model Coast Dental and Coast P.A. believe provides the Equity Doctor and Coast P.A. an incentive for improving overall financial performance of each Dental Center. This amendment incorporates the financial performance of each Dental Center in the determination of the services and support fee earned by us. The Audit Committee of the Board of Directors approved the amendment to the Services and Support Agreement.

     Effective June 1, 2002, the Services and Support fee earned by us for each Dental Center is based on a combination of the actual costs of services provided and the financial performance of the Dental Centers. As compensation for its services and support of the Dental Centers, we earn a two-part monthly services and support fee based on: 1) the actual direct and indirect expenses incurred in providing the services and support to the Dental Centers (including employee costs, supplies, advertising, occupancy, and Dental Center administrative costs); and 2) the financial performance of the Dental Centers. The performance-based portion of the fee is set at 90% of the excess of net dental services revenue over direct and indirect Dental Center operating expenses. Effective October 1, 2002, Coast Dental and Coast P.A. amended the Services and Support Agreement to calculate the performance-based portion of the service and support fee on the aggregate financial performance of all Dental Centers and not on the stand-alone financial performance of each Dental Center. The Audit Committee of the Board of Directors approved this amendment to the Services and Support Agreement.

     Expansion through Acquisitions — Acquisitions made with Coast P.A. Coast Dental and Coast P.A. in prior years have jointly entered into asset purchase agreements with existing dental practices. Coast P.A. acquired the patient lists and any other professional assets and we acquired certain tangible assets, principally the dental equipment, and assumed certain liabilities such as the lease agreement for the facility. The fair value of the patient lists was determined based upon general market information received from an independent dental practice transition consultant regarding traditional dental practice acquisitions. In addition to the purchase price allocations for tangible assets, there are allocations for identifiable intangible assets and non-identifiable intangible assets. The identifiable intangible assets allocation was to non-compete agreements, which are partially allocated to us and partially allocated to Coast P.A.

     The purchase price allocation to Coast P.A. was limited to the value of the patient files and an amount representing the estimated value of Coast P.A.’s right to prohibit the selling professional association and its dentist(s) from competing in the dental business within the specified area surrounding the acquired Dental Center. After a determination of the fair value of the tangible assets and identifiable intangible assets acquired, the remaining purchase price representing non-identifiable intangible assets was allocated to Coast Dental and Coast P.A. (as the value of the Dental Service Agreements (i.e. the Services and Support Agreements) attributable to the Dental Center).

Recent Developments – Overview

     During 2002 and 2001, Coast Dental and Coast P.A. embarked upon several new initiatives, some of which are described in more detail later in this section, to help return us to profitability and to better position us if this turnaround is achieved. As described in previous filings, there is excess capacity in existing Dental Centers, which Coast P.A. believes it can best utilize by increasing the number of dental professionals in these Dental Centers. During the years 2002 and 2001, Coast P.A. has made 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 our ability to increase net revenue, leverage the fixed costs associated with each Dental Center and improve profitability. We have assisted 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 reduce in scope in late 2000 and grow net revenue. In addition to shifting the advertising and marketing approach, we have worked with 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-

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service pricing