COAST DENTAL SERVICES INC - 10-Q Quarterly Report

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

FORM 10-Q


(Mark One)
[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarter ended September 30, 2003

		OR

[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from ________ to ________

Commission File No. 000-21501

COAST DENTAL SERVICES, INC.

(Exact Name of Registrant as Specified in Its Charter)


Florida (State or other jurisdiction of incorporation or organization)		59-3136131 (I.R.S. Employer Identification No.)


2502 Rocky Point Drive North, Suite 1000, Tampa, Florida (Address of principal executive offices)		33607 (Zip Code)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]

APPLICABLE ONLY TO CORPORATE ISSUERS. Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Total number of shares of outstanding Common Stock as of November 3, 2003: 2,138,444.

TABLE OF CONTENTS


CONDENSED BALANCE SHEET
CONDENSED STATEMENTS OF OPERATIONS
CONDENSED STATEMENT OF CASH FLOWS
NOTES TO CONDENSED FINANCIAL STATEMENTS
Ex-11.1 Computation of Per Share Earnings (Loss)
Ex-31.1 Section 302 CEO Certification
Ex-31.2 Section 302 CFO Certification
Ex-32.1 Section 906 CEO Certification
Ex-32.2 Section 906 CFO Certification

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

COAST DENTAL SERVICES, INC.
CONDENSED BALANCE SHEET
UNAUDITED


					September 30,			December 31,
					2003			2002

ASSETS
Current assets:
		Cash and cash equivalents			$	3,248,541		$	2,824,966
		Management fee receivable from Coast P.A., non-interest bearing				19,022,252			17,395,559
		Notes receivable from Equity Doctors – current portion				138,047			114,564
		Supplies, inventory and small tools				2,760,787			2,782,037
		Prepaid expenses and other current assets				531,987			353,368
		Income tax refund receivable				241,559			175,332

			Total current assets			25,943,173			23,645,826
Property and equipment, net						12,336,162			13,765,708
Note receivable from Coast P.A., non-interest bearing						229,218			229,218
Notes receivable from Equity Doctors						746,565			851,217
Non-compete agreements, net of accumulated amortization of $935,987 and $841,183, respectively						187,630			282,435
Dental services agreements, net of accumulated amortization of $3,889,334 and $3,484,290, respectively						9,542,845			9,947,889
Other assets						1,566,218			1,803,501

			Total assets		$	50,551.811		$	50,525,794

				LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable				$	2,559,535		$	2,549,386
	Accrued salaries and benefits					1,433,245			1,357,497
	Accrued expenses					1,362,491			2,180,220
	Line of credit					1,743,567			—
	Current maturities of long-term debt and capital leases					52,941			117,925

				Total current liabilities		7,151,780			6,205,028
Long-term debt and capital leases, excluding current maturities						56,071			78,354

			Total liabilities			7,207,851			6,283,382

Commitment and contingencies
Stockholders’ equity:
	Preferred stock, $.001 par value; 2,000,000 shares authorized, None issued					—			—
	Common stock, $.001 par value; 50,000,000 shares authorized, 2,138,444 and 2,091,223 shares issued and outstanding, respectively					2,138			2,091
	Additional paid-in capital					55,397,828			55,165,701
	Retained deficit					(9,462,906	)		(8,384,197	)

						45,937,060			46,783,595
Less: Stock option receivable from Coast P.A., non-interest bearing						(2,541,183	)		(2,541,183	)
			Treasury stock, 11,537 shares, at cost			(51,916	)		—

			Total stockholders’ equity			43,343,961			44,242,412

			Total liabilities and stockholders’ equity		$	50,551,811		$	50,525,794

The accompanying notes are an integral part of these condensed financial statements.

COAST DENTAL SERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED


			Quarter Ended September 30,						Nine Months Ended September 30,

			2003			2002			2003			2002

Net revenue			$	14,569,606		$	14,728,596		$	43,355,633		$	42,539,431

Dental Center expenses:
	Salaries and employee costs			5,453,554			5,131,473			15,486,498			14,835,699
	Dental supplies and lab fees			2,499,261			2,391,493			7,366,050			7,345,813
	Occupancy			2,021,605			1,931,397			5,935,201			5,725,626
	Advertising			1,003,130			1,600,391			2,895,729			3,557,273
	Finance charges			401,173			345,686			1,134,878			832,938
	Training and development			81,286			216,732			765,881			319,085
	Administrative			383,733			375,812			926,216			1,013,284
	Depreciation			752,414			784,622			2,309,437			2,342,856

		Total Dental Center expenses		12,596,156			12,777,606			36,819,890			35,972,574

	Dental Center gross profit			1,973,450			1,950,990			6,535,743			6,566,857
General and administrative expenses				2,200,224			1,922,893			6,750,501			5,418,354
Depreciation and amortization				299,536			348,037			880,374			991,357
Dental Center closings				(169,572	)		1,778,244			(169,572	)		1,971,886

	Operating loss			(356,738	)		(2,098,184	)		(925,560	)		(1,814,750	)
Interest income				26,813			45,291			87,388			117,809
Interest expense				(95,086	)		(9,771	)		(306,764	)		(22,236	)

Loss before income tax				(425,011	)		(2,062,664	)		(1,144,936	)		(1,719,177	)
Income tax benefit				66,227			20,330			66,227			851,297

Net loss			$	(358,784	)	$	(2,042,334	)	$	(1,078,709	)	$	(867,880	)

Basic loss per share:
Net loss			$	(0.17	)		(0.98	)	$	(0.50	)	$	(0.41	)

Diluted loss per share:
Net loss			$	(0.17	)	$	(0.98	)	$	(0.50	)	$	(0.41	)

Weighted average number of shares outstanding:
	Basic			2,138,444			2,091,223			2,138,444			2,091,223

The accompanying notes are an integral part of these condensed financial statements.

COAST DENTAL SERVICES, INC.
CONDENSED STATEMENT OF CASH FLOWS
UNAUDITED


				Nine Month Ended September 30,

				2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss				$	(1,078,709	)	$	(867,880	)
Adjustments to reconcile net loss to net cash provided by operating activities:
		Depreciation			2,689,962			2,743,984
		Amortization			554,265			590,229
		Deferred income tax benefit			(66,227	)		(888,083	)
		Dental Center closings			(169,572	)		1,971,896
		Valuation allowance on cash surrender value-life insurance			—			434,433
		Loss on disposal of equipment and other adjustments			244,424			60,319
		Changes in operating assets and liabilities:
			Increase in management fee receivable from Coast P.A.		(1,626,692	)		(3,863,502	)
			Decrease in supplies, inventory and small tools		21,250			72,089
			Decrease in prepaid expenses and other current assets		3,746			171,609
			Decrease in other assets		51,900			355,957
			(Decrease) increase in accounts payable and accrued expenses		(371,152	)		819,975

		NET CASH PROVIDED BY OPERATING ACTIVITIES			249,449			1,601,026

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures					(1,376,384	)		(660,358	)
Collections on notes receivable from Equity Doctors					81,170			66,083

		NET CASH USED IN INVESTING ACTIVITIES			(1,295,214	)		(542,265	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit					1,743,567			—
Proceeds from exercise of stock options					169,238			—
Purchase of treasury stock					(51,916	)		—
Debt issue costs paid					(180,936	)		—
Payments on long-term debt					(87,577	)		(213,118	)
Payments on capital leases					(123,036	)		(9,069

		NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES			1,469,340			(222,187	)

INCREASE IN CASH AND CASH EQUIVALENTS					423,575			784,574
Cash and cash equivalents at beginning of period					2,824,966			2,545,770

Cash and cash equivalents at end of period				$	3,248,541		$	3,330,344

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
		Interest (paid) collected, net		$	(164,959	)	$	118,187

		Income taxes refunded, net		$	—		$	1,311,388

		Non-cash stock option receivable from Coast P.A.		$	—		$	52,859

		Assets acquired under capital lease financing		$	123,345		$	117,857

ASSET DISPOSITIONS
	Management fee receivable			$	—		$	(164,334	)

	Supplies, inventory and small tools			$	—		$	126,816	)

	Book value of property and equipment disposed			$	—		$	222,405	)

	Notes receivable			$	—		$	517,555

The accompanying notes are an integral part of these condensed financial statements.

COAST DENTAL SERVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2003 and 2002
(Unaudited)

Note 1 — Basis of Presentation

The accompanying Condensed Financial Statements of Coast Dental Services, Inc. (the “Company”) are unaudited and should be read in conjunction with the audited Financial Statements and notes thereto for the year ended December 31, 2002, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

In the opinion of management, all adjustments necessary for a fair presentation of such Condensed Financial Statements have been included. Such adjustments consist only of normal recurring items. Interim results are not necessarily indicative of results for a full year. The Condensed Financial Statements and notes thereto are presented as permitted by the Securities and Exchange Commission and do not contain certain information included in the Company’s annual Financial Statements and notes thereto.

There were no items of other comprehensive income in the periods presented; accordingly, the Company’s comprehensive loss equals net loss for the three and nine months ended September 30, 2003 and 2002.

Note 2 – Interim Period Stock Compensation Disclosures

As of September 30, 2003, the Company has two stock-based employee compensation plans, which are described more fully in the 2002 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2003. The Company accounts for the plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. The following table illustrates the effect on net loss and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation.


		Quarter Ended						Nine Months Ended
		Sept. 30,						Sept. 30,

		2003			2002			2003			2002

Net loss, as reported		$	(358,784	)	$	(2,042,334	)	$	(1,078,709	)	$	(867,880	)
Add: Stock-based employee compensation expense included in reported net loss, net of related income tax effects			—			—			62,936			—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related income tax effects			(22,850	)		(15,441	)		(70,627	)		(32,281	)

Pro forma net loss		$	(381,634	)	$	(2,057,775	)	$	(1,086,400	)	$	(900,161	)

Loss per share:
	Basic—as reported	$	(0.17	)	$	(0.98	)	$	(0.50	)	$	(0.41	)
	Basic—pro forma	$	(0.18	)	$	(0.98	)	$	(0.51	)	$	(0.43	)

COAST DENTAL SERVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2003 and 2002
(Unaudited)

Note 3 – Recently Issued Authoritative Guidance

In April 2002, Statement of Financial Accounting Standards No. 145 (“SFAS 145”), “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”, was issued. This newly issued standard rescinds SFAS 4, “Reporting Gains and Losses from Extinguishment of Debt – an amendment of APB Opinion No. 30”, which required all gains and losses from the extinguishments of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria set forth by APB Opinion 30 will now be used to classify those gains and losses. SFAS 145 also amends SFAS 13 to require that certain lease modifications that have economic affects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. In addition, SFAS 145 amends other existing authoritative pronouncements to make various technical corrections. The Company adopted SFAS 145 on January 1, 2003. Adoption in 2003 did not have a material impact on the Company’s financial statements.

In June 2002, Statement of Financial Accounting Standards No. 146 (“SFAS 146”) “Accounting for Costs Associated with Exit or Disposal Activities” was issued. SFAS 146 supersedes Emerging Issues Task Force (“EITF”) Issue No. 94-3. The principal difference between SFAS 146 and EITF Issue No. 94-3 relates to when an entity can recognize a liability related to exit or disposal activities. SFAS 146 requires that a liability be recognized for a cost associated with an exit or disposal activity when the liability is incurred. EITF Issue No. 94-3 allowed a liability related to an exit or disposal activity to be recognized at the date an entity commits to an exit plan. The provisions of SFAS 146 are effective for all exit or disposal activities initiated after December 31, 2002. The adoption of SFAS 146 by the Company did not have a material effect upon its financial statements.

On December 31, 2002, Statement of Financial Accounting Standards No. 148 (“SFAS 148”) “Accounting for Stock-Based Compensation — Transition and Disclosure” was issued. SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation. The disclosure requirements for annual and interim financial statements are effective beginning in 2003. The Company has not yet determined whether it will change to the fair-value method of accounting for stock-based compensation.

In November 2002, the FASB issued FASB Interpretation 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Direct Guarantees of Indebtedness of Others.” FIN 45 changes the accounting for and the disclosure of guarantees. FIN 45 requires that guarantees meeting the characteristics described in the Interpretation be initially recorded at fair value in contrast to SFAS 5 which requires recording a liability when a loss is probable and reasonably estimable. The disclosure requirements of FIN 45 are effective for financial statements and annual periods ending after December 1, 2002. The initial recognition and initial measurement provisions of FIN 45 are effective on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 by the Company did not have a material effect upon its financial statements.

In January 2003, the FASB issued FASB Interpretation 46 (“FIN 46”), “Consolidation of Variable Interest Entities (an interpretation of ARB No. 51)”. FIN 46 expands the consolidation requirements of ARB No. 51 to include entities subject to a majority of the risk of loss from the variable interest entity’s activities or entities entitled to receive a majority of the variable interest entity’s returns or both. The consolidation requirements of FIN 46 for variable interest entities created after January 31, 2003, apply January 1, 2004 and apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. The disclosure requirements of FIN 46 are effective in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company does not expect the adoption of FIN 46 to have a material effect upon its financial statements.

COAST DENTAL SERVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2003 and 2002
(Unaudited)

In April 2003, Statement of Financial Accounting Standards No. 149 (“SFAS 149”) “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”, was issued which amends FASB Statement No. 133 (“SFAS 133”) “Accounting for Derivative Instruments and Hedging Activities”. SFAS 149 amends SFAS 133 to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires that contracts with similar characteristics be accounted for on a comparable basis. The provisions of SFAS 149 are effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of SFAS 149 by the Company did not have a material effect upon its financial statements.

In May 2003, Statement of Financial Accounting Standards No. 150 (“SFAS 150”) “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” was issued. SFAS 150 requires that certain financial instruments issued in the form of shares that are mandatorily redeemable as well as certain other financial instruments be classified as liabilities in financial statements. The provisions of SFAS 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the f

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