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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

Commission File No. 000-21501

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(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 [  ] .

     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 [  ].

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

     The aggregate market value of the common stock held by non-affiliates of the Registrant on June 30, 2003, the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $5.3 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, 2004, there were 2,139,110 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Certain specifically designated portions of the Registrant’s definitive Proxy Statement to be used in connection with the Registrant’s 2004 Annual Meeting of Shareholders, which is expected to be filed on or before April 29, 2004, are incorporated by reference in Part III, Items 10-14 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.
2003 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

 

Forward Looking Statements

     This Form 10-K annual report contains statements which are “forward-looking statements.” The words “expect,” “believe,” “goal,” “plan,” “intend,” “estimate” and similar expressions and variations thereof, and discussions of strategy or intentions, are intended to specifically identify forward-looking statements. Forward-looking statements appear in a number of places in this Form 10-K and in other places, particularly, “Recent Developments”, “Business” “Properties”, “Legal Proceedings”, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers which are inherently uncertain. Investors and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors including those set forth in the “Risk Factors” section of this Form 10-K. We undertake no obligation to publicly update or revise the forward-looking statements made in this Form 10-K to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events.

 

PART I

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 and professional corporations, 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 Services and Support Agreements (“Services and Support Agreements”); “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 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.

Recent Developments

Decision to Terminate our Public Company Status

     We incur substantial costs to maintain our public company status. In addition, the costs associated with maintaining our public company status have increased in recent years in the areas of auditing fees, board fees and insurance premiums. Such costs were approximately $725,000 for the year ended December 31, 2003 and the current annualized run rate for these costs is approximately $825,000 per year. We expect certain of these costs to increase in 2004 and beyond in the areas of board fees, auditing fees and Sarbanes-Oxley Section 404 internal controls compliance and attestation costs. We estimate these costs will range from $875,000 to $975,000 in 2004 and from $1,000,000 to 1,115,000 in 2005. These expenses do not include the salaries and time of our employees who are required to devote considerable attention to our public company reporting and compliance obligations.

     Our common stock is registered under the Securities Exchange Act of 1934 (the “Exchange Act”) and as a result we are considered to be a public company. On March 24, 2004 we issued a press release announcing we will seek to terminate our status as a public company by deregistering from the Exchange Act and we filed a current report on Form 8-K with the Securities and Exchange Commission which contains a copy of the press release. Previously, in connection with our self-tender offer in March 2003, our Board of Directors determined that it was in the best interests of us and our shareholders to terminate our status as a public company.

     As described in more detail in the “Update on Recent Initiatives - Evaluation of Our Public Company Status by the Board of Directors and Decision to Terminate Our Public Company Status” and “Risk Factors – Our Board of Directors has decided to terminate our public company status and seek to deregister our common stock from reporting under the Securities Exchange Act of 1934”; the independent members of the Company’s board of directors decided to terminate our public company status, after among other things, considering the disadvantages of being a public company, including the impact on the Company’s cost structure, significantly outweighed the potential advantages of being a public company.

     When we terminate our public company status and are delisted from the Nasdaq SmallCap Market, it is likely that our shareholders will not be able to liquidate their shares of common stock as readily as they could have on the Nasdaq SmallCap Market. Our common stock might be traded on the “pink sheets,” an electronic quotation service for over-the-counter securities, to the extent a market maker decides to make a market in our shares, but there can be no assurance that this would occur. There is generally significantly less liquidity and greater volatility on the “pink sheets” as compared to the Nasdaq SmallCap Market. If our common stock is traded on the “pink sheets”, investors would likely find it more difficult to acquire, dispose of or obtain accurate quotations for our common stock, and our ability to sell equity securities and to raise capital, could be impaired. There can be no assurance that an active trading market for our common stock would ever develop on the “pink sheets.” The “pink sheets” quotation service and “pink sheets” traded companies are not regulated by the Securities and Exchange Commission.

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Cost Reduction and Cost Containment Initiatives

     In January 2004, the Company and Coast P.A. began the implementation a comprehensive set of cost reduction and cost containment initiatives. We began to realize a 5% savings in labor costs in February 2004 and several of the cost reduction and cost containment initiatives are expected to begin yielding significant savings over the next few months. For the full year 2004, we estimate that our cost savings could be as much as approximately $3 million, or 5% of total operating expenses, if these initiatives are successful. However, there can be no assurance that these cost reduction and cost containment initiatives will be successful or that we will attain the anticipated cost savings.

The cost reduction and cost containment efforts include the following initiatives:

•		Reducing staffing at the Dental Centers and the corporate office;
•		Reducing and better management of overtime and temporary labor costs;
•		Expanding the preferred dental lab vendor program;
•		Shifting our emphasis to more effective and less costly marketing and advertising programs;
•		Shifting focus and reducing the cost of training and development programs;
•		Changing to a lower cost telecommunications and data transmission model;
•		Implementing programs to reduce repair and maintenance costs; and
•		Implementing a suite of internally developed management information systems reporting tools which provide daily monitoring and exception reporting of key operating and financial metrics.

     We have not reported net income for a full fiscal year since 1999. As a result of these cost reduction and cost containment initiatives, we are optimistic we can reduce our cost structure and achieve profitability in 2004; however there can be no assurance we will become profitable.

Item 1. Business

General

     Coast Dental Services, Inc. (hereinafter “Coast Dental,” “Company,” “we,” “our” or “us”) 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. In 2002, we changed our state of incorporation from Delaware to Florida.

     The dental professional associations and corporations we provide services and support to (collectively “Coast P.A.”) are owned solely by our President, Dental Director and Director, Adam Diasti, D.D.S., a licensed dentist. 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 services and support fee from providing comprehensive business services and support to Coast P.A. at the Dental Centers pursuant to Services and Support Agreements.

     As of December 31, 2003, we provided comprehensive business services and support to 109 Dental Centers located in Florida, Georgia, Tennessee and Virginia.

     Coast P.A. employed 150 dentists and 111 dental hygienists at December 31, 2003 and provided dental services to approximately 487,000 patients during 2003 and there were approximately 599,000 unique provider visits during 2003.

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Update on Recent Initiatives

Overview

     In fiscal year ended December 31, 2003 our revenues were $56.4 million and we had a net loss of $3.0 million. We have not reported net income since 1999. Over the past three years, 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 we are able to return to profitability. 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 2003, 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 growing its revenues by focusing its advertising approach to attract higher margin fee-for-service and private insurance business to replace the lower margin managed care business Coast P.A. elected to reduce in scope in late 2000. In addition to shifting the advertising and marketing approach, we have assisted Coast P.A. with 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 and providing pricing that 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 implementing the Dentist Equity Model.

     Evaluation of Our Public Company Status by the Board of Directors and Decision to Terminate Our Public Company Status

     Our common stock is registered under the Securities Exchange Act of 1934 (the “Exchange Act”) and as a result we are considered to be a public company. On March 24, 2004, we issued a press release announcing we will seek to terminate our status as a public company by deregistering from the Exchange Act and we filed a current report on Form 8-K with the Securities and Exchange Commission which contains a copy of the press release. Previously, in connection with our self-tender offer in March 2003, our Board of Directors determined that it was in the best interests of us and our shareholders to terminate our status as a public company. The significant factors that were considered at the time included:

	•		the considerable costs associated with remaining a public company including legal, auditing, accounting and other expenses;
	•		the significant amount of time expended by management in connection with meeting our public company obligations;
	•		the lack of liquidity due to low trading volume of our stock;
	•		the unlikelihood of an active trading market due to the limited public float and small shareholder base;
	•		the lack of analyst coverage;
	•		the difficulty in attracting institutional interest;
	•		the competitive disadvantages due to public disclosure of sensitive information;
	•		the unfavorability of our sector; and
	•		the difficulty of utilizing the public equity capital markets as a source of financing due to the limited market for our shares.

     Our Board of Directors has continued to examine, analyze and evaluate whether remaining a public company warrants the significant costs and expenses and loss of operational productivity related to the regulatory burdens of being a public company. Likewise, our Board of Directors also continued to examine, analyze, and evaluate the potential benefits of being a public company to us and our shareholders. Our Board of Directors determined that the disadvantages of being a public company significantly outweighed the potential advantages of remaining a public company and concluded that it is in the best interests of us and our shareholders to deregister from the Exchange Act so that we can become a private company. The four independent members of our Board of Directors voted unanimously to approve deregistration. Directors Terek Diasti and Adam Diasti abstained from voting on the matter because they are the beneficial owners of a majority of our shares. Management has been directed by the independent directors to file a Form 15 with the Securities and Exchange Commission at the close of business on April 7, 2004 seeking to deregister our shares of common stock from the Exchange Act. This will provide additional time for our shares to be bought or sold on the Nasdaq SmallCap Market because our stock will be delisted from the Nasdaq SmallCap Market at the time the Form 15 is filed with the Securities and Exchange Commission.

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     Costs associated with maintaining our public company status have increased in recent years in the areas of auditing fees, board fees and insurance premiums. Such costs in 2003 were approximately $725,000 for the year ended December 31, 2003 and the current annualized run rate for these costs is approximately $825,000 per year. We expect certain of these costs to increase in 2004 and beyond in the areas of board fees, auditing fees and Sarbanes-Oxley Section 404 internal controls compliance and attestation costs. We estimate these costs will range from $875,000 to $975,000 in 2004 and from $1,000,000 to $1,115,000 in 2005. These expenses do not include the salaries and time of our employees who are required to devote considerable attention to our public company reporting and compliance obligations. Certain of these costs would continue after we deregister from the Exchange Act and delist from the Nasdaq SmallCap Market, if our shares are traded on the “Pink Sheets” quotation system. The continuing costs could include stock transfer agent fees, audit fees and directors and officers insurance premiums, as well as the costs associated with providing company information to market makers and broker-dealers. We estimate that the continuing costs would be approximately $350,000 per year (including the cost of an independent audit of our financial statements in order to maintain our ability to obtain external debt financing, and not for “Pink Sheets” reporting and disclosure). Accordingly, we estimate we could save approximately $525,000 over the current annualized run rate of $875,000. We estimate we could save approximately $575,000 to $700,000 over the projected 2004 and 2005 annualized costs as we will avoid the Sarbanes-Oxley Section 404 internal controls compliance and attestation costs.

     We stated previously in our self-tender offer documents filed with the Securities and Exchange Commission and provided to shareholders that even if we did not complete the self-tender offer or enter into a second-step transaction with our controlling shareholders, we would seek to deregister from the Exchange Act and delist from the Nasdaq SmallCap Market if we were eligible to do so. Since we have less than 300 holders of record, we are currently eligible to deregister and terminate our public company status. Our obligation to file periodic reports with the Securities and Exchange Commission, including quarterly and annual reports containing our financial statements, would be suspended upon the filing of the Form 15 with the Securities and Exchange Commission. There may no longer be any public information regarding the Company after the deregistration. In addition, upon filing of the Form 15 with the Securities and Exchange Commission, our common stock will be delisted and no longer be traded on the Nasdaq SmallCap Market. The price of our common stock could suffer an immediate and significant decline as a result of this decision to deregister and delist.

     When we are delisted from the Nasdaq SmallCap Market, it is likely that our shareholders will not be able to liquidate their shares of common stock as readily as they could have on the Nasdaq SmallCap Market. Our common stock might be traded on the “pink sheets,” an electronic quotation service for over-the-counter securities, to the extent a market maker decides to make a market in our shares, but there can be no assurance that this would occur. There is generally significantly less liquidity and greater volatility on the “pink sheets” as compared to the Nasdaq SmallCap Market. If our common stock is traded on the “pink sheets”, investors would likely find it more difficult to acquire, dispose of or obtain accurate quotations for our common stock, and our ability to sell equity securities and to raise capital, could be impaired. There can be no assurance that an active trading market for our common stock would ever develop on the “pink sheets.” The “pink sheets” quotation service and “pink sheets” traded companies are not regulated by the Securities and Exchange Commission. Furthermore, unlike Nasdaq listed companies, “pink sheets” traded companies do not have any corporate governance standards or similar requirements so we would not be required to have independent directors, an independent audit committee, an independent compensation committee, code of conduct or seek shareholder approval for certain actions or be subject to Sarbanes-Oxley compliance matters such as certification of financial statements, prohibitions against personal loans, code of ethics, audit committee approval of related party transactions or an independent audit committee. In addition, any public sales of our shares by our shareholders will become subject to the “penny stock” regulations of the Securities and Exchange Commission unless there is an exemption available. The “penny stock” regulations impose restrictions on broker-dealers which could make it very difficult for our shareholders to sell their shares. While we believe that there is currently an exemption available as a result of our operating history and revenue level, there can be no assurance that an exemption will be available.

Self-Tender Offer

     On March 4, 2003, we initiated a self-tender offer to purchase all of the outstanding shares of our common stock for $4.50 per share. The self-tender offer expired on April 14, 2003. A total of 51 shareholders tendered 11,537 shares by the expiration date. The Company accepted for purchase and payment, all of the shares that were validly tendered for a total purchase price of approximately $52,000. After the self-tender offer was announced, the Company received two unsolicited offers for the purchase of the Company. Our board of directors rejected both of these unsolicited offers.

     We incurred approximately $715,000 in costs and expenses in connection with the self-tender offer.

5

Payor Mix Update

     In the period from December 2000 to December 2003, the payor mix of Coast P.A. has been shifted from 57% managed care to 27% managed care. For the year ended December 31, 2003, 63% 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.

Patient Financing Program Update

     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, 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. Our results with this program have been positive with patient’s financing approximately 9% of dental services with Coast P.A. in the program’s first year (2002) and 11% of their dental services in the second year of the program (2003). The average patient transaction utilizing the financing program has been approximately 3.75 times higher than the overall average patient transaction. In 2003, we made available a sub-prime financing program for patients of Coast, P.A., with lower credit scores. Both of the patient financing programs are non-recourse to Coast P.A.

Coast Smile Plus Membership and Discount Plan Update

     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, Coast P.A. continues to sell through passive point-of-sale marketing in the Dental Centers. Approximately 7,800 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. Approximately 8,100 memberships were generated in 2003 and Coast P.A. generated $9.6 million in patient revenue from Coast Smile Plus members or approximately 11% of its 2003 gross patient revenues. Coast P.A is optimistic that this membership and discount plan will continue to improve the payor mix.

Managed Care Update

     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 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. in year 2001 as a result of these terminations was approximately $13.9 million, which represented 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 traditional insurance business, provided the proper focus is placed on marketing and patient financing programs to attract these 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,

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2002 and 2003, Coast P.A. was able to replace some of this lost business. In 2001, Coast P.A. fee-for-service and traditional insurance patient revenues increased approximately $10.5 million (an approximate 23% increase in non-managed care business). In 2002, Coast P.A. fee-for-service and traditional insurance patient revenues increased $19.6 million or 50%. In 2002, Coast P.A. fee-for-service and traditional insurance patient revenues were in excess of $58.5 million and represented 69% of Coast P.A.’s total patient revenues. In 2003, Coast P.A. fee-for-service and traditional insurance patient revenues increased $7.4 million or 12%. In 2003, Coast P.A. fee-for-service and insurance patient revenues were in excess of $65.9 million and represented 73% of Coast P.A.’s total patient revenue.

     In 2003, one insurance company elected to terminate its dental managed care contract with Coast P.A. Coast P.A. believes the insurance company placed this dental managed care business with several dental groups across the Southeast that accepted lower reimbursement levels than negotiated by Coast P.A. We incurred a loss in our services and support revenues as Coast P.A.’s capitation revenues and patient co-payments were reduced beginning in July 2003, with the full effect of the contract termination effective September 1, 2003. Over the 12 months ended June 30, 2003 gross capitation and patient co-pay revenues of Coast P.A. related to this contract were $7.2 million and our estimated services and support fee related to this contract would have been approximately $4.7 million. The loss to Coast P.A. gross revenues was $1.8 million in the second half of 2003 and the loss to our second half of 2003 services and support fee revenues was $0.8 million. We implemented certain cost control measures in third quarter 2003 which partially mitigated the effect of the reduction in our services and support fee revenues from this Coast P.A. contract termination. Coast P.A. continues to focus on a strategy of increasing total providers and productivity per provider and increasing the higher margin fee-for-service patient base and expanding the Coast Smile Plus discount and membership plan which, if successful, also is expected to assist in mitigating the negative effect on revenues from termination of this contract. There can be no assurance that this will occur. If Coast P.A. is unable to replace the gross revenue stream it lost as a result of the contract termination, it will continue to adversely affect our net revenues.

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 P.A., 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 implementation of the 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 financing on 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 Centers 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.

     The sale of interests in Dental Centers under the Equity Model has been as follows: ten (10) in 2001, six (6) in 2002 and one (1) in 2003. The Equity Model conversion in 2003 occurred in fourth quarter 2003. 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. In fourth quarter 2003, one of the Equity Doctors left the dental practice. Coast P.A. is evaluating whether to dissolve or sell this Equity Doctor practice. As of December 31, 2003, there are ten (10) Equity Doctor Dental Centers in operation, with the eleventh (11th) Dental Center converting to an Equity Doctor Dental Center on December 31, 2003.

     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 affect 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 ten (10) Equity Doctor Dental Centers as of December 31, 2003, is approximately one and one-half times 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.

Dental Center Openings and Closings Update

     Effective August 1, 2003, we re-opened a previously closed Dental Center in Florida. We are actively assisting Coast P.A. to build a patient base and expect it to grow this into a profitable location. There can be no assurance that this re-opened location will become profitable.

     Coast Dental and Coast P.A. continuously evaluate the performance of the Dental Centers and dental practices. During 2003, 2002, and 2001, decisions were made to close and/or consolidate into other locations a total of seventeen (17) 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: one (1) in 2003 (fourth quarter 2003); eight (8) closings and consolidations in 2002 (of which two (2) were in fourth quarter 2002); one (1) relocation in 2002; and 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.

Information Technology Platform Update

     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. During fourth quarter 2003, we commenced installation at the Dental Centers of digital hygiene equipment and an upgrade and expansion of the information technology platforms. This initiative is expected to continue over the next several quarters. The majority of the cost of this initiative will be amortized over the asset life of three to seven years, or the lease terms, generally three years, except for certain planning, process change and post-implementation review costs that will be expensed as incurred.

Training and Development Program Update

     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, and in February 2003, we implemented the second year of this program. During 2003 and 2002, the cost incurred by us for this program was $818,000 and $533,000, respectively. Staff training and development costs are expected to decrease in 2004 from a change in scope in the training and development program.

Services and Operations

     We are primarily responsible for the business and administrative functions of the Dental Centers, but do not perform or provide dental care. We provide legal, accounting, information technology, human resource, payroll, training services, and marketing 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 the 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.

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     As compensation for our professional 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 expenses incurred at the Dental Center except for the salaries and benefits of the 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.” 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.

Acquisitions and Development of Dental Centers

     The cost of an Acquired Dental Center is typically based upon a negotiated percentage of the Dental Center’s historical gross revenue. Acquired Dental Centers typically generate sufficient cash flow to fund their operations. We currently expect to grow the business through increasing the capacity utilization of our existing Dental Centers. When we do increase the size of our Dental Center Network, we presently plan to finance the addition of internally developed and strategically opportunistic acquired Dental Centers principally through existing cash and expected cash flow from operations and, to a lesser extent, from debt.

     We took a very significant step beginning in 1998, shifting from an acquisition model to a development model. Management began to emphasize the opening of internally developed (de-novo) Dental Centers and placed less emphasis on acquiring Dental Centers. While the growth of the patient base of the de-novo Dental Centers has been slower than anticipated, which has negatively impacted our financial performance management is committed to this strategy and continues to believe it is the best long-range strategy. Our current strategy is to increase capacity utilization at our existing Dental Centers. After we achieve higher utilization, we may resume expansion using the development model in order to achieve long term growth in a more cost effective and productive manner.

     We opened 17 internally developed Dental Centers in 1999 in Florida, Georgia and Tennessee. We did not open any internally developed Dental Centers in 2000. During 2001, we opened two (2) internally developed Dental Centers, one each in the Atlanta, GA, and the Nashville, TN, markets. The average cost, to us, of an internally developed Dental Center has been approximately $225,000, which includes the cost of equipment, leasehold improvements and working capital. No internally developed Dental Centers were opened in 2002 or 2003; however in the third quarter 2003 we did re-open a previously closed Dental Denter. We anticipate not opening any new internally developed Dental Centers during 2004.

     During 1999, Coast Dental and Coast P.A. added 11 acquired Dental Centers located in Virginia. The purchase price for these acquired Dental Centers was $2.1 million, consisting primarily of $1.2 million in cash and $.9 million in promissory notes and certain assumed liabilities. Coast Dental and Coast P.A. did not acquire any Dental Centers during 2001, 2002 or in 2003.

     During 1999, we consolidated one previously acquired Dental Center into an existing Dental Center. During 2000, we consolidated twelve (12) Dental Centers into six (6) Dental Centers to take advantage of changing market demographics. In the fourth quarter of 2001, we closed eight (8) previously acquired Dental Centers. In 2002, we closed eight (8) Dental Centers, of which two (2) were in fourth quarter 2002, and sold one Dental Center. In third quarter 2003, we re-opened a previously closed Dental Center in Florida. We are actively assisting Coast P.A. to build a patient base and expect to grow this into a profitable location. In fourth quarter 2003, we closed one (1) Dental Center. We believe that closing the underperforming Dental Centers will improve overall financial performance while allowing management to focus its efforts on improving the performance at remaining Dental Centers.

Federal and State Government Laws and 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 believe 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 including the states in which we operate prohibit corporations that are not owned entirely by dentists from employing practicing licensed dentists (and in some states, dental hygienists and dental assistants), having

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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.

     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 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. Moreover, 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.

     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 as a health care provider is considered a “covered entity” under HIPAA regulations.

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     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. was in compliance with the federal privacy regulations by the effective date of April 14, 2003.

     The HHS 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 was extended to October 16, 2003. We contracted with health care clearinghouses to enable electronic insurance claims filing 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 monitor 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.

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 information technology 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 sole practices, group practices or operate in multiple offices. Many of those dentists have more established practices in their markets.

Seasonality

     Coast P.A. has traditionally experienced its highest volume of patient visits during the first quarter of the year and its lowest volume of patient visits in the summer and in the fourth quarter during the holiday season. Individual Dental Centers typically experience increased patient visits during the period from January through March, when the population of Florida increases for the winter, and decreased patient visits during the summer months and during the fourth quarter holiday season. There is less variability in first quarter business in Coast P.A. operations outside of Florida. Dental Centers located outside of Florida provided 22.2%, 24.5%, and 22.8% of total revenue to Coast P.A. for the years ended December 31, 2003, 2002 and 2001, respectively. We also expect that certain factors may mitigate this seasonality including potential growth in the markets served outside of Florida, Coast Smile Plus discount and membership programs and patient financing programs.

     Seasonality in fee-for-service and traditional insurance business is partially mitigated by capitation revenue from managed care contracts which, with the exception of fluctuations in the number of enrolled members, is earned on an equal pro-rata basis over the year. For the years ended December 31, 2003 2002 and 2001, capitation revenue from managed care contracts represented 9.3%, 10.6% and 16.2%, respectively, of Coast P.A.’s total revenue.

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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. We are seeking registered trademarks for “COAST DENTAL ADVANTAGE”, “ONE COMPANY. COUNTLESS OPPORTUNITIES”, “SMILE PLUS”, “SOON YOUR SMILE COULD BE A WORK OF ART”, and “BRIGHT SMILES BEGIN AT COAST”.

Employees

     As of December 31, 2003, we had approximately 677 full-time and part-time employees, of whom 66 were employed at our headquarters and 611 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 2002 and 2001. The increase in 2003 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.

Dental Center 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) 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 31, 2002, by Coast P.A., total doctor days for Coast P.A. increased in 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 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.

     As of December 31, 2003, Coast P.A. employed 150 dentists or a (net) increase of seventeen (17) dentists over December 31, 2002. As of December 31, 2003, Coast P.A. employed 111 hygienists or a (net) decrease of 3 hygienists over December 31, 2002. Total provider days increased in 2003 as well with total doctor days increasing 1% and hygienist days increasing 4%.

Information Available on our Website

     Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934 are available on our website (www.coastdental.com) as soon as reasonably practicable after we electronically file with or furnish such documents to the Securities and Exchange Commission. Our Code of Ethics and Audit Committee Charter, as well as the Section 16 beneficial ownership reports filed by our officers and directors, are also available on our website. Our internet website and the information contained therein are not incorporated into this annual report on Form 10-K.

Risk Factors

     The following risk factors and other information included in this Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face and there may be additional risks and uncertainties not presently known to us or that we currently deem immaterial. If any of the following risks occur, it could adversely affect our business and financial condition as well as the value of our common stock.

We have incurred losses in the past and we may not return to profitability.

     We have incurred losses in recent years and we have not been profitable since 1999. For the year ended December 31, 2003 we incurred a net loss of approximately $2.99 million. For the year ended December 31, 2002, we incurred a net

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loss of approximately $3.94 million and for the year ended December 31, 2001, we incurred a net loss of approximately $9.37 million. We may not be successful in improving revenue and containing costs such that we can return to profitable operations. If we continue to incur losses, we may need additional capital which may not be available to us, or if available, on terms that may cause substantial dilution to our existing shareholders. If we are unable to improve revenue and reduce costs in the future, losses could continue or increase in the foreseeable future.

Our financial success depends on the efforts and success of Coast P.A. and the Coast Dentists and Hygienists, and our business could be harmed if Adam Diasti, D.D.S. is no longer eligible to own Coast P.A.

     We receive fees for the business services and support we provide to Coast P.A. under Services and Support Agreements. Under these agreements, our service fees are determined by revenues generated by and the financial performance of Coast P.A., so our financial success depends on the success of Coast P.A. and the Coast Dentists and Hygienists. The factors that could impact the financial performance of Coast P.A. and the Coast Dentists and Hygienists include:

	•		changes in the number of patients or the services provided by Coast Dentists and Hygienists;
	•		changes in patient demand for dental services;
	•		changes in the number of Coast Dentists and Hygienists available to service patients of Coast P.A.;
	•		the ability of Coast P.A. to incentivize, motivate, retain and attract new dentists and hygienists;
	•		the ability of Coast P.A. to replace any loss of managed care business;
	•		changes in the number of patient visits as a result of the level of advertising or marketing;
	•		the ability to collect patient and insurance trade accounts receivables;
	•		changes in the competitive landscape in markets served;
	•		any successful malpractice claims against Coast P.A., or its Doctors and Hygienists;
	•		changes in the cost or availability of malpractice insurance for dentists;
	•		the success of patient financing programs; and
	•		the opening of new Dental Centers and closure of underperforming Dental Centers.

     A material loss of revenue, unprofitability or cessation of operations by Coast P.A., for whatever reason, would materially and adversely affect our financial condition and results of operations.

     Our President, Dental Director and Director, Adam Diasti, D.D.S., is a licensed dentist in the states we operate in and is the sole owner of Coast P.A. Our success depends on the continued ability of Adam Diasti, D.D.S. to own Coast P.A. We cannot, by law, own or control Coast P.A. If for any reason Adam Diasti, D.D.S., was no longer eligible to be the sole shareholder of Coast P.A., we would have to enter into similar arrangements with one or more other licensed dentists. Since we cannot be assured that we would be able to enter into similar arrangements and because we cannot employ dentists, our business would be harmed if Adam Diasti, D.D.S., is no longer eligible to own Coast P.A.

If we are not able to collect our Coast P.A. service fee receivable, our financial condition may suffer.

     As of December 31, 2003 Coast P.A. owed us approximately $20.0 million in service fees under our Services and Support Agreements. While we believe that Coast P.A. will be able to pay such service fee receivable, there can be no assurance that this will be the case. In the event Coast P.A. is unable to pay this service fee receivable, we may be required to write-off a portion of the service fee receivable which could adversely affect our liquidity and working capital.

Our Board of Directors has decided to terminate our public company status and seek to deregister our common stock from reporting under the Securities Exchange Act of 1934.

     In connection with our self-tender offer in March 2003, our Board of Directors determined that it was in the best interests of us and our shareholders to terminate our status as a public company. The significant factors that were considered at the time included:

	•		the considerable costs associated with remaining a public company including legal, auditing, accounting and other expenses;
	•		the significant amount of time expended by management in connection with meeting our public company obligations;
	•		the lack of liquidity due to low trading volume of our stock;
	•		the unlikelihood of an active trading market due to the limited public float and small shareholder base;
	•		the lack of analyst coverage;

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	•		the difficulty in attracting institutional interest;
	•		the competitive disadvantages due to public disclosure of sensitive information;
	•		the unfavorability of our sector; and
	•		the difficulty of utilizing the public equity capital markets as a source of financing due to the limited market for our shares.

     We also stated in our self-tender offer materials filed with the SEC and provided to shareholders that we would seek to deregister if we were eligible even if we did not complete the self-tender offer or enter into a second-step transaction with our controlling shareholders. For significant reasons, including but not limited to the above factors, our Board of Directors has again, after careful consideration and evaluation, determined that it is in the best interest of us and our shareholders to terminate our public company status in which event we will seek to deregister our common stock from reporting under the Securities Exchange Act of 1934. The four independent members of our Board of Directors voted unanimously to approve deregistration. Directors Terek Diasti and Adam Diasti abstained from voting on the matter because they are the beneficial owners of a majority of our shares. Over the past several years we have had less than 300 holders of record as defined by the rules of the Securities and Exchange Commission. As such, we are eligible to deregister our common stock at any time by filing a Form 15 with the Securities and Exchange Commission. Our stock price may suffer an immediate and significant decline as a result of this decision to seek to terminate our status as a public company.

     Costs associated with maintaining our public company status have increased in recent years in the areas of auditing fees, board fees and insurance premiums. Such costs in 2003 were approximately $725,000 for the year ended December 31, 2003 and the current annualized run rate for these costs is approximately $825,000 per year. We expect certain of these costs to increase in 2004 and beyond in the areas of board fees, auditing fees and Sarbanes-Oxley Section 404 internal controls compliance and attestation costs. We estimate these costs will range from $875,000 to $975,000 in 2004 and from $1,000,000 to $1,115,000 in 2005. These expenses do not include the salaries and time of our employees who are required to devote considerable attention to our public company reporting and compliance obligations. Certain of these costs would continue after we deregister from the Exchange Act and delist from the Nasdaq SmallCap Market, if our shares are traded on the “Pink Sheets” quotation system. The continuing costs could include stock transfer agent fees, audit fees and directors and officers insurance premiums, as well as the costs associated with providing company information to market makers and broker-dealers. We estimate that the continuing costs would be approximately $350,000 per year (including the cost of an independent audit of our financial statements in order to maintain our ability to obtain external debt financing, and not for “Pink Sheets” reporting and disclosure). Accordingly, we estimate we could save approximately $525,000 over the current annualized run rate of $875,000. We estimate we could save approximately $575,000 to $700,000 over the projected 2004 and 2005 annualized costs as we will avoid the Sarbanes-Oxley Section 404 internal controls compliance and attestation costs.

After deregistration, our stock may trade on the “Pink Sheets” and could be difficult for you to liquidate your shares.

     Upon the filing of a Form 15 to deregister, our obligation to file periodic reports with the SEC, including quarterly and annual reports containing our financial statements, will be suspended and there may no longer be any public information regarding the company after the deregistration. In addition, our common stock would no longer be traded on the Nasdaq SmallCap Market. Even though we would not be considered a public company, our common stock might be traded on the “pink sheets,” an electronic quotation service for over-the-counter securities, to the extent a market maker decides to make a market in our shares, but there can be no assurance that this would occur. There is generally less liquidity and greater volatility on the “pink sheets” as compared to the Nasdaq SmallCap Market. If our common stock is traded on the “pink sheets”, investors would likely find it more difficult to acquire, dispose of or obtain accurate quotations for our common stock, and our ability to sell equity securities and to raise capital, could be impaired. There can be no assurance that an active trading market for our common stock would ever develop on the “pink sheets.” The “pink sheets” quotation service and “pink sheets” traded companies are not regulated by the Securities and Exchange Commission. Furthermore, unlike Nasdaq listed companies “pink sheets” traded companies do not have any corporate governance standards or similar requirements so we would not be required to have independent directors, an independent audit committee, independent compensation committee, code of conduct or seek shareholder approval for certain actions. Furthermore, we would no longer be subject to Sarbanes-Oxley requirements including certification of financial statements, certification of internal controls systems, prohibitions against personal loans to directors and executive officers, audit committee approval of related party transactions, code of ethics for senior officers, independent audit committee and other requirements..

     The price of our common stock could suffer an immediate and significant decline as a result of the decision to deregister and delist.

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Our controlling shareholder has the ability to take action that may adversely affect our business, our stock price and our ability to raise capital.

     As of December 31, 2003, the Diasti Family Limited Partnership (“DFLP”) beneficially owned 65% of our outstanding share capital. Our Chief Executive Officer and Chairman of the Board, Terek Diasti, and our President, Dental Director and Director, Adam Diasti, D.D.S., own a majority position in and control the DFLP. As a result of the 65% ownership position, the DFLP has and will continue to have control over the outcome of matters requiring shareholder approval, including the power to:

	•		elect all of our directors;
	•		amend our articles or by-laws; and
	•		agree to or prevent mergers, consolidations or the sale of all or substantially all our assets.

     Since more than 50% of the voting power of our common stock is held by the DFLP, we are a “controlled company” under Nasdaq rules. As a “controlled company”, we are not required under Nasdaq rules to have a majority of the members of our Board of Directors to be independent directors, nor are we required to have an independent compensation committee. Although our Board of Directors currently consists of a majority of independent directors, and we have an independent compensation committee, the DFLP has the voting power to change the composition of the Board of Directors and the compensation committee. As a Nasdaq listed company and a Securities and Exchange Commission registered company we are, however required under Nasdaq rules, and do maintain, an audit committee consisting solely of independent directors. However, we will no longer be required to have an independent audit committee upon deregistration and delisting.

     DFLP also will be able to delay, prevent or cause a change in control relating to us. The DFLP’s control over us, and its ability to delay or prevent a change in control relating to us could adversely affect the market price of our common stock.

     As a result of the DFLP being our controlling shareholder, the DFLP, Terek Diasti and Adam Diasti are required by our lenders to guarantee our credit facility. There can be no assurance that they would continue to be willing to provide such guarantees. Any sale of shares of our common stock by the DFLP or the perception that such sale could occur, could negatively affect the market price of our common stock and could also materially impair our future ability to raise capital through an offering of securities.

Our stock is thinly traded and our stock price is volatile.

     Historically, the trading volume of our common stock has been very low on the Nasdaq SmallCap Market and our common stock has experienced significantly limited liquidity. For example, since January 1, 2004, the daily trading volume of our shares has been less than 1,000 shares on most days and on some days our shares have not traded at all. In 2003, the average daily trading volume was approximately 16,000 shares (and was approximately 11,500 shares excluding the period the self-tender offer was outstanding and the period that our controlling shareholder (the DFLP) acquired shares on the open market in last 2003). We expect the liquidity of our common stock to decrease significantly upon delisting from the Nasdaq SmallCap Market. Also, the market price of our common stock has fluctuated substantially in the past and is likely to continue to be volatile and subject to wide fluctuations. From January 1, 2002 through December 31, 2003, our common stock has traded on the Nasdaq SmallCap Market at prices as low as $2.10 and as high as $9.50 per share. Furthermore, any sale of shares of our common stock by our controlling shareholder in the future could cause further volatility and negatively impact the price of our shares. The thin trading market for our common stock and fluctuations in the price of our shares have occurred and may continue to occur in response to various factors, many of which we cannot control, including:

	•		quarter-to-quarter variations in our operating results;
	•		conditions in the dental practice management sector and general dentistry market;
	•		changes in investor perceptions;
	•		small shareholder base;
	•		lack of analyst coverage of us or our shares; and
	•		lack of interest in our shares from institutional investors.

     Because our stock is not highly liquid, you may not be able to resell your shares at or above the price you paid.

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Coast P.A. and Coast Dentists and Hygienists compete with other dental practices, dentists and hygienists, and other companies compete with us.

     The practice of dentistry is a highly competitive business in each market in which Coast P.A. operates. Coast P.A. competes against other dental practices in the hiring and retention of qualified dentists, hygienists and other personnel. The Coast Dentists and Hygienists compete against the other dentists and hygienists in the communities they serve. Many of these competing dental practices, dentists and hygienists have more established practices and greater resources. Providing business services to dental practices is also a competitive business. We compete with other companies with strategies similar to ours in providing business services to dental practices. Competitors with greater access to financial resources may enter our markets and compete with us. We may not be able to compete successfully with existing or new competitors. Any of these factors could adversely impact our business, financial condition and financial results of operations or cash flows.

Our information systems are critical to our business, and a failure of those systems could have a material adverse effect on us.

     Our business and success depends, in part, upon our ability to store, retrieve, process and manage a significant amount of information, and to provide Coast P.A. with efficient and effective comprehensive practice management systems. We are in the early stages of upgrading our information systems which we expect to enhance our ability to provide timely and comprehensive information to support Coast P.A. If our information systems fail to perform as expected, or if we suffer an interruption, malfunction or loss of information processing capabilities or historical data, it could harm our business, results of operations and our relationships with Coast P.A. and Coast Dentists. Our information systems are managed from our West Coast of Florida based headquarters, where there is risk of hurricane or other storm related damages or outages.

Coast P.A. and the Coast Dentists are subject to extensive governmental regulations which significantly limits how we can operate.

     Governmental authorities regulate the dental industry and dental practices extensively which significantly limits how we can operate. For example, as a business services company, we are prohibited by law from practicing dentistry or employing dentists and dental hygienists. We do not control the practice of dentistry by Coast P.A. and the Coast Dentists and Hygienists or their compliance with legal requirements that apply to dentists and hygienists and their dental practices. Since 72 of the 109 Dental Centers are located in the State of Florida, our revenue is particularly sensitive to regulatory conditions in the State of Florida. Many states, including Florida, prohibit us, as a business services and non-professional corporation, from:

	•		practicing dentistry, which, in some states, includes restrictions on managing or operating a dental office;
	•		splitting professional fees with dentists;
	•		owning or controlling equipment used in dental practices;