<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 3, 1997
REGISTRATION NO. 333-34385
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
COAST DENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 8741 59-3136131
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
---------------------
<TABLE>
<S> <C>
TEREK DIASTI, CEO
COAST DENTAL SERVICES, INC. COAST DENTAL SERVICES, INC.
6200 COURTNEY CAMPBELL CAUSEWAY, STE. 690 6200 COURTNEY CAMPBELL CAUSEWAY, STE. 690
TAMPA, FLORIDA 33607 TAMPA, FLORIDA 33607
(813) 288-1999 (813) 288-1999
(Address, including zip code, and telephone (Name, address, including zip code, and
number, telephone
including area code, of registrant's principal number, including area code, of agent for
executive offices) service)
</TABLE>
---------------------
WITH COPIES TO:
<TABLE>
<S> <C>
DARRELL C. SMITH, ESQUIRE JEFFREY M. STEIN, ESQUIRE
MARK A. CATCHUR, ESQUIRE KING & SPALDING
SHUMAKER, LOOP & KENDRICK, LLP 191 PEACHTREE STREET, N.E.
101 E. KENNEDY BLVD., SUITE 2800 ATLANTA, GEORGIA 30303-1763
TAMPA, FLORIDA 33602 (404) 572-4600
(813) 229-7600
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION -- DATED SEPTEMBER 3, 1997
PROSPECTUS
- --------------------------------------------------------------------------------
2,000,000 Shares
[COAST DENTAL LOGO]
Common Stock
- --------------------------------------------------------------------------------
Of the 2,000,000 shares of common stock, par value $.001 per share (the "Common
Stock"), offered hereby (the "Offering"), 1,600,000 shares are being sold by
Coast Dental Services, Inc. (the "Company") and 400,000 shares are being sold by
certain selling stockholders of the Company (the "Selling Stockholders"). The
Company will not receive any of the proceeds from the sale of shares by the
Selling Stockholders. See "Principal and Selling Stockholders."
The Common Stock is included in The Nasdaq Stock Market's National Market (the
"Nasdaq National Market") under the symbol "CDEN." On September 2, 1997, the
last reported sales price for the Common Stock on the Nasdaq National Market was
$21.50 per share. See "Price Range of Common Stock."
SEE "RISK FACTORS" ON PAGES 7 TO 16 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==============================================================================================================================
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $ $
==============================================================================================================================
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Principal and Selling
Stockholders" and "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $500,000.
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 300,000 additional shares of Common Stock on the
same terms and conditions as set forth above. If all such additional shares
are purchased by the Underwriters, the total Price to Public will be
$ , the total Underwriting Discounts and Commissions will be
$ and the total Proceeds to Company will be $ and the
total Proceeds to Selling Stockholders will be $ . See
"Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and the Selling Stockholders and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares to the Underwriters is expected
to be made at the office of Prudential Securities Incorporated, One New York
Plaza, New York, New York, on or about , 1997.
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
ROBERT W. BAIRD & CO.
INCORPORATED
, 1997
<PAGE> 3
[Coast DENTAL LOGO]
[A map of the State of Florida and Georgia is shown which depicts separately
marked existing and planned internally developed and acquired Dental Centers.]
---------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS, IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M
UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus and information under "Risk Factors." Unless the
context otherwise requires, references in this Prospectus to "Coast Dental" or
the "Company" refer to Coast Dental Services, Inc. and its predecessor; "Dental
Centers" refers to dental offices managed or to be managed by the Company
pursuant to a services and support agreement; "Coast Florida P.A." refers to the
Florida professional association which employs the dentists and hygienists
providing dental services at the Dental Centers pursuant to a services and
support agreement with the Company; "Coast P.A." refers collectively to the
Coast Florida P.A. and any professional association or corporation located
outside the State of Florida, with which the Company has entered, or may enter,
into a services and support agreement (the "Services and Support Agreement");
"internally developed Dental Centers" refers to Dental Centers which are
initially opened, developed and managed by the Company pursuant to a Services
and Support Agreement with a Coast P.A.; "acquired Dental Centers" refers to
Dental Centers resulting from the acquisition of an existing dental facility by
the Company, combined with the acquisition by a Coast P.A. of the existing
dental practice located at that facility; "Coast Dentists" refers to the
licensed dentists employed by a 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. Except as otherwise indicated, the information
contained in this Prospectus (i) assumes that the Underwriters' over-allotment
options will not be exercised and (ii) gives retroactive effect to reverse stock
splits effected prior to the Company's initial public offering resulting in an
exchange of 1 share for 3.857 shares of Common Stock issued and outstanding.
THE COMPANY
Coast Dental Services, Inc. provides management services to 48 Dental
Centers located in central and northern Florida. Of the 48 Dental Centers, 16
were internally developed and 32 were acquired by the Company. As of September
2, 1997, 64 Coast Dentists were employed by the Coast Florida P.A., serving over
328,000 patients. In addition, the Company currently has seven internally
developed Dental Centers under construction in central Florida and Atlanta,
Georgia, with the Company's first Dental Center located in Atlanta, Georgia
scheduled to open by September 30, 1997.
The United States dental industry is highly fragmented, consisting of more
than 110,000 dental practices with approximately 88% of these practices operated
by dentists working alone or with one other dentist. According to the Health
Care Financing Administration, expenditures for all dental services in the
United States were an estimated $45.2 billion in 1995 and are expected to grow
at a rate of 6.6% per year through 2000. Based upon a 1990 Survey by the
American Dental Association ("ADA"), general dentistry was estimated to
represent approximately 83% of all dental services performed in the United
States. The Company believes several factors are driving the overall industry
growth. First, as the "baby boom" generation ages, the demand for many higher
priced dental maintenance products and procedures (such as crowns, bridges and
dentures) will increase relative to the demand for other more routine, lower
priced dental products and procedures (such as cleanings and fillings). Second,
increasing attention to dental health and, in particular, to personal appearance
has increased the demand for general dentistry services and cosmetic dental
products and procedures (such as bonding and whitening). Finally, a greater
percentage of the population is now covered by private or government funded
dental health insurance thereby facilitating increased dental office visits and
a greater utilization of general dentistry services.
The Company's goal is to develop a leadership position in the management of
general dentistry practices throughout Florida and the southeastern United
States. The Company earns fees paid by a Coast P.A. for providing management
services and support to the Dental Centers. Pursuant to the Services and Support
Agreement, the Company receives a percentage of a Coast P.A.'s gross patient
revenue. A uniform operating model (the "Coast Operating Model") developed by
the Company is utilized at the Dental Centers to increase productivity and
maintain the low cost delivery of quality general dentistry services. The key
elements of the Coast Operating Model are: (i) affiliating with general dental
providers that focus on the most common, high volume dental products and
procedures which lend themselves to cost-effective delivery; (ii) centralizing
management and administrative responsibilities, thus allowing Coast Dentists to
concentrate on delivering
3
<PAGE> 5
high quality dental care; (iii) facilitating the training of the Dental Center
staff, including Coast Dentists and hygienists, in the most efficient techniques
for managing the delivery of high volume, quality dental services; and (iv)
assisting with the implementation of marketing programs designed to meet the
needs of each Dental Center. The Company plans to expand the Coast Dental
Network to maximize economies of scale in management and administration,
materials procurement and marketing, and to facilitate contracting with managed
care companies. The Company plans to increase penetration in currently served
regions and to expand into new contiguous markets in the southeastern United
States through the addition of internally developed and acquired Dental Centers.
For the twelve months ended June 30, 1997, the average patient revenue
production for the 20 Coast Dentists affiliated with the Company for the entire
period was approximately $597,000. In addition, for the same period, the Coast
Dentists averaged 107 patient visits per week (including hygienist visits).
Based upon data contained in the ADA's 1995 survey and accounting for hygienist
visits, the Company believes that Coast Dentists have achieved substantially
higher patient revenue production and patient visits than the national average
for general practitioners, although there can be no assurance that such industry
data is representative of current productivity by the average general dental
practitioner. For internally developed Dental Centers, the Company has attained
profitability (determined by subtracting from the services and support fee
earned by the Company at an internally developed Dental Center the amount of the
Company's expenditures incurred at such Dental Center, excluding corporate
overhead) in an average of three to four months from opening. Full integration
of an acquired Dental Center generally takes approximately six months.
As the Coast Dental Network has grown, an increasing percentage of the
Coast Dentists' patient revenue has been derived from a growing managed care
patient base. The Coast Dentists began to provide dental services under managed
care contracts in 1995 and, for the six months ended June 30, 1997, managed care
business had grown to represent an average of 33.5% of patient revenue. The
Company believes that managed care companies are presently focused on increasing
their revenue and gaining market share by offering a full range of health
insurance options, including dental insurance. As a result, managed care
companies are aggressively seeking to contract with dental providers that offer
extensive regional coverage, have the ability to deliver dental services at
managed care pricing levels, and possess the necessary management information
systems and contract administration expertise. Accordingly, the Coast Dentists
enjoy a competitive advantage over sole practitioners and small dental group
practices that generally do not have the resources to develop such capabilities
or managed care relationships.
RECENT DEVELOPMENTS
Addition of Dental Centers in Florida. Since the Company's initial public
offering on February 11, 1997, the Company has added 15 acquired Dental Centers
located in central Florida. The combined purchase price for these acquired
Dental Centers was $5.2 million. In addition, the Company has added four
internally developed Dental Centers located in Palm Bay, Lakeland, Sarasota and
Venice, Florida and currently has one internally developed Dental Center under
construction in Melbourne, Florida.
Addition of Dental Centers in Atlanta, Georgia. The Company currently has
six internally developed Dental Centers under construction in Atlanta, Georgia,
with the first internally developed Dental Center scheduled to open by September
30, 1997.
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company................ 1,600,000 shares
Common Stock Offered by the Selling Stockholders... 400,000 shares
Common Stock to be Outstanding after the
Offering(1)...................................... 7,299,871 shares
Use of Proceeds.................................... To finance the addition of internally
developed and acquired Dental Centers. See
"Use of Proceeds."
Nasdaq National Market Symbol...................... CDEN
</TABLE>
- ---------------
(1) Excludes an aggregate of 900,000 shares of Common Stock reserved for
issuance under the Company's stock incentive plans (the "Plans"), of which
options for approximately 285,000 shares have been granted. See
"Management -- The Plans."
5
<PAGE> 7
SUMMARY FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------- ---------------------------
PRO FORMA PRO FORMA
1993 1994 1995 1996 1996(1) 1996 1997 1997(2)
------ ------ ------ ------- --------- ------ ------ ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue........................ $1,194 $1,868 $3,325 $ 8,128 $17,870 $3,351 $7,936 $10,114
Dental Center expenses............. 852 1,433 2,353 5,451 12,831 2,172 5,210 6,940
------ ------ ------ ------- ------- ------ ------ -------
Gross profit....................... 342 435 972 2,677 5,039 1,179 2,726 3,174
General and administrative
expenses......................... 306 585 697 1,090 1,776 486 894 1,000
Pro forma net income (loss)(3)..... 4 (109) 135 856 1,812 386 1,187 1,385
Pro forma earnings per share(3).... $ 0.45 $ 0.23 $ 0.26
Weighted average shares
outstanding (000s)............... 4,029 5,211 5,270
SELECTED OPERATING DATA:
Dental Centers(4).................. 4 8 11 29 19 43
Gross revenue per Dental
Center(5)........................ NA $ 535 $ 590 $ 635 $ 302 $ 385
Coast Dentists(4).................. 4 8 10 35 21 64
Dental chairs(4)................... 22 38 48 148 82 221
Patient visits..................... 11,881 19,346 42,005 100,949 39,349 94,734
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------------------
PRO PRO FORMA
ACTUAL FORMA(6) AS ADJUSTED(7)
------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 8,990 $ 8,305 $40,305
Total assets.............................................. 19,496 19,848 51,848
Long-term debt, including current maturities.............. 813 1,065 1,065
Stockholders' equity...................................... 17,225 17,325 49,325
</TABLE>
- ---------------
(1) After giving effect to the 1996 Acquisitions, the 1997 Acquisitions, the
Company's entering into a Services and Support Agreement with the Coast
Florida P.A. on October 1, 1996, and the Company's issuance of 2,200,000
shares of Common Stock at an initial public offering price of $8.00 on
February 11, 1997 (the "Initial Public Offering"), as if such adjustments
had occurred at January 1, 1996. See "Selected Pro Forma Financial Data" and
"The Acquisitions."
(2) After giving effect to the 1997 Acquisitions and the Initial Public
Offering, as if such adjustments had occurred at January 1, 1997. See
"Selected Pro Forma Financial Data" and "The Acquisitions."
(3) Pro forma adjusted to reflect a 39% income tax rate as if the Company was
taxed as a C Corporation during the periods presented. The Company converted
to a C Corporation on February 11, 1997. See "Selected Pro Forma Financial
Data."
(4) Presented as of the end of the period.
(5) Includes only Dental Centers open for at least one year as of the beginning
of the period, so that two Dental Centers are included for 1994, four Dental
Centers are included for 1995, eight Dental Centers are included for 1996
and the six months ended June 30, 1996 and 12 Dental Centers are included
for the six months ended June 30, 1997.
(6) After giving effect to the acquisitions completed after June 30, 1997, as if
such acquisitions had occurred as of June 30, 1997. See "The
Acquisitions -- 1997 Acquisitions" and "Selected Pro Forma Financial Data."
(7) After giving effect to the consummation of the Offering and the application
of the estimated net proceeds therefrom. See "Selected Pro Forma Financial
Data."
6
<PAGE> 8
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to the other information set forth in this Prospectus,
in connection with an investment in the Common Stock offered hereby.
This Prospectus contains statements which constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The words "expect,"
"believe," "goal," "plan," "intend," "estimate" and similar expressions and
variations thereof used in this Prospectus are intended to specifically identify
forward-looking statements. Those statements appear in a number of places in
this Prospectus and include statements regarding the intent, belief or current
expectations of the Company, its directors or its officers with respect to,
among other things: (i) potential acquisitions or internal development of Dental
Centers and the successful integration of such acquisitions and internally
developed Dental Centers into the Coast Dental Network; (ii) the use of the
proceeds of the Offering; (iii) the Company's financing plans; (iv) trends
affecting the Company's financial condition or results of operations; (v) the
Company's growth strategy and operating strategy; (vi) trends in the health
care, dental care and managed care industries; (vii) trends in governmental
regulations; and (viii) the declaration and payment of dividends. Prospective
investors are cautioned that any such forward looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in the forward looking
statements as a result of various factors. The accompanying information
contained in this Prospectus, including without limitation the information set
forth under the headings "Risk Factors," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and "Business," identifies
important factors that could cause such differences. The Company undertakes no
obligation to publicly update or revise forward looking statements made in this
Prospectus to reflect events or circumstances after the date of this Prospectus
or to reflect the occurrence of unanticipated events.
RISKS ASSOCIATED WITH EXPANSION STRATEGY. From its inception in 1992
through 1994, the Company opened eight internally developed Dental Centers. In
1995, the Company added three internally developed Dental Centers. The Company
added one internally developed and 17 acquired Dental Centers in 1996. The
Company has added four internally developed and 15 acquired Dental Centers to
date in 1997. The success of the Company's expansion strategy will depend on
factors which include the following:
Expansion to Georgia. The Company expects to add a number of
internally developed Dental Centers in the fall of 1997 in the Atlanta
metropolitan area. These Dental Centers will represent the Company's first
expansion outside of the State of Florida. In conjunction with the
Company's expansion into Atlanta, Georgia, the Company expects to enter
into a Services and Support Agreement with a Georgia professional
corporation (the "Coast Georgia P.A.") to manage the Dental Centers in
Georgia. The terms of the Services and Support Agreement between the
Company and the Coast Georgia P.A. are expected to be substantially similar
to the terms of the Company's current Services and Support Agreement with
the Coast Florida P.A. The Coast Georgia P.A.'s services and support fee is
expected to be approximately 74% of the Coast Georgia P.A.'s Dental Center
revenue. There can be no assurance that the Company will have the ability
to integrate and operate these Dental Centers in the same manner as its
current internally developed Dental Centers and acquired Dental Centers.
Ability to Identify and Consummate Suitable Acquisitions. The Company
intends to devote a substantial amount of time and expense in attempting to
acquire the assets of suitable dental practices. Identifying appropriate
acquisitions and proposing, negotiating and consummating acquisitions can
be a lengthy and costly process. Furthermore, the Company may compete for
acquisition opportunities with companies that have greater resources than
the Company. There can be no assurance that suitable acquisition candidates
are available or can be identified or that acquisitions can be consummated
on terms favorable to the Company.
Integration of Acquisitions. Acquisitions require the Company to
attract and retain competent and experienced management personnel and
require the implementation of reporting and tracking systems, management
information systems and other operating systems. There can be no assurance
that the
7
<PAGE> 9
Company will be able to attract suitable management or other personnel or
effectively implement the Company's operating systems. Further, the
Company's financial results in fiscal quarters immediately following a
material acquisition may be adversely impacted while the Company attempts
to integrate an acquired Dental Center. While full integration of an
acquired Dental Center generally takes approximately six months, there can
be no assurance that there will not be substantial unanticipated costs or
problems associated with the integration effort. During the first few
months after an acquisition, the Company's expenses related to the acquired
Dental Center may exceed the revenues it realizes from the acquired Dental
Center and accordingly any such acquisitions may have a negative effect on
the Company's operating results. As the Company pursues its expansion
strategy, there can be no assurance that the Company will be able to
continue to successfully integrate acquired Dental Centers and any failure
or inability to do so may have a material adverse effect on the Company's
results of operations or financial condition and the Company's ability to
implement its expansion strategy.
Ability to Internally Develop Dental Centers. The Company intends to
devote a substantial amount of time and expense in identifying locations in
suitable markets for the development of new internally developed Dental
Centers. Identifying locations in suitable geographical markets and
negotiating the necessary leases can be a lengthy and costly process.
Furthermore, the Company will need to provide the new facility with the
appropriate equipment, furnishings, materials and supplies. The average
cost to the Company to open an internally developed Dental Center has been
approximately $200,000. Additionally, a new internally developed Dental
Center must be staffed with a suitable dentist employed by a Coast P.A. The
Company will be required to obtain the consent of the applicable Coast P.A.
prior to adding an internally developed Dental Center. Since an internally
developed Dental Center may be staffed with a dentist with no previous
patient base, significant advertising and marketing expenditures may be
required to attract patients. There can be no assurance that an internally
developed Dental Center will ever become profitable for the Company.
Availability of Funds for Expansion Strategy. The Company's expansion
strategy will require that substantial capital investment and adequate
financing be available to the Company. Capital is needed not only for the
acquisition of assets of dental practices, but also for the internal
development of Dental Centers, integration of operations and the addition
of equipment and technology. The Company currently believes that the net
proceeds from this Offering, cash flow from operations and borrowings
available under the Company's bank credit facility will be adequate to meet
the Company's anticipated capital needs for approximately eighteen months.
After 1998, the Company may be required to obtain financing through
additional borrowings or the issuance of additional equity or debt
securities which could have an adverse effect on the value of the shares of
Common Stock of the Company. There can be no assurance that the Company
will be able to obtain such financing or that, if available, such financing
will be on terms acceptable to the Company. Any inability of the Company to
obtain suitable additional financing could cause the Company to change its
expansion strategy which could have a material affect on the Company.
Ability to Manage Dental Centers. The success of the Company's
expansion strategy will depend on the Company's ability to effectively
manage an increasing number of new Dental Centers while continuing to
manage existing Dental Centers. The addition of new Dental Centers through
acquisitions and internal development may impair the Company's ability to
efficiently and successfully provide its management services to the Dental
Centers and to also adequately manage and supervise the Company's
employees. The Company expects to continue to aggressively add Dental
Centers. The Company has not managed such a large volume of Dental Centers
as are currently operated and which are planned and the Company's future
results could be materially adversely affected if it is unable to
effectively manage such a growing number of Dental Centers.
STATE LAW RESTRICTIONS ON THE COMPANY'S ACQUISITIONS. The laws of certain
states, including Florida and Georgia, prohibit non-dentist entities from
practicing dentistry. In Florida, statutes and regulations expressly limit the
influence non-dentists may exercise over dentists and dental hygienists. As a
result, the Company only acquires those assets of a dental practice which are
allowable by law, which generally include all of the assets of the dental
practice except for patient lists, patient records and related assets which are
8
<PAGE> 10
acquired by a Coast P.A. The purchase price of the dental practice acquisitions
are allocated so that a Coast P.A. pays for the patient list, patient records
and related assets while the Company pays for the remaining assets. The dentist
from whom the dental practice is acquired is employed by a Coast P.A. Florida
and Georgia law prohibit the Company from employing dentists or dental
hygienists. While the Company purchases all equipment and materials used in the
dental practice, the dentist and the Coast P.A. maintain complete care, custody
and control of all of the equipment and materials used in the practice of
dentistry as required by Florida law. There can be no assurance that the Company
will not be further restricted from acquiring certain assets of the dental
practices under the laws of the states of Florida or Georgia or under the laws
of any other states in which the Company may desire to operate in the future.
Such restrictions could have a material adverse affect on the Company.
RELIANCE ON THE REVENUE OF THE COAST P.A. The Company's revenue depends on
revenue generated by the Coast Dentists employed by a Coast P.A. At this time,
100% of the Company's revenue is attributable to management fees paid by the
Coast Florida P.A. There can be no assurance that a Coast P.A. and the Coast
Dentists will continue to maintain successful dental practices, that a Services
and Support Agreement will not be terminated or that the Coast Dentists will
continue to be employed by a Coast P.A. The Company has no current intention of
entering into services and support agreements with entities other than a Coast
P.A. within the State of Florida. Under the Services and Support Agreement, the
Company agrees with a Coast P.A. that it will not provide services and support
for any other dental practice in the market area where the Dental Centers are
located without first obtaining the express written consent of the Coast P.A.
DEPENDENCE ON THE COAST P.A. AND THE COAST DENTISTS. The Company receives
fees for services provided to a Coast P.A. under a Services and Support
Agreement, but does not employ dentists or hygienists or control the practices
of the Coast Dentists. The Company's revenue is dependent on revenue generated
by the Coast Dentists and, therefore, effective and continued performance of the
Coast Dentists during the term of the Services and Support Agreement is
essential to the Company's long-term success. Since October 1, 1996, the
services and support fee paid by the Coast Florida P.A. has been 76% of the
Dental Centers' gross revenue. Prior to October 1, 1996, the services and
support fee paid by the Coast Florida P.A. to the Company averaged 78.5% of the
Dental Centers' gross revenue. The Company pays out of the services and support
fee all of the operating and nonoperating expenses incurred by a Coast P.A. at
the Dental Centers, except for the salaries and benefits of the Coast Dentists
and hygienists, federal and state income taxes, and bad debt and other expenses
designated as an expense of a Coast P.A. The reduction in fees agreed to in
October 1, 1996 was a result of increased costs recognized by the Coast Florida
P.A. in connection with the Company's rapid expansion. Any further reduction in
these fees in the future could have an adverse impact on the Company's operating
results. The Coast Georgia P.A. is expected to pay to the Company a services and
support fee, equal to approximately 74% of the Dental Centers' gross revenue.
The services and support fee paid by the Coast Georgia P.A. is lower than the
services and support fee paid by the Coast Florida P.A. in order to compensate
for higher operating costs associated with the Atlanta market. Any material loss
of revenue or poor operating results by a Coast P.A. would have a material
adverse effect on the Company. Additionally, the Company's ability to grow is
dependent on a Coast P.A.'s ability to continue to expand. Therefore, losses or
inability to obtain financing by a Coast P.A., thus restricting its ability to
expand, would require the Company to advance funds to that Coast P.A. or require
the Company to contract with other dental professional associations. In the
event of a breach of the Services and Support Agreement by a Coast P.A., there
can be no assurance that the legal remedies available to the Company will be
adequate to compensate the Company for its damages resulting from such breach.
See "Business -- Services and Support Agreement."
POTENTIAL CONFLICTS OF INTEREST OF THE COMPANY'S PRESIDENT AND CHIEF
OPERATING OFFICER RELATING TO THE COAST P.A. The Company's President, Chief
Operating Officer and Director, Dr. Adam Diasti, is the sole owner of the Coast
Florida P.A. and the Coast Georgia P.A. Dr. Diasti is the brother of the
Company's Chairman and Chief Executive Officer, Terek Diasti, and Vice President
of Operations, Tim Diasti. As a result of Dr. Diasti's ownership of the Coast
Florida P.A. and the Coast Georgia P.A. and his family relationships, potential
conflicts of interest may arise in certain matters including, but not limited
to, matters related to the Services and Support Agreement and future services
and support agreements. Although Dr. Diasti has a fiduciary duty to the Company,
there can be no assurance that the Company will not be
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affected by matters in which Dr. Diasti has a potential conflict of interest. In
1996 and for the six month period ended June 30, 1997, Adam Diasti received
combined salary and other distributions from the Coast Florida P.A. in the
amounts of $74,458 and $25,000, respectively. The Company believes, however,
that the terms of the Services and Support Agreement, including the management
fee, are fair to the Company and are on terms no less favorable to the Company
than would have been reached through arm's-length negotiations with an unrelated
third party. In addition, the Company and Dr. Diasti have entered into a stock
transfer and pledge agreement whereby upon the death or disability of Dr. Diasti
or breach by Dr. Diasti or the Coast Florida P.A. of its Services and Support
Agreement with the Company, the Company may require Dr. Diasti to sell his
ownership interest in the Coast Florida P.A. to a third party designated by the
Company at fair market value. Under the stock transfer and pledge agreement, Dr.
Diasti is permitted to sell his ownership interest in the Coast Florida P.A.
provided that the purchaser agrees to be bound by the terms of the stock
transfer and pledge agreement. The Company expects to enter into a similar stock
transfer and pledge agreement with Dr. Diasti with respect to the Coast Georgia
P.A. The Company's Audit Committee, consisting of two independent directors and
the Company's Chief Financial Officer, reviews and approves any transactions
with Dr. Diasti or a Coast P.A., including any amendments or modifications to
the Services and Support Agreement. See "Business -- Services and Support
Agreement," "Management" and "Certain Transactions."
OBLIGATIONS OF A COAST P.A. The Company has previously loaned capital to
the Coast Florida P.A. in connection with acquisitions by the Coast Florida
P.A., which was repaid as of July 31, 1997. The Company's current policy is not
to provide such financing in connection with acquisitions, however, in the event
a Coast P.A. does not have financing available to grow in the future, the
Company could provide financing if the Company determines that doing so is in
its best interest and is approved by the Audit Committee. On an ongoing basis,
the Company is owed sums by the Coast Florida P.A. pursuant to the Services and
Support Agreement which amounted to $2.0 million at June 30, 1997 and which
represented 132.5% of the services and support fees earned by the Company for
the month of June 1997. A material failure by a Coast P.A. to pay its debts in
operating its business as they become due could have a material adverse effect
on the business of the Company and its ability to expand. Additionally, if a
Coast P.A. defaults on notes issued to Coast Dentists in connection with
acquired Dental Centers and those Coast Dentists were to exercise their
available remedies, there could be an adverse effect on the continued operations
of the Company at those Dental Centers as well as an adverse effect on the
revenue of the Company. See "Risk Factors -- Risks Related to Intangible
Assets," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Certain Information
on the Coast P.A." and "Certain Transactions."
GOVERNMENT REGULATIONS. Business arrangements between dentists and
business corporations that provide practice management services are regulated
extensively at the state and federal levels, including regulation in the
following areas:
Corporate Practice of Dentistry. The laws of many states prohibit
corporations that are not owned entirely by dentists from employing
dentists (and in some states, dental hygienists and dental assistants),
having control over clinical decision-making, or engaging in other
activities that are deemed to constitute the practice of dentistry. Florida
law specifically prohibits non-professional corporations from employing
dentists and dental hygienists, exercising control over patient records,
and making decisions relating to clinical matters, office personnel, hours
of practice, pricing, credit, refunds, warranties and advertising. Under
Georgia law, dentists may only be employees of professional corporations or
associations whose shareholders or members are limited to licensed
dentists. Georgia dentists must maintain patient records that document the
course of treatment and may not waive co-payment or bill a third party for
more than the usual fee. The Company does not employ dentists or dental
hygienists and does not exercise control over any prohibited areas. While
Dr. Adam Diasti, the sole shareholder of the Coast Florida P.A. and the
Coast Georgia P.A., is also a shareholder, director and officer of the
Company, he acts independently when making decisions in these areas on
behalf of a Coast P.A. and the Company has no control over his decisions in
these areas.
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Some states, including Florida and Georgia, also prohibit
non-professional corporations from owning, maintaining or operating an
office for the practice of dentistry. These laws have generally been
construed to permit arrangements under which the dentists are not employed
by or otherwise controlled as to clinical matters by the party supplying
facilities and non-professional services. Florida law specifically requires
that dentists or their professional corporations maintain complete care,
custody and control of all equipment and materials used in the practice of
dentistry. The Services and Support Agreement between the Company and the
Coast Florida P.A. expressly provides that the Company shall not exercise
control over any matters that would violate the requirements of Florida
law.
Fee-Splitting and Anti-kickback Laws.
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 a 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.
In addition, most states have laws prohibiting paying or receiving
any remuneration, direct or indirect, that is intended to induce
referrals for health care items or services, including dental items and
services.
Federal Law. Federal law prohibits the offer, payment,
solicitation or receipt of any form of remuneration in return for the
referral of patients covered by federally funded health care programs
such as Medicare and Medicaid, or in return for purchasing, leasing,
ordering or arranging for the purchase, lease or order of any item or
service that is covered by a federal program. For this reason, the
Services and Support Agreement provides that the Company will not engage
in direct marketing to potential sources of business, but will only
assist Coast P.A. personnel in these endeavors by providing training,
marketing materials and technical assistance.
Advertising Restrictions. Many states, including Florida, prohibit
dentists from using advertising which includes any name other than their
own, or from advertising in any manner that is likely to lead a person to
believe that a non-dentist is engaged in the practice of dentistry. The
Services and Support Agreement provides that all advertising shall conform
to these requirements. Florida law also requires all advertising to
identify the Florida dentist who assumes total responsibility for the
advertisement and may not include the name of a person who is not either
actually involved in the practice of dentistry at the advertised location
or an owner of the practice being advertised. In Georgia, 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. All of
the advertisements include the name of Dr. Adam Diasti who owns the dental
practices through the Coast Florida P.A. and the Coast Georgia P.A.
Limitations on Delegation. Some states, including Florida and
Georgia, regulate the manner in which dentists delegate certain tasks to
non-dentists. In Florida, if a dentist uses a nonlicensed person to prepare
orthodontic or prosthetic devices such as dentures, certain record keeping
requirements must be met.
These laws have civil and criminal penalties and have been subject to
limited judicial and regulatory interpretation. They are enforced by regulatory
agencies that are vested with broad discretion in interpreting their meaning.
The Company's agreements and activities have not been examined by federal or
state
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authorities under these laws and regulations. For these reasons, there can be no
assurance that review of the Company's business arrangements or the operation of
the Dental Centers will not result in determinations that adversely affect the
Company's operations or that the long-term Services and Support Agreement or
certain of its provisions will not be held invalid and unenforceable. In
addition, these laws and their interpretation vary from state to state. The laws
and regulations of certain states into which the Company seeks to expand may
require the Company to change the form of relationships entered into with
dentists in a manner that restricts the Company's operations in those states.
See "Business -- Governmental and State Regulations."
NON-COMPETITION COVENANTS. The Services and Support Agreement requires a
Coast P.A. to use its best efforts to enter into employment agreements with the
Coast Dentists that include covenants not to compete with a Coast P.A. for a
period of two years after termination of employment, and which require the
dentists to pay certain specified amounts to a Coast P.A. if this provision is
breached. In most states, including Florida and Georgia, a covenant not to
compete will be enforced only to the extent it is necessary to protect a
legitimate business interest of the party seeking enforcement, does not
unreasonably restrain the party against whom enforcement is sought, and is not
contrary to the public interest. This determination is made based on all the
facts and circumstances of the specific case at the time enforcement is sought.
For this reason, one cannot predict with certainty whether a court will enforce
such a covenant in a given situation. In addition, no judicial precedents have
addressed whether a management company's interest under a management agreement
will be viewed as the type of protectable business interest that would permit it
to enforce such a covenant or to require a Coast P.A. to enforce such covenants
against the Coast Dentists. Furthermore, liquidated damages provisions will not
be enforced unless the court determines that the amount is a reasonable estimate
of actual damages that would be difficult to ascertain exactly. Since the
intangible value of the Services and Support Agreement depends primarily on the
ability of a Coast P.A. to preserve its business, which could be harmed if
employed dentists went into competition with a Coast P.A., a determination that
these provisions will not be enforced could have a significant adverse impact on
the Company. See "Business -- Services and Support Agreement."
COMPETITION. The Company must compete with other companies which seek to
acquire the allowable business assets of, provide management and other services
to, and affiliate with existing dental practices. The Company is aware of
several other companies which are actively engaged in businesses similar to that
of the Company, some of which have substantially greater financial resources and
longer operating histories than the Company and are located in areas where the
Company may seek to expand in the future. The Company assumes that additional
companies with similar objectives may enter the Company's markets and compete
with the Company and there can be no assurance that the Company will be able to
compete effectively with such companies. The business of providing dental
services is highly competitive in each of the markets in which the Dental
Centers operate. The Coast Dentists compete with other dentists who maintain
single offices or operate a single satellite office, as well as with dentists
who maintain group practices or operate in multiple offices. Many of these
dentists have more established practices in their markets. There can be no
assurance that the Coast Dentists will be able to compete effectively with such
other dentists. See "Business -- Competition."
RISKS ASSOCIATED WITH MANAGED CARE CONTRACTS AND CAPITATED FEE
ARRANGEMENTS. As an increasing percentage of the population is covered by
managed care organizations that provide dental coverage, the Company believes
that its success will, in part, be dependent upon its ability to assist a Coast
P.A. in negotiating contracts with HMOs and health insurance companies and other
third party payors pursuant to which services will be provided on a risk-sharing
or capitated basis. Managed care contracts accounted for 33.5% of the Coast
Florida P.A.'s revenue for the six month period ended June 30, 1997. Most of
these contracts are for one year terms which automatically renew and are
terminable by either party on 90 days notice. Under some of these agreements,
the health care provider may accept a pre-determined amount per month per
patient in exchange for providing all necessary covered services to the patients
covered under the agreement. These contracts pass much of the risk of providing
care from the payor to the provider. The Company has limited experience in
managing capitated fee arrangements and there can be no assurance that the
Company will be successful in managing such arrangements. The proliferation of
these contracts in
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markets served by the Company could result in greater predictability of revenue,
but less certainty with respect to profitability. There can be no assurance,
however, that a Coast P.A. will be able to negotiate satisfactory arrangements
on a risk-sharing or "capitated basis." In addition, to the extent that patients
or enrollees covered by these contracts require, in the aggregate, more frequent
or extensive care than is anticipated, operating margins may be reduced or the
revenue derived from these contracts may be insufficient to cover the costs of
the services provided. In such circumstances, the Company could incur losses.
Any such reduction of earnings or losses could have a material adverse affect on
the Company's results of operations. See "Business -- Governmental and State
Regulations."
RISKS ARISING FROM HEALTH CARE REFORM. There can be no assurance that the
laws and regulations of the states in which the Company operates will not change
or be interpreted in the future either to restrict or adversely affect the
Company's relationships with dentists or the operation of Dental Centers.
Federal and state governments are currently considering various types of health
care initiatives and comprehensive revisions to the health care and health
insurance systems. Some of the proposals under consideration, or others that may
be introduced, could, if adopted, have a material adverse effect on the
Company's financial condition and results of operations. It is uncertain what
legislative programs, if any, will be adopted in the future, or what actions
Congress or state legislatures may take regarding health care reform proposals
or legislation. In addition, changes in the health care industry, such as the
growth of managed care organizations and provider networks, may result in lower
payments for the services of the Coast Dentists. See "Business -- Governmental
and State Regulations."
COST CONTAINMENT AND REIMBURSEMENT TRENDS. The Company estimates that
62.8% of the revenue of the Coast Florida P.A. is derived from government
sponsored health care programs and private third-party payors and has increased
significantly in recent periods. The health care industry has experienced a
trend toward cost containment as government and private third-party payors seek
to impose lower reimbursement and utilization rates and negotiate reduced
payment schedules with service providers. The Company believes that these trends
may result in a reduction from historical levels in per patient revenue of the
Dental Centers. Further reductions in payments to dentists or other changes in
reimbursement for health care services could have an adverse affect on the
Company's revenue, unless the Dental Centers is otherwise able to offset such
payment reductions. There can be no assurance that any of the reduced revenues
and operating margins could be offset through cost reductions, increased volume,
introduction of new procedures or otherwise. See "Business -- Governmental and
State Regulations."
RISKS OF PROVIDING DENTAL SERVICES. The Coast Dentists provide dental
services to the public and are exposed to the risk of professional liability and
other claims. Such claims, if successful, could result in substantial damage
awards to the claimants which may exceed the limits of any applicable insurance
coverage. The Company does not control the practice of dentistry by the Coast
Dentists or the compliance with regulatory and other requirements directly
applicable to the Coast Dentists and their practices. Each Coast Dentist has
undertaken, however, to comply with all applicable regulations and requirements,
and the Company is indemnified under its Services and Support Agreement for
claims against the Company arising from the performance of dental services
provided by the Coast Dentists. The Company maintains liability insurance for
itself and is named as an additional insured party on the liability insurance
policy of the Coast Dentists. In addition, a Coast P.A., under its Services and
Support Agreement, is required to indemnify the Company for losses or liability
relating to claims against the Coast Dentists. While the Company believes it has
adequate liability insurance coverage, there can be no assurance that a pending
or future claim or claims will not be successful and, if successful, will not
exceed the limits of available insurance coverage, that such coverage will
continue to be available at acceptable costs and on favorable terms. See
"Business -- Services and Support Agreement."
RISKS OF BECOMING SUBJECT TO LICENSURE. Federal and state laws regulate
insurance companies, HMOs and certain other managed care organizations. Many
states also regulate the establishment and operation of networks of health care
providers. In most states, including Florida, these laws do not apply to
discounted fee-for-service arrangements. These laws also do not generally apply
to networks that are paid on a "capitated" basis, i.e. based on the number of
covered persons the network is required to serve without regard to the cost of
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service actually rendered, unless the entity with which the network provider is
contracting is not a licensed health insurer or HMO. There are exceptions to
these rules in some states. For example, certain states require a license for a
capitated arrangement with any party unless the risk-bearing entity is a
professional corporation that employs the professionals. The Company believes
that it is in compliance with the laws of the State of Florida with respect to
the operation of the Dental Centers and the Company in Florida, but there can be
no assurance that interpretations of these laws by the regulatory authorities in
Florida or in the states in which the Company expands will not require licensure
or a restructuring of some or all of the Company's operations. In the event that
the Company is required to become licensed under these laws, the licensure
process can be lengthy and time consuming and, unless the regulatory authority
permits the Company to continue to operate while the licensure process is
progressing, the Company could experience a material adverse change in its
business while the licensure process is pending. In addition, many of the
licensing requirements mandate strict financial and other requirements which the
Company may not immediately be able to meet. Further, once licensed, the Company
would be subject to continuing oversight by and reporting to the respective
regulatory agency. The regulatory framework of certain jurisdictions may limit
the Company's expansion into, or ability to continue operations within, such
jurisdictions if the Company is unable to modify its operational structure to
conform with such regulatory framework. Any limitation on the Company's ability
to expand could have an adverse effect on the Company. Furthermore, certain
states, such as Florida, have recently enacted laws which require nonexempt
entities administering managed care contracts with HMOs to register as "fiscal
intermediaries" with such states. In the case of Florida, the Company intends to
either register with the State of Florida once the state adopts registration
procedures or obtain a third-party administrator license from the State of
Florida which would then make the Company exempt from the fiscal intermediary
registration law. See "Governmental and State Regulations."
DEPENDENCE ON KEY INDIVIDUALS. The success of the Company is dependent
upon the continued services of the Company's senior management. The loss of the
services of one or more of these individuals, including the Company's Chairman
and Chief Executive Officer, Terek Diasti; its President, Chief Operating
Officer and sole owner of the Coast Florida P.A. and the Coast Georgia P.A.,
Adam Diasti; or its Chief Financial Officer, Joseph R. Smith, could have a
material adverse effect on the Company. The Company believes that its future
success will also depend in part upon its ability to attract and retain
qualified management personnel. Competition for such personnel is intense and
the Company competes for qualified personnel with numerous other employers, some
of whom have greater financial and other resources than the Company. There can
be no assurance that the Company will be successful in attracting and retaining
such personnel. See "Management."
CONTROL BY PRINCIPAL STOCKHOLDER. Upon completion of the Offering, Terek
Diasti, Adam Diasti and Tim Diasti, through the Diasti Nevada Family Limited
Partnership, will own approximately 35.0% of the outstanding shares of Common
Stock (33.6% if the underwriters' over-allotment option is exercised in full).
Accordingly, these individuals, as a group, will be able to significantly
influence, and may be able to effectively control all matters requiring
stockholder approval, including the election of the Company's directors and any
amendments to the Company's Certificate of Incorporation and Bylaws, and to
control the business of the Company. Such control could preclude any acquisition
of the Company and could adversely affect the market price of the Common Stock.
See "Principal and Selling Stockholders" and "Description of Capital Stock."
RISKS RELATED TO INTANGIBLE ASSETS. The Company's pro forma total assets
reflect substantial intangible assets in the form of non-compete agreements and
dental service agreements. These intangible assets are being amortized over
their expected useful lives. There can be no assurance that the value of such
intangible assets will ever be realized by the Company. As of June 30, 1997,
approximately 29% of the Company's total assets were intangible assets. The
dental service agreements amount is being amortized on a straight-line basis
over 25 years and the non-compete agreements amount is being amortized on a
straight-line basis over a period of three to nine years. The Company's policy
is to evaluate on a regular basis whether events and circumstances have occurred
that indicate that all or a portion of the carrying amount of such assets may no
longer be recoverable, in which case an additional charge to earnings would
become necessary. Any future determination requiring the write-off of a
significant portion of such unamortized assets would adversely affect
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the Company's results of operations. See Unaudited Pro Forma Combined Financial
Information of the Company.
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, the
Company will have outstanding 7,299,871 shares of Common Stock, of which the
2,000,000 shares sold in the Offering (2,300,000 if the Underwriters'
over-allotment option is exercised), the 2,530,000 shares sold in the Company's
initial public offering and an additional 106,415 shares will be freely
tradeable without restriction or further registration under the Securities Act
of 1933 (the "Securities Act"). The remaining 2,663,456 shares (the "Restricted
Shares") are subject to certain restrictions described below. Holders of
2,657,659 of the Restricted Shares will be eligible to sell a portion of such
shares pursuant to Rule 144 ("Rule 144") under the Securities Act, subject to
manner of sale, volume, notice and information requirements of Rule 144.
Notwithstanding the eligibility of certain shares to be sold following the
completion of the Offering, such shares are subject to certain additional
restrictions on transfer pursuant to certain agreements described below. See
"Shares Eligible for Future Sale."
The Company, its executive officers and directors and the Selling
Stockholders have agreed that they will not, directly or indirectly, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of any option to purchase or other sale or disposition)
of any shares of Common Stock or any securities convertible into, or exercisable
or exchangeable for, Common Stock or other capital stock of the Company, or any
right to purchase or acquire Common Stock or other capital stock of the Company,
for a period of 180 days after the date of this Prospectus, without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, except for bona fide gifts or transfers affected by such
stockholders other than on any securities exchange or in the over-the-counter
market to donees or transferees that agree to be bound by similar agreements
(the "Lock-up Agreements"). Prudential Securities Incorporated may, at any time
and without notice, release all or any portion of the shares subject to such
agreements. Sales of substantial amounts of Common Stock in the public market,
or the availability of such shares for future sale, could adversely affect the
market price of the Common Stock and could impair the Company's future ability
to raise additional capital through an offering of its equity securities. See
"Shares Eligible for Future Sale" and "Underwriting."
The Company has filed a Form S-8 registration statement under the
Securities Act to register all shares of Common Stock subject to then
outstanding stock options and Common Stock issuable pursuant to the Incentive
Plan. Shares covered by this registration statement will thereupon be eligible
for sale in the public markets, subject to the Lock-up Agreements relating to
shares held by executive officers. See "Management" and "Shares Eligible for
Future Sale."
The Company is unable to predict the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock, or the perception that such sales could occur, could
adversely affect the market price of the Common Stock and could impair the
Company's future ability to obtain capital through offerings of equity
securities. See "Principle and Selling Stockholders," "Shares Eligible for
Future Sale" and "Underwriting."
Following the Offering the Company may issue Common Stock from time to time
in connection with the acquisition of stock or assets of other companies.
Securities issued in such transactions may be exempt from registration under the
Securities Act.
CERTAIN ANTI-TAKEOVER PROVISIONS. Certain provisions in the Company's
Certificate of Incorporation and Bylaws and Delaware law may make a change in
control of the Company more difficult to effect, even if a change in control
were in the stockholders' interest. Such provisions include certain super
majority voting requirements contained in the Company's Certificate of
Incorporation. The Company's Certificate of Incorporation also provides that the
Board of Directors is divided into three classes of directors, elected for
staggered three-year terms. In addition, the Company's Certificate of
Incorporation allows the Board of
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Directors to determine the terms of preferred stock which may be issued by the
Company without approval of the holders of the Common Stock, and thereby enables
the Board of Directors to inhibit the ability of the holders of the Common Stock
to effect a change in control of the Company. See "Description of Capital
Stock -- Certain Provisions of Delaware Law."
The Company has entered into employment agreements with three executive
officers. Such agreements require the Company to pay certain amounts to such
employees upon their termination following certain events including a change in
control of the Company. Such agreements may inhibit a change in control of the
Company. See "Management -- Employment Agreements."
RESTRICTIONS ON PAYMENT OF DIVIDENDS. The Company's bank credit facility
places certain restrictions on the future payment of dividends. Furthermore, the
Company currently intends to retain all future earnings for the operation and
expansion of its business and, accordingly, the Company does not anticipate that
any dividends will be declared or paid for the foreseeable future. See "Dividend
Policy."
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THE COMPANY
The Company was incorporated in August 1992 as Sunshine Health Services
Inc., a Florida corporation, and changed its name to Coast Dental, Inc. ("CDI")
in August 1994. Effective March 31, 1996, CDI was merged into Coast Dental
Services, Inc., a Delaware corporation, for the purpose of reincorporating the
Company in the State of Delaware and changing its corporate name. The Company
obtains its revenue from the Coast P.A. for providing management services and
support to the general dentistry practices at the Dental Centers.
As of September 2, 1997, the Company was managing 48 Dental Centers located
in central and northern Florida. Of the 48 Dental Centers, 16 were internally
developed and 32 were acquired by the Company. The Company opened two internally
developed Dental Centers in both 1992 and 1993, four in 1994, three in 1995, one
in 1996, and four in 1997. The Company added 17 acquired Dental Centers in 1996,
including one in January, seven in April, three in September, three in November
and three in December. The Company has added 15 acquired Dental Centers to date
in 1997, including three in March, six in April, three in June, one in July and
two in August.
The address of the Company's executive offices is 6200 Courtney Campbell
Causeway, Suite 690, Tampa, Fl. 33607, and its telephone number is (813)
288-1999.
THE ACQUISITIONS
1996 ACQUISITIONS
In January 1996, the Company completed its first acquisition of one Dental
Center for a purchase price of $40,000 and in April 1996 acquired seven Dental
Centers for a purchase price of $1.8 million. For the year ended December 31,
1995, these eight dental practices produced combined gross revenue of
approximately $3.5 million.
In September 1996, the Company added three separately acquired Dental
Centers located in Tampa, Wesley Chapel and Orlando, Florida. The combined
purchase price for these three acquired Dental Centers was $620,000. For the
year ended December 31, 1995 and the six months ended June 30, 1996, these three
dental practices produced combined gross revenue of approximately $1.1 million
and $558,000, respectively.
In November 1996, the Company added three acquired Dental Centers located
in Casselberry, Apopka and Orlando, Florida. The combined purchase price for
these three acquired Dental Centers was $2.5 million. For the year ended
December 31, 1995 and the nine months ended September 30, 1996, these three
dental practices produced combined gross revenue of approximately $3.4 million
and $2.4 million, respectively.
In December 1996, the Company added three separately acquired Dental
Centers located in Gainesville, Kissimmee and Orlando, Florida. The combined
purchase price for these three acquired Dental Centers was $375,000. For the
year ended December 31, 1995 and the nine months ended September 30, 1996, these
three dental practices produced combined gross revenue of approximately $600,000
and $500,000, respectively.
The acquisitions completed during 1996 are referred to herein as the "1996
Acquisitions." See the Financial Statements and Unaudited Pro Forma Combined
Financial Information of the Company.
1997 ACQUISITIONS
In March 1997, the Company added three acquired Dental Centers located in
Oak Ridge, Lake Mary and Maitland, Florida. The combined purchase price of these
three acquired Dental Centers was $925,000. For the year ended December 31, 1996
and the three months ended March 31, 1997, these three dental practices produced
combined gross revenue of approximately $1.2 million and $426,000, respectively.
In April 1997, the Company added six acquired Dental Centers located in St.
Petersburg (two locations), Port Richey, Palm Harbor, Clearwater, and New Port
Richey, Florida. The combined purchase price of these
17
<PAGE> 19
six acquired Dental Centers was $1.7 million. For the year ended December 31,
1996 and the three months ended March 31, 1997, these six dental practices
produced combined gross revenue of approximately $3.1 million and $789,000,
respectively.
In June 1997, the Company added three acquired Dental Centers located in
Ocala and Kissimmee (two locations), Florida. The combined purchase price of
these three acquired Dental Centers was $1.2 million. For the year ended
December 31, 1996 and the three months ended March 31, 1997, these three dental
practices produced combined gross revenue of approximately $1.8 million and
$455,000, respectively.
In July 1997, the Company added one acquired Dental Center located in New
Smyrna Beach, Florida. The purchase price of this acquired Dental Center was
$585,000. For the year ended December 31, 1996 and the six months ended June 30,
1997, this dental practice produced gross revenue of approximately $861,000 and
$400,000, respectively.
In August 1997, the Company added two separately acquired Dental Centers
located in Punta Gorda and Cape Coral, Florida. The combined purchase price of
these two acquired Dental Centers was $720,000. For the year ended December 31,
1996 and the six months ended June 30, 1997, these two dental practices produced
gross revenue of approximately $1.1 million and $601,000, respectively.
The acquisitions completed after June 30, 1997 are collectively referred to
herein as the "Recent Acquisitions." The acquisitions completed during 1997 are
collectively referred to herein as the "1997 Acquisitions."
RELATIONSHIP BETWEEN THE COMPANY AND THE COAST P.A.
The Company provides management services to 48 Dental Centers located in
Florida pursuant to the Services and Support Agreement with the Coast Florida
P.A., which is wholly-owned and controlled by Dr. Adam Diasti. A Coast P.A.
receives its revenue from payments by or for the account of patients, while the
Company receives fees from a Coast P.A. for providing management services and
support to the Dental Centers pursuant to its Services and Support Agreement.
The Coast Dentists and dental hygienists practicing in the Dental Centers are
employed and compensated by the Coast P.A. The Company employs and compensates
all administrative and support staff, including receptionists, office managers
and dental assistants located in each Dental Center.
The Company provides management and administrative services to the Dental
Centers, thus allowing the Coast Dentists to focus exclusively on the provision
of general dental care. The Coast P.A. maintains full control over the dental
practices of the Coast Dentists and sets prices for all dental services. The
Coast P.A. makes all final decisions regarding advertising and marketing
programs related to its practice while the Company assists in the development
and implementation of advertising and marketing programs. The Company purchases
all non-dental inventory and supplies and, as directed by the Coast P.A., all
dental inventory and supplies for each Dental Center.
The Company assists in marketing the Coast Dental Network to HMOs, health
insurance companies and other third-party payors who have an established
presence in regional markets served, or expected to be served, by a Coast P.A.
The Company assists the Coast P.A. in negotiating managed care contracts with
managed care companies, to be entered into by, and at the sole discretion of,
the Coast P.A.
The Company has expanded and expects to continue to expand through the
addition of internally developed and acquired Dental Centers. When the Company
acquires an existing dental office, the Company acquires the assets to the
extent permitted by law. Typically, the Company acquires the dental office lease
and all dental and office equipment. The Coast P.A. acquires the patient lists,
patient records and related assets, and enters into employment agreements with
the acquired practice's dentists and hygienists to staff the Dental Centers. The
Company also opens internally developed Dental Centers in conjunction with a
Coast P.A. which become subject to a Services and Support Agreement. When
opening internally developed Dental Centers, the Company provides the dental
office and all the necessary equipment and support staff while the Coast P.A.
provides dentists and dental hygienists. The patient lists and records are the
property of the Coast P.A.
18
<PAGE> 20
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,600,000 shares of
Common Stock offered by the Company (after deducting underwriting discounts and
commissions and estimated offering expenses), based upon an assumed offering
price of $21.50, the last reported sales price for the Common Stock on the
Nasdaq National Market at September 2, 1997, are estimated to be approximately
$32.0 million ($38.4 million if the Underwriters' over-allotment option is
exercised in full). The Company will not receive any of the proceeds from the
sale of shares of Common Stock by the Selling Stockholders.
The Company intends to use the net proceeds from the Offering to finance
the expansion of the Company through the addition of both internally developed
and acquired Dental Centers. Pending such uses, the net proceeds will be
invested in short-term, investment-grade securities, certificates of deposit or
direct or guaranteed obligations of the United States government.
PRICE RANGE OF COMMON STOCK
The Common Stock has been included for quotation in the Nasdaq National
Market under the symbol "CDEN" since February 11, 1997. The following table sets
forth, for the periods indicated, the range of high and low sales prices per
share of Common Stock for the period, as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
1997 HIGH LOW
- ---- ------ ------
<S> <C> <C>
First Quarter (beginning February 11, 1997)................. $14.00 $10.25
Second Quarter.............................................. 16.88 12.13
Third Quarter (through September 2, 1997)................... 24.88 14.25
</TABLE>
On September 2, 1997, the last reported sales price of the Common Stock on
the Nasdaq National Market was $21.50 per share and the number of holders of
record of the Common Stock was approximately 68.
DIVIDEND POLICY
The Company has not paid or declared any dividends since its inception
other than cash distributions of $643,000 to stockholders to pay federal income
taxes on taxable income earned by the Company through February 10, 1997 as an S
Corporation. See Note 2 to Notes to Financial Statements. The Company currently
intends to retain all future earnings for the operation and expansion of its
business and, accordingly, the Company does not anticipate that any dividends
will be declared or paid on the Common Stock for the foreseeable future. Any
future determination to pay cash dividends will be at the discretion of the
Board of Directors and will be dependent upon the Company's financial condition,
results of operations, capital requirements and such other factors as the Board
of Directors deems relevant. The Company's bank credit facility places certain
restrictions on the future payment of dividends. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
19
<PAGE> 21
CAPITALIZATION
The following table sets forth the current portion of long-term debt and
the capitalization of the Company as of June 30, 1997, (i) on an actual basis,
(ii) on a pro forma basis to give effect to the Recent Acquisitions and (iii) as
adjusted to give effect to the sale of the 1,600,000 shares of Common Stock
offered by the Company hereby, which, based upon an assumed public offering
price of $21.50 per share, are estimated to be approximately $32.0 million
(after deducting underwriting discounts and commissions and estimated offering
expenses). This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and Unaudited Pro Forma Combined Financial Information
and related Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt and capital lease
obligations............................................... $ 290 $ 344 $ 344
Long-term debt and capital lease obligations................ 523 721 721
Stockholders' equity(1):
Common Stock: $.001 par value; 50,000,000 shares
authorized, 5,700,000, shares outstanding and
7,299,871, shares outstanding, pro forma as adjusted... 6 6 8
Additional paid-in capital................................ 16,233 16,333 48,331
Retained earnings......................................... 986 986 986
------- ------- -------
Total stockholders' equity........................ 17,225 17,325 49,325
------- ------- -------
Total capitalization.............................. $18,038 $18,390 $50,390
======= ======= =======
</TABLE>
- ---------------
(1) Excludes 900,000 shares of Common Stock reserved for future issuance
pursuant to the Plans. At June 30, 1997, options to purchase approximately
285,000 shares of Common Stock have been granted under the Plans, at a
weighted average exercise price of approximately $11.59 per share, of which
approximately 46,000 are presently exercisable. See "Management -- The
Plans," "Shares Eligible for Future Sale," and Note 12 to the Notes to
Financial Statements of the Company.
20
<PAGE> 22
SELECTED PRO FORMA FINANCIAL DATA
The pro forma financial data are derived from the Unaudited Pro Forma
Combined Financial Information of the Company appearing elsewhere in this
Prospectus. The Pro Forma Statement of Operations Data presented in the
following table for the year ended December 31, 1996 give effect to (i) the 1996
Acquisitions and the 1997 Acquisitions, (ii) the Company's entering into the
Services and Support Agreement with the Coast Florida P.A. on October 1, 1996,
and (iii) the Company's Initial Public Offering and the application of the net
proceeds therefrom, as if they had occurred at January 1, 1996. The Pro Forma
Statement of Operations Data for the six months ended June 30, 1997 give effect
to (i) the 1997 Acquisitions and (ii) the Initial Public Offering, as if they
had occurred at January 1, 1997. The Pro Forma Balance Sheet Data presented in
the following table at June 30, 1997 give effect to (i) the Recent Acquisitions
and (ii) the consummation of the Offering and the application of the estimated
net proceeds therefrom as described under "Use of Proceeds", as if they had
occurred as of June 30, 1997.
The pro forma financial data should be read in conjunction with the
Unaudited Pro Forma Combined Financial Information of the Company and the
related notes thereto included elsewhere in this Prospectus. Management believes
the assumptions used in the Unaudited Pro Forma Combined Financial Information
provide a reasonable basis on which to present the pro forma financial data. The
pro forma financial data are provided for informational purposes only and should
not be construed to be indicative of the Company's financial position or results
of operations had the transactions and events described in the notes thereto
been consummated on the dates assumed and are not intended to project the
Company's financial condition or results of operations on any future date or for
any future period.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ----------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA:
Net revenue................................................. $ 17,870 $ 10,114
Dental Center expenses:
Staff salaries............................................ 5,454 3,037
Dental supplies and lab fees.............................. 2,875 1,626
Advertising............................................... 976 553
Rent...................................................... 2,202 1,173
Depreciation and other.................................... 1,324 551
-------- --------
Total Dental Center expenses................................ 12,831 6,940
-------- --------
Gross profit................................................ 5,039 3,174
General and administrative expenses....................... 1,430 821
Depreciation and amortization............................. 346 179
-------- --------
Operating income............................................ 3,263 2,174
Interest (expense) income -- net.......................... (294) 97
-------- --------
Income before income taxes.................................. 2,969 2,271
Income tax expense........................................ (1,157) (886)
-------- --------
Net income................................................ $ 1,812 $ 1,385
======== ========
Earnings per share.......................................... $ 0.45 $ 0.26
======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------
(IN THOUSANDS)
<S> <C>
PRO FORMA BALANCE SHEET DATA:
Working capital............................................. $ 40,305
Total assets................................................ 51,848
Long-term debt, including current maturities................ 1,065
Stockholders' equity........................................ 49,325
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Information
21
<PAGE> 23
SELECTED FINANCIAL DATA
The following selected financial data with respect to the Company's
Statements of Operations Data for the years ended December 31, 1993, 1994, 1995
and 1996, and the Company's Balance Sheet Data as of December 31, 1994, 1995 and
1996, are derived from the Financial Statements of the Company which have been
audited by Deloitte & Touche LLP, independent auditors. The selected financial
data presented below for the year ended December 31, 1992 and for the six months
ended June 30, 1996 and 1997 are unaudited and were prepared by management of
the Company on the same basis as the audited Financial Statements included
elsewhere herein and, in the opinion of management of the Company, include all
adjustments necessary to present fairly the information set forth therein. The
results for the six months ended June 30, 1997 are not necessarily indicative of
the results to be expected for the full year ending December 31, 1997 or future
periods. The following data should be read in conjunction with the Financial
Statements of the Company and the related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Business -- Coast Dental Center Locations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue................................... $ 398 $ 1,194 $ 1,868 $ 3,325 $ 8,128 $ 3,351 $ 7,936
Dental Center expenses
Staff salaries.............................. 63 291 446 863 2,324 947 2,414
Dental supplies and lab fees................ 35 166 385 557 1,203 444 1,160
Advertising................................. 71 155 221 351 675 262 507
Rent........................................ 33 140 218 296 811 305 766
Depreciation and other...................... 52 100 163 286 438 214 363
------- ------- ------- ------- ------- ------- -------
Total Dental Center expenses.................. 254 852 1,433 2,353 5,451 2,172 5,210
------- ------- ------- ------- ------- ------- -------
Gross profit................................ 144 342 435 972 2,677 1,179 2,726
General and administrative expenses........... -- 296 580 682 950 433 751
Depreciation and amortization................. 11 10 5 15 140 53 143
------- ------- ------- ------- ------- ------- -------
Operating income (loss)..................... 133 36 (150) 275 1,587 693 1,832
Interest (expense) income -- net.............. (9) (30) (32) (50) (184) (60) 114
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes............. 124 6 (182) 225 1,403 633 1,946
Income tax (expense).......................... -- -- -- -- -- -- (617)
------- ------- ------- ------- ------- ------- -------
Net income (loss)............................. $ 124 $ 6 $ (182) $ 225 $ 1,403 $ 633 $ 1,329
======= ======= ======= ======= ======= ======= =======
Pro forma income tax (expense) benefit(1)..... $ (50) $ (2) $ 73 $ (90) $ (547) $ (247) $ (142)
------- ------- ------- ------- ------- ------- -------
Pro forma net income (loss)(1)................ $ 74 $ 4 $ (109) $ 135 $ 856 $ 386 $ 1,187
======= ======= ======= ======= ======= ======= =======
Earnings per share............................ $ 0.40 $ 0.18 $ 0.26
Pro forma earnings per share.................. 0.24 0.11 0.23
Weighted average shares outstanding(000s)..... 3,500 3,500 5,211
SELECTED OPERATING DATA:
Dental Centers(2)............................. 2 4 8 11 29 19 43
Gross revenue per Dental Center(3)............ NA NA $ 535 $ 590 $ 635 $ 302 $ 385
Coast Dentists(2)............................. 2 4 8 10 35 21 64
Dental chairs(2).............................. 11 22 38 48 148 82 221
Patient visits................................ NA 11,881 19,346 42,005 100,949 39,349 94,734
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................ $ (24) $ (228) $ (496) $ (168) $ (816) $ 8,990
Total assets......................................... 376 583 914 1,198 7,969 19,496
Long-term debt, including current maturities......... 172 210 385 608 4,649 813
Stockholders' equity................................. 126 132 (50) 175 1,464 17,225
</TABLE>
- ---------------
(1) Pro forma adjusted to reflect a 39% income tax rate as if the Company was
taxed as a C Corporation during the periods presented. The Company converted
to a C Corporation on February 11, 1997. See "Selected Pro Forma Financial
Data."
(2) Presented as of the end of the period.
(3) Includes only Dental Centers open for at least one year as of the beginning
of the period, so that two Dental Centers are included for 1994, four Dental
Centers are included for 1995, eight Dental Centers are included for 1996
and the six months ended June 30, 1996 and 12 Dental Centers are included
for the six months ended June 30, 1997.
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company opened its first Dental Center in May 1992, and to date has
added 16 internally developed and 32 acquired Dental Centers. The Company
derives its revenue through fees earned from the Coast P.A. for providing
management services and support at the Dental Centers. The Company provides
management services to 48 Dental Centers, located in central and northern
Florida. As of September 2, 1997, 64 Coast Dentists were employed by the Coast
Florida P.A., serving over 328,000 patients. The Company expects to expand the
Coast Dental Network in new and existing markets through the addition of
internally developed and acquired Dental Centers.
Pursuant to the Services and Support Agreement with a Coast P.A., the
Company provides management services and support to facilitate the development
and growth of Dental Centers. Operating expenses at the Dental Centers, with the
exception of compensation paid to the Coast Dentists and dental hygienists, are
expenses of the Company and are recognized as incurred. Since October 1, 1996,
the services and support fee paid by the Coast Florida P.A. has been 76% of the
Dental Centers' gross revenue. Prior to October 1, 1996, the services and
support fee paid by the Coast Florida P.A. to the Company averaged 78.5% of the
Dental Centers' gross revenue. In conjunction with the Company's expansion into
Atlanta, Georgia, the Company expects to enter into a Services and Support
Agreement with the Coast Georgia P.A. to manage the Dental Centers in Georgia.
The Coast Georgia P.A. is expected to pay to the Company a services and support
fee, equal to approximately 74% of the Dental Centers' gross revenue. The
services and support fee paid by the Coast Georgia P.A. is lower than the
services and support fee paid by the Coast Florida P.A. in order to compensate
for higher operating costs associated with the Atlanta market. The Company pays,
out of the services and support fee, all of the operating and nonoperating
expenses incurred by a Coast P.A. at the Dental Centers, except for the salaries
and benefits of the Coast Dentists and hygienists, federal and state income
taxes, and bad debt and other expenses designated as an expense of a Coast P.A.
If the current fee had been charged by the Company instead of the previously
agreed fees for the years ended December 31, 1994, 1995 and 1996, the fees
earned by the Company would have been reduced by approximately $128,000, $74,000
and $263,000, respectively. Effective June 1, 1997 the Company agreed to pay
each Coast P.A. the sum of $50,000 in connection with each internally developed
Dental Center it commits to open, in consideration for a Coast P.A.'s agreement
to expand the Service and Support Agreement to include the new internally
developed Dental Centers. See "Risk Factors -- Dependence on the Coast P.A. and
the Coast Dentists" and "Certain Transactions."
The Company opened two internally developed Dental Centers in both 1992 and
1993, four in 1994, three in 1995 and one in 1996. In June and July 1997, the
Company opened four internally developed Dental Centers located in Palm Bay,
Lakeland, Sarasota and Venice, Florida. In addition, the Company currently has
seven internally developed Dental Centers under construction in central Florida
and Atlanta, Georgia, with the Company's first Dental Center located in Atlanta,
Georgia scheduled to open by September 30, 1997. The average cost to the Company
of an internally developed Dental Center has been approximately $150,000, which
includes the cost of equipment, leasehold improvements and working capital
associated with initial operations. At internally developed Dental Centers,
profitability to the Company has been attained in an average of three to four
months from opening.
The 1996 Acquisitions resulted in the addition of 17 acquired Dental
Centers located in central and northern Florida. The combined purchase price for
these acquired Dental Centers was $5.3 million, consisting of $1.2 million in
cash and $4.1 million in promissory notes. On a pro forma basis, had the 1996
Acquisitions occurred at the beginning of 1996, the Company would have recorded
$3.8 million in net revenue for such period.
During the six months ended June 30, 1997, the Company added a total of 12
acquired Dental Centers located in central and northern Florida. The combined
purchase price for these acquired Dental Centers was $3.9 million, consisting of
$2.7 million in cash, $967,000 in promissory notes and the assumption of
$171,000
23
<PAGE> 25
in liabilities. On a pro forma basis, had these acquisitions occurred at the
beginning of 1996, the Company would have recorded $9.8 million and $4.3 million
in net revenue for 1996 and the six months ended June 30, 1997, respectively.
In July 1997, the Company acquired one Dental Center located in New Smyrna
Beach, Florida. The purchase price for this acquired Dental Center was $585,000,
consisting of $285,000 in cash, 5,797 shares of the Company's Common Stock and
$200,000 in promissory notes. On a pro forma basis, had this acquisition
occurred at the beginning of 1996, the Company would have recorded $654,000 and
$328,000 in net revenue for 1996 and the six months ended June 30, 1997,
respectively.
In August 1997, the Company separately acquired two Dental Centers located
in Punta Gorda and Cape Coral, Florida. The combined purchase price for these
acquired Dental Centers was $720,000, consisting of $360,000 in cash and
$360,000 in promissory notes. On a pro forma basis, had these acquisitions
occurred at the beginning of 1996, the Company would have recorded $1.1 million
and $601,000 in net revenue for 1996 and the six months ended June 30, 1997,
respectively.
The Coast Florida P.A. currently derives its revenue from a combination of
sources, including fees paid by private pay patients, indemnity insurance
reimbursements and capitation payments from managed care companies. Medicaid
reimbursements currently account for approximately 2.4% of the revenue of the
Coast Florida P.A. The Coast Florida P.A. currently maintains 11 capitated
managed care contracts.
The following table outlines the payor mix for the Coast Florida P.A.'s
revenue for the periods presented:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31 SIX MONTHS
--------------------- ENDED
1994 1995 1996 JUNE 30, 1997
----- ----- ----- -------------
<S> <C> <C> <C> <C>
Self-pay............................................. 100.0% 65.0% 55.0% 37.3%
HMOs................................................. -- 22.0 26.0 33.5
Private insurers..................................... -- 12.0 17.0 26.8
Medicaid............................................. -- 1.0 2.0 2.4
----- ----- ----- -----
Total...................................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
Prior to the Initial Public Offering, the Company had been an S Corporation
for federal income tax purposes. The Company's S Corporation status terminated
upon the consummation of the Initial Public Offering.
24
<PAGE> 26
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net revenue (consisting
of management fees derived pursuant to the Services and Support Agreement),
certain items in the Company's statements of operations for the periods
indicated:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------- --------------
1994 1995 1996 1996 1997
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Net revenue.............................. 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Dental Center expenses:
Staff salaries......................... 23.9 26.0 28.6 28.3 30.4
Dental supplies and lab fees........... 20.6 16.7 14.8 13.2 14.6
Advertising............................ 11.8 10.6 8.3 7.8 6.4
Rent................................... 11.7 8.9 10.0 9.1 9.7
Depreciation and other................. 8.7 8.6 5.4 6.4 4.5
----- ----- ----- ----- -----
Total Dental Center expenses............. 76.7 70.8 67.1 64.8 65.6
----- ----- ----- ----- -----
Gross profit........................... 23.3 29.2 32.9 35.2 34.4
----- ----- ----- ----- -----
General and administrative expenses...... 31.0 20.5 11.7 12.9 9.5
Depreciation and amortization............ 0.3 0.5 1.7 1.6 1.8
----- ----- ----- ----- -----
Operating income (loss)................ (8.0) 8.2 19.5 20.7 23.1
Interest (expense) income -- net......... (1.7) (1.5) (2.3) (1.8) 1.4
----- ----- ----- ----- -----
Income (loss) before income taxes........ (9.7) 6.7 17.2 18.9 24.5
Income tax (expense)..................... -- -- -- -- (7.8)
----- ----- ----- ----- -----
Net income (loss)........................ (9.7)% 6.7% 17.2% 18.9% 16.7%
===== ===== ===== ===== =====
Pro forma income tax (expense) benefit... 3.9 (2.7) (6.7) (7.4) (1.7)
----- ----- ----- ----- -----
Pro forma net income (loss).............. (5.8)% 4.0% 10.5% 11.5% 15.0%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Net Revenue. Net revenue increased 136.9% from $3.4 million for the six
months ended June 30, 1996 to $7.9 million for the six months ended June 30,
1997. This increase was caused primarily by a 31.0% increase in net revenue
attributable to the 12 comparable Dental Centers (Dental Centers that were open
throughout the periods being compared), which accounted for $837,000 of the net
revenue increase; the three internally developed Dental Centers opened in 1997,
which accounted for $174,000 of the increase; the 17 acquired Dental Centers
added in 1996, which accounted for $2.8 million of the increase; and the 12
acquired Dental Centers added in 1997, which accounted for $844,000 of the
increase. Capitation payments received from 11 managed care contracts during the
six months ended June 30, 1997 accounted for $1.1 million of this increase.
Increases in net revenue are primarily driven by increases in patient visits.
Patient visits increased 140.7% from 39,349 for the six months ended June 30,
1996 to 94,734 for the six months ended June 30, 1997. This increase was caused
primarily by an increase of 10,117 patient visits at the 12 comparable Dental
Centers, an increase of 2,537 patient visits at the three internally developed
Dental Centers, an increase of 33,521 patient visits at the 17 acquired Dental
Centers added in 1996 and an increase of 9,210 patient visits at the 12 acquired
Dental Centers added in 1997.
Staff Salaries. Staff salaries increased 154.9% from $947,000 for the six
months ended June 30, 1996 to $2.4 million for the six months ended June 30,
1997. This increase in staff salaries was caused primarily by an increase in
salaries of $265,000 for the 12 comparable Dental Centers, $78,000 for the three
internally developed Dental Centers opened in 1997, $832,000 for the 17 acquired
Dental Centers added in 1996 and $292,000 for the 12 acquired Dental Centers
added in 1997. Staff salaries include the compensation paid to the
administrative staff at each Dental Center, including the dental assistants,
office managers, sterilization technicians and front desk managers. As a
percentage of net revenue, staff salaries increased from 28.3% for
25
<PAGE> 27
the six months ended June 30, 1996 to 30.4% for the six months ended June 30,
1997. This increase was caused primarily by an increase in staffing due to the
addition of internally developed and acquired Dental Centers which was slightly
offset by staff levels at the 12 comparable Dental Centers remaining relatively
constant while net revenue increased. While an internally developed Dental
Center can operate with a relatively limited dental staff in the early stages of
its development, the services of a dentist, dental hygienist, dental assistant
and front desk manager are still necessary. As a result, staff salaries as a
percentage of net revenue will typically be higher in the first six months of
operation until patient visits are increased. In addition, for acquired Dental
Centers, staff salaries as a percentage of net revenue will typically be higher
in the first three to six months following an acquisition as the Company
implements the Coast Operating Model to increase productivity and efficiency.
Dental Supplies and Lab Fees. Dental supplies and lab fees increased
161.2% from $444,000 for the six months ended June 30, 1996 to $1.2 million for
the six months ended June 30, 1997. This increase was caused primarily by an
increase in patient visits and dental services provided at the 12 comparable
Dental Centers, the three internally developed Dental Centers and the 29
acquired Dental Centers. As a percentage of net revenue, dental supplies and lab
fees increased from 13.2% for the six months ended June 30, 1996 to 14.6% for
the six months ended June 30, 1997. This increase was caused primarily by the
addition of the 29 acquired Dental Centers. Dental supplies and lab fees as a
percentage of net revenue will typically be higher in the first three to six
months following an acquisition as the Company implements the Coast Operating
Model to increase productivity and efficiency.
Advertising. Advertising expense increased 93.7% from $262,000 for the six
months ended June 30, 1996 to $507,000 for the six months ended June 30, 1997.
This increase was caused primarily by implementation of a more aggressive
advertising program for the acquired Dental Centers. As a percentage of net
revenue, advertising expense decreased from 7.8% for the six months ended June
30, 1996 to 6.4% for the six months ended June 30, 1997. This decrease was
caused primarily by an increase in market penetration by comparable Dental
Centers while advertising expenses remained relatively constant for those Dental
Centers.
Rent. Rent expense increased 151.0% from $305,000 for the six months ended
June 30, 1996 to $766,000 for the six months ended June 30, 1997. This increase
was caused primarily by the addition of the three internally developed Dental
Centers, the 17 acquired Dental Centers in 1996 and the 12 acquired Dental
Centers in 1997. As a percentage of net revenue, rent expense increased from
9.1% for the six months ended June 30, 1996 to 9.7% for the six months ended
June 30, 1997. This increase was caused primarily by higher rent expense
associated with the 17 acquired Dental Centers in 1996 and the 12 acquired
Dental Centers in 1997.
Other Expenses. Other expenses increased 69.9% from $214,000 for the six
months ended June 30, 1996 to $363,000 for the six months ended June 30, 1997.
This increase was caused primarily by increases in insurance costs, credit card
discounts and other costs, which accounted for $30,000 of the increase, and
depreciation expense associated with the addition of the 32 Dental Centers,
which accounted for $119,000 of the increase. As a percentage of net revenue,
other expenses decreased from 6.4% for the six months ended June 30, 1996 to
4.5% for the six months ended June 30, 1997. This decrease was caused primarily
by increased economies of scale associated with the increasing number of patient
visits.
General and Administrative Expenses. General and administrative expenses
increased 73.5% from $433,000 for the six months ended June 30, 1996 to $751,000
for the six months ended June 30, 1997. This increase was caused primarily by an
increase in corporate administrative salaries, which accounted for $215,000 of
the increase, professional fees due to the change from a private to a
publicly-held company, which accounted for $53,000 of the increase, and rent and
insurance costs due to the growth of the Company, which accounted for $50,000 of
the increase. As a percentage of net revenue, general and administrative
expenses decreased from 12.9% for the six months ended June 30, 1996 to 9.5% for
the six months ended June 30, 1997. This decrease was caused primarily by
economies of scale realized through the centralization of Dental Center
management. General and administrative expenses consist primarily of expenses
incurred at the corporate office.
Depreciation and Amortization. Depreciation and amortization expense
increased 170.5% from $53,000 for the six months ended June 30, 1996 to $143,000
for the six months ended June 30, 1997. As a percentage of net revenue,
depreciation and amortization expense increased from 1.6% for the six months
ended June 30,
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1996 to 1.8% for the six months ended June 30, 1997. This increase was caused
primarily by equipment purchases and leasehold improvements at the Company's new
corporate headquarters.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Revenue. Net revenue increased 144.5% from $3.3 million for the year
ended December 31, 1995 to $8.1 million for the year ended December 31, 1996.
This increase was caused primarily by a 38.7% increase in net revenue
attributable to the eight comparable Dental Centers, which accounted for $1.1
million of the increase; the three internally developed Dental Centers opened in
1995, which accounted for $964,000 of the increase; and the 17 acquired Dental
Centers added in 1996, which accounted for $2.7 million of the increase.
Capitation payments received from 11 managed care contracts during the year
ended December 31, 1996 accounted for $975,000 of this increase. Patient visits
increased 140.3% from 42,005 for the year ended December 31, 1995 to 100,949 for
the year ended December 31, 1996. This increase was caused primarily by an
increase of 13,457 patient visits at the eight comparable Dental Centers, an
increase of 13,291 patient visits at the three internally developed Dental
Centers and 32,085 patient visits at the 17 acquired Dental Centers.
Staff Salaries. Staff salaries increased 169.3% from $863,000 for the year
ended December 31, 1995 to $2.3 million for the year ended December 31, 1996.
This increase in staff salaries was caused primarily by an increase in salaries
of $287,000 for the eight comparable Dental Centers, $271,000 increase for the
three internally developed Dental Centers and $898,000 for the 17 acquired
Dental Centers. As a percentage of net revenue, staff salaries increased from
26.0% for the year ended December 31, 1995 to 28.6% for the year ended December
31, 1996. The increase was caused primarily by the increase in staffing due to
the addition of internally developed and acquired Dental Centers which was
somewhat offset by staff levels at the eight comparable Dental Centers remaining
relatively constant while net revenue increased.
Dental Supplies and Lab Fees. Dental supplies and lab fees increased
116.1% from $557,000 for the year ended December 31, 1995 to $1.2 million for
the year ended December 31, 1996. This increase was caused primarily by the
increase in patient visits and dental services provided at the eight comparable
Dental Centers, the three internally developed and the 17 acquired Dental
Centers. As a percentage of net revenue, dental supplies and lab fees decreased
from 16.7% for the year ended December 31, 1995 to 14.8% for the year ended
December 31, 1996. This decrease was caused primarily by the Company changing
suppliers in October 1995 and negotiating a more favorable supply agreement. In
addition, as the Coast Dental Network expands into new markets, changing
demographics have caused crowns and dentures as a percentage of total product
mix to decrease. Crowns and dentures result in lab fees not incurred with other
dental products and procedures.
Advertising. Advertising expense increased 92.5% from $351,000 for the
year ended December 31, 1995 to $675,000 for the year ended December 31, 1996.
This increase was caused primarily by implementation of a more aggressive
advertising program for the 17 acquired Dental Centers. As a percentage of net
revenue, advertising expense decreased from 10.6% for the year ended December
31, 1995 to 8.3% for the year ended December 31, 1996. This decrease was caused
primarily by an increase in market penetration by comparable Dental Centers
while advertising expenses remained relatively constant for those Centers.
Rent. Rent expense increased 174.1% from $296,000 for the year ended
December 31, 1995 to $811,000 for the year ended December 31, 1996. This
increase was caused primarily by the addition of the three internally developed
Dental Centers and the 17 acquired Dental Centers. As a percentage of net
revenue, rent expense increased from 8.9% for the year ended December 31, 1995
to 10.0% for the year ended December 31, 1996. This increase was caused
primarily by higher rent expense associated with the 17 acquired Dental Centers.
Other Expenses. Other expenses increased 52.7% from $287,000 for the year
ended December 31, 1995 to $438,000 for the year ended December 31, 1996. This
increase was caused primarily by increases in insurance costs, credit card
discounts and other costs, which accounted for $85,000 of the increase, and
depreciation expense, associated with the addition of the eighteen Dental
Centers, which accounted for $66,000 the increase. As a percentage of net
revenue, other expenses decreased from 8.6% for the year ended
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December 31, 1995 to 5.4% for the year ended December 31, 1996. This decrease
was caused primarily by increased economies of scale associated with the
increasing number of patient visits.
General and Administrative Expenses. General and administrative expenses
increased 39.3% from $682,000 for the year ended December 31, 1995 to $950,000
for the year ended December 31, 1996. This increase was caused primarily by
corporate administrative salaries increasing, which accounted for $333,000 of
the increase, and a decrease in other general and administrative expenses of
$65,000. As a percentage of net revenue, general and administrative expenses
decreased from 20.5% for the year ended December 31, 1995 to 11.7% for the year
ended December 31, 1996. This decrease was caused primarily by economies of
scale realized through the centralization of Dental Center management.
Depreciation and Amortization. Depreciation and amortization expense
increased 821.5% from $15,000 for the year ended December 31, 1995 to $140,000
for the year ended December 31, 1996. As a percentage of net revenue,
depreciation and amortization expense increased from 0.5% for the year ended
December 31, 1995 to 1.7% for the year ended December 31, 1996. This increase
was caused primarily by the recognition of amortization expense in 1996 related
to a covenant not to compete agreement pursuant to the Volusia Acquisition,
which accounted for $83,000 of the increase, and depreciation expense incurred
at the corporate office which accounted for $27,000 of the increase.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net Revenue. Net revenue increased 78.0% from $1.9 million for 1994 to
$3.3 million for 1995. This increase was caused primarily by a 14.2% increase in
net revenue attributable to the four comparable Dental Centers, all of which
were internally developed and accounted for $224,000 of the net revenue
increase; the four internally developed Dental Centers that were opened during
1994, which accounted for $431,000 of the increase and; the three internally
developed Dental Centers opened in 1995, which accounted for $802,000 of the
increase. Capitation payments received from 11 managed care contracts during
1995 accounted for approximately $20,000 of the increase. Patient visits
increased 117.1% from 19,346 in 1994 to 42,005 in 1995. This increase was caused
primarily by an increase of 6,509 patient visits at the four comparable Dental
Centers, an increase of 6,228 patient visits at the four internally developed
Dental Centers opened in 1994 and an increase of 9,922 patient visits at the
three internally developed Dental Centers opened in 1995.
Staff Salaries. Staff salaries increased 93.8% from $446,000 in 1994 to
$863,000 in 1995. This increase was caused primarily by the increase in staff
related to the addition of the four internally developed Dental Centers in 1994
and the three internally developed Dental Centers in 1995. As a percentage of
net revenue, staff salaries increased from 23.8% in 1994 to 26.0% in 1995. This
increase was caused primarily by the opening of internally developed Dental
Centers in 1994 and 1995. Staff salaries at the comparable Dental Centers
remained relatively constant.
Dental Supplies and Lab Fees. Dental supplies and lab fees increased 44.5%
from $385,000 in 1994 to $557,000 in 1995. This increase was primarily caused by
the increase in patient visits and dental services provided at the four
comparable Dental Centers, the four internally developed Dental Centers opened
in 1994 and the three internally developed Dental Centers opened in 1995. As a
percentage of net revenue, dental supplies and lab fees decreased from 20.6% in
1994 to 16.7% in 1995. This decrease was caused primarily by the Company
changing suppliers in October 1995 and negotiating a more favorable supply
agreement. In addition, as the Coast Dental Network expands into new markets,
changing demographics have caused crowns and dentures as a percentage of the
total product mix to decrease.
Advertising. Advertising expense increased 58.6% from $221,000 in 1994 to
$351,000 in 1995. This increase was caused primarily by the increased
advertising for the four internally developed Dental Centers opened in 1994 and
the three internally developed Dental Centers opened in 1995. As a percentage of
net revenue, advertising expense decreased from 11.7% in 1994 to 10.6% in 1995.
This decrease was caused primarily by increased economies of scale in
advertising achieved through greater market penetration.
Rent. Rent expense increased 35.8% from $218,000 in 1994 to $296,000 in
1995. This increase was caused primarily by the addition of the four internally
developed Dental Centers opened in 1994 and the three
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internally developed Dental Centers opened in 1995. Rent expense at the four
comparable Dental Centers remained relatively constant. As a percentage of net
revenue, rent expense decreased from 11.7% in 1994 to 8.9% in 1995. This
decrease was caused primarily by the increase in net revenue at comparable
Dental Centers and the seven internally developed Dental Centers more than
offsetting the increase in rent expense.
Other Expenses. Other expenses increased 76.1% from $163,000 in 1994 to
$286,000 in 1995. This increase was caused primarily by increases in insurance
costs, credit card discounts and expenses related to the three internally
developed Dental Centers opened during 1995, which accounted for $92,000 of the
increase, and depreciation expense, which accounted for $32,000 of the increase.
As a percentage of net revenue, other expenses remained relatively constant,
decreasing from 8.7% in 1994 to 8.6% in 1995.
General and Administrative Expenses. General and administrative expenses
increased 17.5% from $580,000 in 1994 to $682,000 in 1995. This increase was
caused primarily by corporate administrative salaries increasing $131,000 while
other general and administrative expenses decreased $29,000. Additions to
corporate staff were made in 1994 in anticipation of the Company's expansion in
1995. As a percentage of net revenue, general and administrative expenses
decreased from 31.0% in 1994 to 20.5% in 1995. This decrease was caused
primarily by economies of scale realized through the centralization of Dental
Center management.
Depreciation and Amortization. Depreciation and amortization increased
200.0% from $5,000 in 1994 to $15,000 in 1995. This increase was caused
primarily by equipment purchases for the corporate office in 1995.
SEASONALITY
The Company has traditionally experienced its highest volume of patient
visits during the first and last quarters of the year and its lowest volume of
patient visits in the summer. Individual Dental Centers typically experience
increased patient visits during the period from October through March, when the
population of Florida increases for the winter, and decreased patient visits
during the summer months. Seasonality for the period since January 1, 1995 has
been mitigated by the increase in monthly capitation revenue from managed care
contracts to the Coast Florida P.A., which represented 9.4% and 13.9% of total
revenue to the Coast Florida P.A. for the period ended December 31, 1996 and
June 30, 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through a
combination of commercial borrowings and cash generated from operations. Net
cash provided by operations for the years ended 1994, 1995, 1996 and for the six
months ended June 30, 1997 was $135,000, $231,000, $2.1 million and $519,000,
respectively. Net cash provided by operations for 1994, 1995 and 1996 consisted
primarily of net income and increases in accounts payable, offset by an increase
in 1995 and 1996 in the management fee receivable. For the six months ended June
30, 1997, net cash provided by operations consisted primarily of net income and
increases in accounts payable and accrued expenses offset by an increase in
management fees and other receivables.
Cash used in investing activities for the years ended December 31, 1994,
1995 and 1996 of $200,000, $157,000 and $5.6 million, respectively, was almost
exclusively related to the purchase of equipment and leasehold improvements
related to the internally developed Dental Centers opened during those periods.
For the six months ended June 30, 1997, cash used in investing activities of
$4.0 million related primarily to the acquisition of tangible and intangible
assets of 12 acquired Dental Centers.
Cash provided by financing activities for the years ended December 31,
1994, 1995 and 1996 was $147,000, $46,000 and $3.8 million, respectively,
primarily due to higher levels of bank borrowings to support the Company's
addition of both internally developed and acquired Dental Centers. Following the
Initial Public Offering, cash provided by financing activities increased to
$11.1 million for the six months ended June 30, 1997.
On August 15, 1996, the Company entered into a revolving line of credit
with Barnett Bank of Florida (the "1996 Credit Agreement"), which provided an
aggregate of $1.5 million for general working capital
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needs and expansion of the number of Dental Centers. During February 1997, the
Company repaid all amounts owed on the 1996 Credit Agreement with the proceeds
from its Initial Public Offering. In March 1997, the Company entered into a
revolving line of credit agreement with Barnett Bank of Florida (the "March
Credit Agreement"), which provides an aggregate of $5.0 million for general
working capital needs and expansion of the number of Dental Centers. The
revolving line of credit bears interest at the Barnett Bank of Florida's prime
rate or LIBOR plus 1.75%, at the Company's option, and is payable on demand.
Interest only is payable monthly. Amounts borrowed pursuant to the March Credit
Agreement are secured by a first security interest in most of the Company's
assets, including its receivables and equipment, and are subject to repayment on
demand. The March Credit Agreement contains negative and affirmative covenants
and agreements restricting the Company's disposition of assets, capital
expenditures, acquisitions, operations and payment of dividends as well as
requiring the maintenance of certain financial ratios. As of June 30, 1997, the
Company had available the entire $5.0 million for borrowing under the March
Credit Agreement.
In August 1997, the Company received a commitment from Barnett Bank of
Florida to enter into a new revolving line of credit agreement (the "Barnett
Credit Agreement"), which would increase the available borrowings under the
March Credit Agreement to $15.0 million subject to various customary
contingencies as well as the successful completion of the Offering. The terms
and conditions of the Barnett Credit Agreement are expected to be substantially
similar to those under the March Credit Agreement.
The Company has added acquired Dental Centers throughout the years and has
issued promissory notes at times in connection therewith. In certain of these
acquisitions the Company has provided security in the assets purchased pursuant
to seller financing. The outstanding balance on such notes as of June 30, 1997
was $700,000. The interest rates on the notes range from 8% to 9% per annum and
the maturity dates for the notes range from March 1998 to October 2003.
Upon the completion of the Initial Public Offering the Company converted
from an S Corporation to a C Corporation and became obligated to pay federal and
state income taxes. Prior to the Initial Public Offering, the Company
historically distributed funds to its shareholders sufficient to pay their
personal income tax liabilities attributable to the Company's earnings as an S
Corporation.
The Company has previously loaned capital to the Coast Florida P.A. in
connection with acquisitions of existing dental practices. The Coast Florida
P.A. has no outstanding balance on such loans as of June 30, 1997.
The Company has historically financed its acquisitions with cash and
promissory notes, and while the Company currently expects generally to finance
its acquisitions in a similar manner, it recently financed a portion of an
acquisition in July 1997 with 5,797 shares of Common Stock.
The Company currently expects to continue to add internally developed and
acquired Dental Centers through the end of 1997. The average cost of an
internally developed Dental Center has been approximately $150,000, which
typically includes approximately $50,000 for the cost of equipment, $75,000 for
leasehold improvements and $25,000 for initial working capital associated with
the internal operations of the Dental Centers. In addition, effective June 1,
1997, the Company agreed to pay $50,000 to the Coast P.A. for each internally
developed Dental Center it commits to open as an inducement to such Coast P.A.
to extend the Service and Support Agreement to each new internally developed
Dental Center. To date, the Company has paid $550,000 to the Coast Florida P.A.
in connection with the Company's obligation regarding added internally developed
Dental Centers and currently committed internally developed Dental Centers. The
cost of an acquired Dental Center is based upon a negotiated percentage of the
Dental Center's historical gross revenue. Acquired Dental Centers typically
generate sufficient cash flow to fund their operations. The Company plans to
finance the addition of internally developed and acquired Dental Centers for the
foreseeable future through a combination of bank financing, seller financing,
issuances of Common Stock, cash flow from operations and the net proceeds to be
received from the Offering. See "Use of Proceeds." While the Company is
constantly in discussions with existing dental practices regarding possible
acquisitions, the Company does not have any current understanding or agreement
regarding any material acquisition.
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Based upon the Company's anticipated capital needs for operations of its
business, general corporate purposes, the addition of internally developed and
acquired Dental Centers and repayment of certain debts, management believes that
the combination of the funds expected to be available under the Company's
revolving line of credit, cash flow from operations and the net proceeds
received from the Offering will be sufficient to meet the Company's funding
requirements to conduct its operations and for further implementation of its
growth strategy for approximately 18 months. After such time, remaining capital
resources will continue to be used for Company operations and growth and, to the
extent additional capital resources are needed, the Company may utilize
supplemental borrowings where available and, where desirable, the issuance of
debt or equity securities.
CERTAIN INFORMATION ON THE COAST P.A.
Pursuant to the Services and Support Agreement with a Coast P.A., the
Company provides management services and support to the Coast P.A. in order to
facilitate the development and growth of Dental Centers. For certain competitive
reasons, the Company has currently chosen to limit its management relationships
in Florida to those with the Coast Florida P.A. Under a Services and Support
Agreement, a Coast P.A. pays a fee to the Company equal to a percentage of the
Dental Centers' gross revenue. Only the fees earned by the Company for its
services to a Coast P.A. and the actual expenses of the Company are reflected in
the financial statements of the Company. Neither the Coast P.A.'s expenses nor
any of the amounts retained by a Coast P.A. are reflected in the financial
statements of the Company. Operating expenses at the Dental Centers, with the
exception of compensation paid to the Coast Dentists and dental hygienists, are
expenses of the Company and recognized as such. The Coast P.A. is legally
responsible for the payment of the Coast Dentists and dental hygienists and such
other costs of the Coast P.A. which are not considered operating expenses at the
Dental Centers, such as the Coast P.A.'s acquisition debt and bank debt.
The current Services and Support Agreement between the Company and the
Coast Florida P.A. was negotiated between the Company and Dr. Adam Diasti, the
sole shareholder, director and officer of the Coast Florida P.A. (and the
Company's President, Chief Operating Officer and a major shareholder). To date,
Adam Diasti has received compensation and distributions from the Coast Florida
P.A. for 1994, 1995, 1996 and the six-month period ended June 30, 1997, in the
total amount of $50,000, $45,000, $74,000 and $25,000, respectively. See "Risk
Factors -- Potential Conflicts of Interest of the Company's President and Chief
Operating Officer Relating to the Coast P.A." and "Certain Transactions." Any
changes in a Services and Support Agreement are to be approved by the Company's
Audit Committee. In determining its approval of a Services and Support Agreement
and in determining possible future changes, the Audit Committee will consider
the following factors: (i) the services and support the Company provides; (ii)
the costs incurred by the Company in connection with providing its services and
support; (iii) the Company's margins; (iv) the reasonableness of such fees; and
(v) the Coast P.A.'s stated requirements for retained amounts which will allow
the Coast P.A. to provide attractive financial compensation and incentives to
its dentists, to have the necessary financial resources to pay its current and
future obligations as they became due and to continue to expand the Coast P.A.'s
operations in conjunction with the Company's growth strategy. The Company
believes that the current Services and Support Agreement adequately takes into
account the above factors.
In the past, under certain circumstances and in consideration of the above
factors, the Company has agreed to minimal reductions in its services and
support fees with the Coast Florida P.A. Additionally, the Company recently
agreed to make a payment to each Coast P.A. in connection with each new
internally developed Dental Center. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview." While minimal
reductions in fees and payments to the Coast Florida P.A. in the past have been
more than offset by the Company's expanded operations, there can be no assurance
that any future reductions in fees from a Coast P.A. or increased payments to a
Coast P.A. (which are not currently planned by the Company) would not have an
adverse effect on the Company. The amounts projected to be retained by a Coast
P.A. under its Services and Support Agreement with the Company will be a factor
in allowing a Coast P.A. to satisfy its debts and in expanding its practice into
future Dental Centers. A material failure of a Coast P.A. to pay its debts as
they become due could have a material adverse effect on the business of the
Company and its ability to expand.
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Based upon certain financial data and representations provided to the
Company by the Coast Florida P.A., the Company believes that the Coast Florida
P.A. has a positive net worth and will be in a position to pay its debts as they
become due for the foreseeable future. The Company has previously provided
certain financing to the Coast Florida P.A. in connection with acquisition debt
incurred by the Coast Florida P.A. This previous obligation has been repaid to
the Company, and the Company's current policy is not to provide such financing
to a Coast P.A. in the future. The Company is owed sums from the Coast Florida
P.A. on an ongoing basis under its Services and Support Agreement. This sum as
of June 30, 1997, was in the amount of $2.0 million, representing 132.5% of the
services and support fees earned by the Company for the month of June 1997. See
"Risk Factors -- Dependence on the Coast P.A. and the Coast Dentists,"
"-- Obligations of the Coast P.A." and "Certain Transactions."
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BUSINESS
Coast Dental Services, Inc. provides management services to 48 Dental
Centers, located in central and northern Florida. Of the 48 Dental Centers, 16
were internally developed and 32 were acquired by the Company. As of September
2, 1997, 64 Coast Dentists were employed by the Coast Florida P.A., serving over
328,000 patients. In addition, the Company currently has seven internally
developed Dental Centers under construction in central Florida and Atlanta,
Georgia, with the Company's first Dental Center located in Atlanta, Georgia
scheduled to open by September 30, 1997.
DENTAL SERVICES INDUSTRY
The United States dental industry is highly fragmented, consisting of more
than 110,000 dental practices with approximately 88% of these practices operated
by dentists working alone or with one other dentist. According to the Health
Care Financing Administration, expenditures for all dental services in the
United States were an estimated $45.2 billion in 1995 and are expected to grow
at a rate of 6.6% per year. Based upon a 1990 survey by the ADA, general
dentistry was estimated to represent approximately 83% of all dental services
performed in the United States. The Company believes several factors are driving
the overall industry growth. First, as the "baby boom" generation ages, the
demand for many higher priced dental maintenance products and procedures (such
as crowns, bridges and dentures) will increase relative to the demand for other
more routine, lower priced dental products and procedures (such as cleanings and
fillings). Second, increasing attention to dental health and, in particular, to
personal appearance has increased the demand for general dentistry services and
cosmetic dental products and procedures (such as bonding and whitening).
Finally, a greater percentage of the population is now covered by private or
government funded dental health insurance thereby facilitating increased dental
office visits and a greater utilization of general dentistry services.
The number of people covered by private dental insurance (i.e., managed
care and indemnity plans) is expected to increase in the near future due, in
large part, to efforts by health insurers to gain a competitive advantage by
offering dental insurance packages to both their present and prospective
members. Payments for dental services by private insurance companies grew from
approximately $3.8 billion in 1980 to approximately $16.8 billion in 1993. Many
of these insurers are managed care companies, whose present focus is on the need
to increase revenue and market share by offering a full range of health
insurance options including dental insurance. In an August 1996 press release,
the National Association of Dental Plans initially estimated that, based upon
its survey of 80 HMO companies, dental managed care enrollment grew 15% in 1996.
Despite the growth in private dental insurance, a significant portion of
the United States population is not covered by any type of private or government
funded dental insurance. A majority of this uninsured population is comprised of
lower income individuals who cannot afford a basic level of dental services. As
a result, many current government health care reform proposals include
provisions for increased dental coverage. It is estimated that government
funding for dental insurance grew 124% from 1990 to 1994.
While both private and government funded dental insurance programs vary
widely in their coverage and benefits, they are expected to impact the dental
industry in two major ways. First, as more people obtain dental insurance of any
kind, the Company believes there will be increased utilization of general dental
services. As a result, demand for elective cosmetic procedures, typically not
covered by dental insurance programs, is also expected to increase as patients
are educated as to the benefits of these procedures. Second, health insurance
companies, including HMOs and other managed care companies, are contracting with
dental practitioners and dental practice networks to provide dental services on
a capitated basis. Under capitated contracts, the dental practitioner or dental
practice network agrees to accept a predetermined monthly fee per assigned
patient in exchange for providing certain dental services to patients covered by
the contract.
The Company anticipates that, as the number of managed care plans and
government funded programs providing dental insurance grows, pressures relating
to cost containment by dental care providers will increase, as in many other
sectors of the health care industry. Such cost containment pressures will likely
place smaller dental care provider groups and individual practices at a
significant disadvantage. These practices generally have higher operating costs
because overhead must be spread over a relatively small revenue base and minimal
purchasing power can be exercised with suppliers. Furthermore, in order to
properly negotiate and administer dental managed care contracts, dental care
providers must develop the necessary management infrastructure
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and sophisticated information systems which often exceed the capabilities of
most sole practitioners and small dental practice groups.
Traditionally, dentistry has operated as a highly-fragmented, professional
"cottage" industry with most dentists working alone or with one other dentist.
According to the ADA, more than 150,000 dentists provided dental services
through approximately 113,000 dental practices in the United States in 1994. The
traditional solo practitioner or small dental practice group has historically
managed all aspects of the dental practice, including administrative,
purchasing, accounting and marketing functions. Dentists have not historically
competed with each other based upon the pricing of their services and,
therefore, pricing of dental services often varies little among traditional
dental providers within a particular market. Based upon data contained in the
ADA's 1994 survey, the national average annual patient revenue production was
approximately $306,000 for solo general practitioners and approximately $268,000
for nonsolo general practitioners. In addition, pursuant to the same ADA survey,
solo general practitioners averaged 80 patient visits per week (including
hygienist visits) nationwide and nonsolo general practitioners averaged 78
patient visits per week (including hygienist visits) nationwide.
In order to remain competitive, dental care providers are increasingly
consolidating. Much of this consolidation is taking place through the formation
of dental physician practice management companies ("Dental PPMs") which contract
with the dental care providers. Dental PPMs are growing in response to the
demand by managed care companies for larger dental practice groups which can
offer dental care over a wide geographic area. In addition, Dental PPMs
generally have the management infrastructure and sophisticated information
systems necessary to negotiate and manage the risk associated with capitated
managed care contracts and to provide the contract administration expertise
required by managed care companies. Furthermore, Dental PPMs allow dental
practitioners to capture increased market share and incremental revenue through
the addition of managed care contracts. However, the mere consolidation of
practices and creation of a Dental PPM to manage the practices will most likely
not, in itself, be sufficient to enhance the competitive position of the
combined dental groups. Effective management and a cost efficient operating
model are necessary for a Dental PPM to compete successfully in this changing
and growing industry.
BUSINESS STRATEGY
The Company's goal is to develop a leadership position in the management of
general dentistry practices throughout Florida and the southeastern United
States. The Company derives its revenue through fees earned from the Coast P.A.
for providing management services and support at the Dental Centers. A uniform
operating model (the "Coast Operating Model") developed by the Company is
utilized at the Dental Centers to increase productivity and maintain the low
cost delivery of quality general dentistry services. The key elements of the
Coast Operating Model are: (i) affiliating with general dental providers that
focus on the most common, high volume dental products and procedures which lend
themselves to cost-effective delivery; (ii) centralizing management and
administrative responsibilities, thus allowing Coast Dentists to concentrate on
delivering high quality dental care; (iii) facilitating the training of the
Dental Center staff, including Coast Dentists and hygienists, in the most
efficient techniques for managing the delivery of high volume, quality dental
services; and (iv) assisting with the implementation of marketing programs
designed to meet the needs of each Dental Center. The Company plans to expand
the Coast Dental Network to maximize economies of scale in management and
administration, materials procurement and marketing, and to facilitate
contracting with managed care companies. The Company plans to increase
penetration in currently served regions and to expand into new contiguous
markets in the southeastern United States through the addition of internally
developed and acquired Dental Centers.
The Coast Operating Model
The focus of the Company is to manage Dental Centers where Coast Dentists
provide general dentistry services. General dentistry is estimated to represent
approximately 83% of all dental services performed in the United States. General
dentistry products and procedures provided by Coast Dentists at the Dental
Centers include, but are not limited to, sealants, crowns, bridges, dentures,
examinations, cleaning, polishing, whitening, filling cavities, simple root
canals and extractions, but exclude orthodontics, periodontics,
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<PAGE> 36
endodontics and oral surgery which require specialized care. Coast Dentists
focus on the most common, high volume general dentistry products and procedures
which lend themselves to cost-effective delivery, emphasizing crowns, bridges
and dentures. The Company believes that, based upon a 1994 survey of dental fees
conducted by the ADA and the Company's understanding of current competitor
pricing, Coast Dentists are able to offer more affordable dental products and
procedures, often at prices at least 25% below the national average for certain
comparable dental products and procedures.
In addition to providing dental care, the traditional dental practitioner
typically performs all the management and administrative functions for the
practice, including billing, purchasing, accounting and the hiring of
administrative personnel. Through the Coast Operating Model, the Coast Dentist
is relieved of most management and administrative responsibilities, allowing the
Coast Dentist to concentrate on delivering high quality general dental care,
thus maximizing both productivity and efficiency. The Company provides the
Dental Center with management and financial information systems which improve
each Dental Center's cost efficiency and maintain greater uniformity in the
delivery of dental care services. The Company believes that its management
controls and quality assessment programs are generally more comprehensive than
those of traditional sole dental practitioners and small dental groups and have
contributed significantly to the delivery of high quality dental care at the
Dental Centers.
After a dentist joins a Coast P.A., the dentist is familiarized with the
Company's management operating systems at the Company's headquarters in Tampa,
Florida. The Company also employs training teams which travel to each new Dental
Center to train the Dental Center's business staff with respect to the Company's
management operating systems. Follow-up visits by the training team are
conducted approximately six months following the opening of each Dental Center
to maintain the business operations of the Dental Centers. A Coast P.A. conducts
initial training for its dental professionals regarding standardized dental
techniques and systems which seek to establish uniform standards for providing
high quality and cost effective dental services. Thereafter, periodic continuing
education and training sessions are provided by a Coast P.A. for reinforcement
of its dental techniques and systems as well as for new procedures and practices
to be utilized throughout the Coast Dental Network.
Demand is stimulated at each Dental Center through a combination of value
pricing and direct marketing to the consumer. The Company assists in developing
and implementing aggressive and innovative direct marketing plans for each
Dental Center, utilizing local radio and print advertising and marketing
promotions to highlight each Dental Center's convenient location and affordable
prices. For the six months ended June 30, 1997, an average of approximately 8.4%
of each Dental Center's revenue was spent on advertising and marketing. In
contrast, the traditional dentist's office, which relies primarily on referrals
from dentists and patients, spent approximately 1% of gross billings on
advertising and marketing. As a result of state regulations in Florida and
Georgia, a Coast P.A. controls all decisions regarding advertising and marketing
programs related to their practices, but rely upon the Company to provide advice
and assistance in the development and implementation of such programs.
The Coast Dental Network
The Company's goal is to develop a leadership position in the management of
general dentistry practices throughout Florida and the southeastern United
States. The Company plans to effect certain economies of scale in management,
materials procurement and direct marketing through the expansion of the Coast
Dental Network. The Company intends to centralize many administrative and
management functions, such as accounting, staffing, training and billing,
thereby more effectively managing its overhead. In addition, expansion of the
Coast Dental Network maximizes the effectiveness of marketing programs to both
customers and managed care companies. Finally, the Company anticipates that it
will be able to increase its negotiating leverage with managed care companies
and purchasing power with suppliers.
The Company assists a Coast P.A. in negotiating and contracting with
managed care companies which generally have an established presence in local
regions served, or expected to be served, by the Coast Dentists. Managed care
contracts accounted for 33.5% of the Coast Florida P.A.'s revenue at the Dental
Centers for the six months ended June 30, 1997. The Company believes each Coast
P.A. is well positioned to attract
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<PAGE> 37
significant additional business from HMOs and other managed care companies,
which generally prefer to deal with health care providers that can offer
extensive regional coverage to their members. The Company has recently assisted
the Coast Florida P.A. in finalizing managed care contracts with several leading
HMOs. Under certain of these agreements, the Coast Florida P.A. accepts a
pre-determined amount per month per patient in exchange for providing all
necessary covered services to patients insured under the agreements. Under the
remaining agreements, the Coast Florida P.A. agrees to charge the patient a
predetermined fee per procedure. The managed care contracts between the Coast
Florida P.A. and managed care companies are for one year terms which
automatically renew and are terminable by either party on 90 days notice. All
managed care contracts between the Coast Florida P.A. and managed care companies
which have reached the end of their term have been renewed.
Presently, managed care companies are focusing on dental care to gain a
competitive advantage by offering a full range of health care coverage.
Utilizing the Coast Operating Model, a Coast P.A. is well positioned to continue
to take advantage of the growing managed care business even as cost containment
becomes a factor. In addition, an increase in patients provided through managed
care contracts creates an opportunity for the Coast Dentists to proactively sell
elective dental products and procedures that may not be covered by a particular
dental plan.
The Company is expanding into select markets through the implementation of
a well formulated and controlled strategy. When evaluating whether or not to
enter a new region, the Company considers a number of factors. First, the
Company studies the demographics of the local area including, but not limited
to, per capita income, population density and age distribution of residents. The
Company also reviews the competition for general dentistry services in the local
area with the objective of locating Dental Centers where Coast Dentists are able
to offer their dental services at substantially more affordable prices than
their local competitors. The Company also seeks locations containing substantial
numbers of consumers who are covered by dental managed care plans, but who have
access to only a limited number of general dental providers through these plans.
While targeting potential markets for the location of an internally
developed Dental Center, the Company typically assists a Coast P.A. in
contracting with managed care companies serving a particular market. By
contracting with managed care companies prior to entering a new market, a
minimum recurring revenue stream is established during the early stages of the
Dental Center's development. The Company typically seeks to locate in large
shopping centers, where pedestrian traffic is heavy. This provides the Dental
Center with the opportunity to rapidly increase patient revenue beyond the
minimum guaranteed managed care revenue through the implementation of a direct
marketing program. Internally developed Dental Centers typically require 90 days
to prepare for opening. During the initial phase of development, the Dental
Center operates on a limited schedule with reduced professional and
administrative staffing, until sufficient patient volume and productivity is
achieved. Generally, Coast Dentists who have experience utilizing the Coast
Operating Model are placed by a Coast P.A. in new internally developed Dental
Centers, often providing services at two locations until a full-time Coast
Dentist is required by a Coast P.A.
In evaluating potential acquired Dental Centers, the physical plant and
equipment of the Dental Center is evaluated, as are historical revenue and
expense levels, including the mix of managed care and fee-for-service revenue.
The Company targets Dental Centers which are self supporting, but which can
benefit from the implementation of the Coast Operating Model. The Company
generally seeks to affiliate with dentists who are willing to remain in practice
as Coast Dentists. Following the acquisition of a Dental Center, a
post-acquisition team is actively involved in the integration of the Dental
Center into the Coast Dental Network. This integration includes centralizing
many administrative and management functions and bringing the Dental Center on
line with the Company's management information systems. The Company believes the
full integration of an acquired Dental Center, including the implementation of
the Coast Operating Model, generally takes approximately six months to complete.
For the twelve months ended June 30, 1997, the average revenue production
for the 20 Coast Dentists affiliated with the Company for the entire period was
approximately $597,000. In addition, for the same period, the Coast Dentists
averaged 107 patient visits per week (including hygienist visits). The Company
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believes that Coast Dentists have achieved substantially higher patient revenue
production and patient visits than the national average for general
practitioners. For internally developed Dental Centers, the Company has attained
profitability (determined by subtracting from the services and support fee
earned by the Company at an internally developed Dental Center the amount of the
Company's expenditures incurred at such Dental Center, excluding corporate
overhead) in an average of three to four months from opening. Full integration
of an acquired Dental Center generally takes approximately six months.
RECENT DEVELOPMENTS
As of September 2, 1997, the Company was managing 48 Dental Centers located
in central and northern Florida, 16 of which were internally developed and 32 of
which were acquired. The Company opened two internally developed Dental Centers
in both 1992 and 1993, four in 1994, three in 1995, one in 1996 and four in
1997.
The Company added 17 acquired Dental Centers in 1996. In January 1996, the
Company completed its first acquisition of one Dental Center in January 1996 for
a purchase price of $40,000 and in April 1996 added seven acquired Dental
Centers for a purchase price of $1.8 million. In September 1996, the Company
added a total of three separately acquired Dental Centers located in Tampa,
Wesley Chapel and Orlando, Florida. The combined purchase price for these three
acquired Dental Centers was $620,000. In November 1996, the Company added a
total of three acquired Dental Centers located in Casselberry, Apopka and
Orlando, Florida. The combined purchase price for these three acquired Dental
Centers was $2.5 million. In December 1996, the Company added a total of three
separately acquired Dental Centers located in Gainesville, Kissimmee and
Orlando, Florida. The combined purchase price for these three acquired Dental
Centers was $375,000. See Note 4 of the Notes to the Financial Statements.
To date, the Company has added 15 acquired Dental Centers in 1997. In March
1997, the Company added three acquired Dental Centers located in Oak Ridge, Lake
Mary and Maitland, Florida. The purchase price of these three acquired Dental
Centers was $925,000. In April 1997, the Company added six acquired Dental
Centers located in St. Petersburg (two locations), Port Richey, Palm Harbor,
Clearwater, and New Port Richey, Florida. The combined purchase price of these
six acquired Dental Centers was $1.7 million. In June 1997, the Company added
three acquired Dental Centers located in Ocala and Kissimmee (two locations),
Florida. The combined purchase price of these three acquired Dental Centers was
$1.2 million. In July 1997, the Company added one acquired Dental Center located
in New Smyrna Beach, Florida. The purchase price of this acquired Dental Center
was $585,000. In August 1997, the Company added two separately acquired Dental
Centers located in Punta Gorda and Cape Coral, Florida. The combined purchase
price of these acquired Dental Centers was $720,000.
Between June and July 1997, the Company opened four internally developed
Dental Centers located in Palm Bay, Lakeland, Sarasota and Venice, Florida. The
combined cost of opening these four internally developed Dental Centers was
approximately $422,000. The Company currently has six internally developed
Dental Centers under construction in Atlanta, Georgia, with the first internally
developed Dental Center scheduled to open by September 30, 1997. In addition,
the Company has one internally developed Dental Center under construction in
Melbourne, Florida.
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COAST DENTAL CENTER LOCATIONS
The current locations of the Dental Centers and the date each was opened or
acquired are as follows:
<TABLE>
<CAPTION>
CURRENT LOCATIONS(1) DATE OPENED/ACQUIRED*
- -------------------- ---------------------
<S> <C>
Cape Coral.................................................. August 1997*
Punta Gorda................................................. August 1997*
Venice...................................................... July 1997
Sarasota.................................................... July 1997
New Smyrna Beach............................................ July 1997*
Lakeland.................................................... June 1997
Palm Bay.................................................... June 1997
Kissimmee................................................... June 1997*
Kissimmee................................................... June 1997*
Ocala....................................................... June 1997*
St. Petersburg.............................................. April 1997*
St. Petersburg.............................................. April 1997*
Palm Harbor................................................. April 1997*
Port Richey................................................. April 1997*
New Port Richey............................................. April 1997*
Clearwater.................................................. April 1997*
Maitland.................................................... March 1997*
Lake Mary................................................... March 1997*
Oak Ridge................................................... March 1997*
Lakeland.................................................... December 1996
Orlando..................................................... December 1996*
Kissimmee................................................... December 1996*
Gainesville................................................. December 1996*
Orlando..................................................... November 1996*
Apopka...................................................... November 1996*
Casselberry................................................. November 1996*
Orlando..................................................... September 1996*
Wesley Chapel............................................... September 1996*
Tampa....................................................... September 1996*
Port Orange................................................. April 1996*
Palm Coast.................................................. April 1996*
Ormond Beach................................................ April 1996*
Orange City................................................. April 1996*
Deltona..................................................... April 1996*
Daytona..................................................... April 1996*
Daytona..................................................... April 1996*
Tampa....................................................... January 1996*
Titusville.................................................. December 1995
Tampa....................................................... March 1995
St. Petersburg.............................................. January 1995
Tampa....................................................... December 1994
Dunedin..................................................... November 1994
Oldsmar..................................................... August 1994
Largo....................................................... May 1994
Clearwater.................................................. September 1993
Spring Hill................................................. April 1993
Port Richey................................................. September 1992
Holiday..................................................... May 1992
</TABLE>
- ---------------
(1) Locations are all in the State of Florida.
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SERVICES AND OPERATIONS
The Company is primarily responsible for the management and administrative
functions of its Dental Centers, but does not provide dental care. The Company
provides financial, accounting, billing, training, marketing assistance and
collection services for a Coast P.A. and employs the Dental Center's management
and administrative personnel. A Coast P.A. maintains full control over the
dental practices of the Coast Dentists, employs the Coast Dentists and their
hygienists and sets standards of care in order to promote the provision of
quality dental care. A 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.
Advertising and Marketing. The Company assists in developing and
implementing aggressive and innovative direct marketing plans for each Dental
Center, utilizing local radio and print advertising and marketing promotions.
The Company produces all broadcast advertising internally and tailors such
advertising to the particular local market. The name of the Coast Dentist is
prominently featured in each advertisement. The advertising typically highlights
affordable services and convenient locations. Florida and Georgia regulations
provide certain restrictions on the Company's ability to provide advertising and
marketing services to the Coast P.A. and govern the content of certain
advertisements. See "Risk Factors -- Government Regulations -- Advertising
Restrictions" and "-- Coast Operating Model."
Managed Care Contracts. The Coast Dental Network is marketed to HMOs,
health insurance companies and other third party payors who have an established
presence in regional markets served, or expected to be served, by the Coast
Dental Network. The Company provides expertise to each Coast P.A. by assisting
in the negotiation of contracts with managed care companies. In some instances,
the managed care contract provides for a monthly pre-determined amount or per
patient amount, while in other instances, the managed care contract provides for
certain discounts or fixed fees for dental services provided under the contract.
The managed care contracts are typically for one year terms which automatically
renew for additional one year periods unless terminated by either party. To
date, all managed care contracts that were subject to renewal have been renewed.
The Company believes that managed care contracts provide Coast Dentists with a
steady patient flow and predictable revenue.
Management Information Systems. The Company utilizes information systems
which track important data related to each Dental Center's operations and
financial performance. The Company monitors all expenditures on advertising in
order to advise a Coast P.A. as to where advertising expenditures need to be
increased or decreased. The Company's systems also track new patient cases for
each of its Dental Centers and the Company develops programs to monitor whether
new patient services at the Dental Centers are at projected levels. Billing and
collection information is sent daily by each of the Dental Centers to the
Company for processing. The Company also provides each of the Dental Centers
with monthly operating data and quarterly financial statements. The Company
provides an analysis of the financial results and recommends changes to improve
the financial performance of the Dental Center. This analysis allows a Dental
Center to make periodic adjustments in marketing and operations.
Recruiting and Training. The Coast P.A. employs, supervises and trains all
Coast Dentists and dental hygienists in each Dental Center. Each Coast Dentist
is a graduate of an accredited dental program, and each Dental Center is
supervised by a Coast Dentist with at least three years of experience. A Coast
P.A. maintains full control over the dental practice of the Coast Dentists and
set standards of practice in order to promote quality dental care. All
personnel, other than Coast Dentist's and dental hygienist, are employed,
supervised and trained by the Company. The Company, while not engaged in the
practice of dentistry, assists the Dental Center in the day-to-day operations
and management of personnel. The Coast P.A. is responsible for compliance with
state and local regulations of the practice of dentistry and with license or
certification requirements.
Staffing and Scheduling. The Dental Centers are generally open from 8:30
a.m. to 5:00 p.m., Monday through Friday. A Dental Center will increase its
hours and open on Saturday if necessary to accommodate additional patient
visits. A Coast P.A. typically rotates a Coast Dentist to another Dental Center
in order to accommodate unusual volume at that Dental Center. Currently,
staffing by a Coast P.A. and the Company at
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a typical Dental Center consists of one dentist, one hygienist, one office
manager, one receptionist and three dental assistants. The staffing and
scheduling procedures established by the Company after direction from and
approval by a Coast P.A. allows the Coast Dentists to spend substantially all of
their time in the Dental Center working with patients.
Purchasing and Distribution. Because of the growing number of Dental
Centers, the Company is able to make purchases of dental supplies and inventory,
equipment, and office furniture at reduced per unit costs. The Company
negotiates arrangements with suppliers that provide cost savings to each of the
Dental Centers. Dental equipment supplies are obtained by the Company as
directed by the Coast P.A. Dental and administrative supplies are purchased by
the Company and distributed on a just-in-time basis to each Dental Center,
thereby limiting storage of unused inventory and supplies.
Facilities. All Dental Centers are leased and are generally located either
in shopping centers or professional office buildings. Substantially all of the
Dental Centers include private treatment rooms and large patient waiting areas
rather than one large treatment area. Dental Centers typically range from six to
12 treatment rooms and range in size from 1,200 square feet to 3,900 square
feet. Pursuant to its Services and Support Agreement, the Company provides
office facilities, dental equipment and furnishings to the Coast P.A.
SERVICES AND SUPPORT AGREEMENT
The Company has entered into a Services and Support Agreement with the
Coast Florida P.A. pursuant to which the Company is the exclusive business
manager, to the extent allowable by law, of the Dental Centers. As Dental
Centers are acquired or internally developed by the Company and the Coast
Florida P.A., the Dental Centers are generally expected to be governed by the
existing Services and Support Agreement, subject to possible future
modifications or amendments. The compensation paid to the Company under its
existing Services and Support Agreement is currently 76% of the gross revenue of
the Coast Florida P.A.
Under the Services and Support Agreement, the Company is obligated to
provide comprehensive administrative and business services and support
including, among other things, to (i) provide, maintain and repair all offices,
equipment and furnishings, (ii) employ all non-professional personnel necessary
for the operation of the Dental Centers, (iii) provide payroll services, (iv)
implement standard business systems and procedures and provide systems and
procedures training, (v) order all general business inventory and supplies
required by the Dental Centers and handle accounts payable, (vi) establish and
maintain information systems and provide accounting and bookkeeping services,
(vii) monitor compliance with rules and regulations applicable to Dental Center
business, (viii) provide marketing assistance, (ix) provide advisory services
regarding future offices, and (x) provide assistance in billing and collections,
all as to the extent permitted by law.
The Services and Support Agreement provides that the Coast Florida P.A. is
responsible for, among other things, (i) employing and supervising all dentists
and dental hygienists, (ii) complying with all laws, rules and regulations
relating to dentists and dental hygienists, (iii) participating in quality
assurance/utilization review programs, (iv) maintaining proper dental patient
records, and (v) using its best effort to obtain professional liability
insurance with limits of not less than $1.0 million per claim and aggregate
policy limits of not less than $3.0 million.
Under the terms of the Services and Support Agreement, the Coast Florida
P.A. is required to indemnify, hold harmless, and defend the Company from and
against any and all claims from negligent or intentional acts or omissions,
including the performance of dental services, by the Coast Florida P.A. and its
employees. The Company is required to indemnify, hold harmless and defend the
Coast Florida P.A. from and against any and all claims resulting from negligent
or intentional acts or omissions by the Company.
As compensation for its management services under the current Services and
Support Agreement, the Coast Florida P.A. pays the Company a monthly services
and support fee equal to 76%, of the gross revenue of the Dental Center.
Effective June 1997, the Company has agreed to pay to the Coast Florida P.A. the
sum of $50,000 in connection with each internally developed Dental Center opened
as inducement to the Coast
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Florida P.A. to extend the Services and Support Agreement as each internally
developed Dental Center is opened. Dental Center expenses paid by the Company
from the services and support fee include all operating and nonoperating
expenses incurred at the Dental Center except for the salaries and benefits of
the Coast Dentists and dental hygienists, federal and state income taxes, bad
debt, and any other expenses designated as an expense of the Coast Florida P.A.
The Coast Florida P.A. is owned and managed by Adam Diasti, an executive officer
and director of the Company. See "Risk Factors -- Dependence on the Coast P.A.
and the Coast Dentists," "Risk Factors -- Potential Conflicts of Interest of the
Company's President and Chief Operating Officer", "Management" and "Certain
Transactions." Future modifications, amendments or revisions to the Services and
Support Agreement will be approved in advance by the Audit Committee of the
Company's Board of Directors, a majority of which consist of the independent
outside directors of the Company.
Pursuant to the Services and Support Agreement, an advisory board
("Advisory Board") consisting of one member designated by the Company, currently
Joseph Smith, Chief Financial Officer and a director of the Company, and one
member designated by the Coast Florida P.A., currently Adam Diasti, President
and director of the Company will have the responsibility for, among other
things, (i) reviewing any renovation and expansion plans and capital equipment
expenditures relating to the Coast Florida P.A., (ii) approving the non-dental
ancillary services provided by the Coast Florida P.A., (iii) providing input on
agreements with institutional care providers and third party payors, (iv)
assisting the Company in developing long-term strategic planning objectives, (v)
providing advice regarding the priority of major capital expenditures and (vi)
resolving disputes between the Company and the Coast Dentists. Because of legal
restrictions regarding the unauthorized practice of dentistry and other express
legal restrictions in the State of Florida, the Services and Support Agreement
prohibits the Company from exercising any control, either direct or indirect,
over the Coast Dentists' professional decisions, patient records, and decisions
relating to pricing, advertising, office personnel and hours of practice.
The Services and Support Agreement is for a term of 40 years, which
automatically renews annually, and is terminable by the Company if the Company
determines that any applicable legislation, rule or regulation may have an
adverse effect on the Company's rights, remedies or discretion under the
Services and Support Agreement. The Services and Support Agreement is terminable
by either party if the other party materially defaults in the performance of any
of its obligations under the Services and Support Agreement and such default
continues for a certain period of time after notice, or if the other party files
a petition for bankruptcy or other similar events occur. The Services and
Support Agreement provides that it shall be amended by the parties in the event
of any regulatory matters affecting the validity of the specific Services and
Support Agreement as is necessary to bring it into compliance. However, the
Company may terminate the Services and Support Agreement if amendment will not
preserve the underlying financial arrangement.
During the term of the Services and Support Agreement, the Company and the
Coast Florida P.A. agree not to disclose certain confidential and proprietary
information regarding the other. The Coast Florida P.A. is required under the
Services and Support Agreement to use its best efforts to enter into and enforce
written employment agreements with each of its professional employees containing
covenants not to compete with the Coast Florida P.A. in a specified geographic
area for a specified period of time after termination of the employment
agreement. The employment agreements generally provide for liquidated damages
and injunctive relief in the event of a breach of the covenant not to compete.
However, the Company's ability to enforce the covenant not to compete is not a
certainty. See "Risk Factors -- Non-competition Covenants." Under the Services
and Support Agreement, the Company is to be designated as a third party
beneficiary in the employment agreements between the Coast Florida P.A. and the
Coast Dentist.
To assist in maintaining the continuity of the Services and Support
Agreement, the Company has entered into an Agreement to Transfer Stock and Stock
Pledge (the "Agreement") with Dr. Adam Diasti, sole shareholder of the Coast
Florida P.A., pursuant to which Dr. Diasti has agreed to sell all of his shares
of Coast Florida P.A. stock (the "Coast Florida P.A. Shares") to a dentist(s) or
professional association licensed to practice dentistry in the applicable state,
designated by the Company, in the event (i) Dr. Diasti dies; (ii) Dr. Diasti
loses his license to practice dentistry in such state for any reason; (iii)
there is a default under the Services and Support Agreement by the Coast Florida
P.A. or Dr. Diasti; (iv) Dr. Diasti becomes
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insolvent, files or has filed against him a bankruptcy petition which is not
discharged within thirty (30) days, has a receiver appointed for his business,
assets or property, has his bank accounts, property or accounts attached, has
execution levied against his business or property, makes an assignment for
benefit of creditors or has any of his Coast Florida P.A. shares attached or
levied upon for payment of his debts; (v) Dr. Diasti is adjudicated incompetent
by any court of law; (vi) Dr. Diasti no longer meets the qualifications to be a
shareholder of a dental professional association in such state; or (vii) Dr.
Diasti breaches the Agreement.
The purchase price for the Coast Florida P.A. Shares under the Agreement is
an amount which is equal to the fair market value of the Coast Florida P.A.
Shares as determined by a nationally recognized firm of independent certified
public accountants. The term of the Agreement is for as long as the Services and
Support Agreement and any renewals thereof are in effect. Under the Agreement,
Dr. Diasti has pledged to the Company all of his Coast Florida P.A. Shares to
secure his agreement to sell his Coast Florida P.A. Shares to the Company's
designee. Notwithstanding the above, Dr. Diasti shall have the right to sell or
transfer his stock during the term of the Agreement so long as the transferee is
bound by the terms thereof. An arrangement between the Company and Dr. Diasti
similar to the Agreement is expected to be entered into in connection with the
Coast Georgia P.A. and Dr. Diasti's ownership interest therein.
The Services and Support Agreement between the Company and the Coast
Georgia P.A. is expected to be substantially similar to the current Services and
Support Agreement between the Company and the Coast Florida P.A. except the
compensation to be paid to the Company is expected to be 74% of the Coast
Georgia P.A.'s gross revenue. The Company plans to continue to use the current
form of its Services and Support Agreement to the extent possible and
marketable, as it enters into other states or into arrangements with other
dental practices. However, the terms of future agreements may differ according
to market conditions and the statutory or regulatory requirements of the
particular state in which the dental practice is located.
GOVERNMENTAL AND STATE REGULATIONS
General Overview. The Company's operations and relationships are subject
to a variety of governmental and regulatory requirements relating to the conduct
of its business. The Company is also subject to laws and regulations which
relate to business corporations in general. The Company believes that it
exercises care in an effort to structure its practices and arrangements with
dental practices to comply with relevant federal and state law and believes that
such arrangements and practices comply in all material respects with all
applicable statutes and regulations. The health care industry and dental
practices are highly regulated, and there can be no assurance that the
regulatory environment in which the Company operates will not change
significantly and adversely in the future. In general, regulation of health care
providers and companies is increasing.
There are currently several federal and state initiatives designed to amend
regulations relating to the provision of health care services, the access to
health care, the costs of health care and the manner in which health care
providers are reimbursed for their services. However, it is not possible to
predict whether any such initiatives will be enacted as legislation or, if
enacted, what their form, effective dates or impact on the Company will be. See
"Risk Factors -- Government Regulations."
Every state imposes licensing requirements on dentists and on their
facilities and services. In addition, many states require regulatory approval,
including certificates of need, before establishing certain types of health care
facilities, offering certain services or making expenditures in excess of
statutory thresholds for health care equipment, facilities or programs. The
execution of a management agreement with a dental practice does not in most
states require any health care regulatory approval on the part of the Company or
the dental practice. However, in connection with the expansion of existing
operations and the entry into new markets, the Company and its associated dental
practice may become subject to additional regulation. See "Risk
Factors -- Government Regulations."
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Health Care Regulations Affecting the Company. Business arrangements
between dentists and business corporations are regulated extensively at the
state and federal levels, including regulation in the following areas:
Corporate Practice of Dentistry. The laws of many states prohibit
corporations that are not owned entirely by dentists from employing
dentists (and in some states, dental hygienists and dental assistants),
having control over clinical decision-making, or engaging in other
activities that are deemed to constitute the practice of dentistry. Florida
law specifically prohibits non-professional corporations from employing
dentists and dental hygienists, exercising control over patient records,
and making decisions relating to clinical matters, office personnel, hours
of practice, pricing, credit, refunds, warranties and advertising. In
Georgia, dentists may be employed by corporations only if the entity is
organized as a professional corporation or association whose shareholders
or members are licensed dentists. The Company does not employ dentists or
dental hygienists and does not exercise control over any prohibited areas.
While Dr. Adam Diasti, the sole shareholder of each Coast P.A., is also a
shareholder, director and officer of the Company, he acts independently
when making decisions in these areas on behalf of the Coast P.A.s.
Some states, including Florida and Georgia, also prohibit
non-professional corporations from owning, maintaining or operating an
office for the practice of dentistry. These laws have generally been
construed to permit arrangements under which the dentists are not employed
by or otherwise controlled as to clinical matters by the party supplying
facilities and non-professional services. Florida law specifically requires
that dentists or their professional corporations maintain complete care,
custody and control of all equipment and materials used in the practice of
dentistry. The Services and Support Agreement between the Company and the
Coast Florida P.A. provides that the Company shall not exercise control
over any matters that would violate the requirements of the applicable
state law.
Fee-Splitting and Anti-kickback Laws.
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 provide 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 a 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.
In addition, most states have laws prohibiting paying or receiving
any remuneration, direct or indirect, that is intended to induce
referrals for health care items or services, including dental items and
services.
Federal Law. Federal law prohibits the offer, payment,
solicitation or receipt of any form of remuneration in return for the
referral of patients covered by federally funded health care programs
such as Medicare and Medicaid, or in return for purchasing, leasing,
ordering or arranging for the purchase, lease or order of any item or
service that is covered by a federal program.
The Company operates in a manner that complies with these
requirements. For this reason, the Services and Support Agreement
provides that the Company will not engage in direct marketing to
potential sources of business, but will only assist Coast P.A. personnel
in these endeavors by providing training, marketing materials and
technical assistance.
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<PAGE> 45
Advertising Restrictions. Many states, including Florida, prohibit
dentists from using advertising which includes any name other than their
own, or from advertising in any manner that is likely to mislead 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 is not permitted. The Services
and Support Agreement provides that all advertising shall conform to these
requirements. Florida law also requires all advertising to identify the
Florida dentist who assumes total responsibility for the advertisement and
may not include the name of a person who is not either actually involved in
the practice of dentistry at the advertised location or as owner of the
practice being advertised. All of the Florida advertisements include the
name of Dr. Adam Diasti who owns the dental practice through the Coast
Florida P.A. In Georgia, advertisements will need to include the name of at
least one dentist practicing at the advertised location unless the Georgia
Board of Dentistry has approved the use of a tradename.
Limitations on Delegation. Some states, including Florida, regulate
the manner in which dentists delegate certain tasks to non-dentists. In
Florida, if a dentist uses a nonlicensed person to prepare orthodontic or
prosthetic devices such as dentures, certain record keeping requirements
must be met. In Georgia, dentists must personally and directly supervise
dental hygienists and dental assistants.
These laws have civil and criminal penalties. Nonetheless, these laws have been
subject to limited judicial and regulatory interpretation. They are enforced by
regulatory agencies that are vested with broad discretion in interpreting their
meaning. The Company's agreements and activities have not been examined by
federal or state authorities under these laws and regulations. For these
reasons, there can be no assurance that review of the Company's business
arrangements or the operation of the Dental Centers will not result in
determinations that adversely affect the Company's operations or that the
long-term Services and Support Agreement or certain of its provisions will not
be held invalid and unenforceable.
In addition, these laws and their interpretation vary from state to state.
The laws and regulations of certain states into which the Company seeks to
expand may require the Company to change the form of relationships entered into
with dentists in a manner that restricts the Company's operations in those
states.
Anti-Fraud Laws
State Law. State laws prohibit any person from knowingly and
willfully making any false statement or misrepresentation of a material
fact in seeking payment for items or services.
Federal Law. Federal law prohibits any person from knowingly and
willfully making any false statement or misrepresentation of a material
fact in seeking payment for items or services. Federal laws impose civil
monetary penalties for filing claims that the filing party "should know"
are not appropriate under rules applicable to federally funded health care
programs.
Self-Referral Laws
State Law. Many states, subject to certain exceptions, prohibit
referrals for certain health services if the referring dentist has an
ownership interest in and/or a compensation arrangement with the entity
receiving the referral. Many states require the dentist to disclose such
interests to patients.
Federal Law. Federal law, subject to certain exceptions, prohibits
certain Medicare and Medicaid referrals to entities in which a dentist has
an ownership interest or with which the dentist has a compensation
arrangement.
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<PAGE> 46
The federal law and most state laws have exceptions for in-office services
provided under the direct supervision of the dentist. There is no assurance that
changes in these laws or their interpretation will not affect the Company's
current or future activities.
Regulatory Compliance. The Company believes that health care regulations
will continue to change, and as a result, regularly monitors developments in
health care law. The Company expects to modify its agreements and operations
from time to time as the business and regulatory environment change. However,
there can be no assurance that such change will not adversely affect the ability
of the Company to operate as it currently does or to remain profitable in doing
so.
INSURANCE
The Company's business entails an inherent risk of claims of liability. The
Coast Dentists are involved in the delivery of health care services to the
public and, therefore, are exposed to the risk of professional liability claims.
Claims of this nature, if successful, could result in substantial damage awards
to the claimants that may exceed the limits of any applicable insurance
coverage. Insurance against losses related to claims of this type can be
expensive and varies widely from state to state. The Company is indemnified
under the Services and Support Agreement for claims against the Company arising
from the performance of medical and dental services provided by the Coast
Florida P.A. The Company maintains liability insurance for itself and negotiates
liability insurance for the Coast Dentists. Successful malpractice claims
asserted against the Coast Florida P.A., however, could have an adverse effect
on the Company's profitability. The Company maintains professional liability and
general liability insurance on a claims-made basis in the amounts of $1.0
million per incident, and $3.0 million in the aggregate per annum, along with a
$5.0 million umbrella policy. While the Company believes it has adequate
liability insurance coverage, there can be no assurance that a pending or future
claim or claims will not be successful or, if successful, will not exceed the
limits of available insurance coverage or that such coverage will continue to be
available at acceptable costs and on favorable terms.
COMPETITION
The Company is aware of several other companies which are actively engaged
in the consolidation of existing dental practices and providing management
services to dental practices, some of which may have substantially greater
financial resources and longer operating histories than the Company. The Company
assumes that additional companies with similar objectives may enter the
Company's markets and compete with the Company. The primary basis of competition
between dental PPMs are the extent of the dental care network, management
expertise and experience, sophistication of management information systems, the
elements of its operating system, the availability of managed care business,
opportunity for career enhancement of potential associated dentists, liquidity,
high visibility, pricing in acquisition and management agreements, degrees of
control required by the merger and the size of operations.
The business of providing dental services is highly competitive in each of
the markets in which the Dental Centers operate. The primary bases of
competition within the dental services industry are price of services, marketing
exposure, convenience of location and traffic flow of location, hours of
operation, reputation, managed care contracts, quality of care, and appearance
and usefulness of facility and equipment. Coast Dentists compete with other
dentists who maintain single offices or operate a single satellite office, as
well as with dentists who maintain group practices or operate in multiple
offices. Many of those dentists have more established practices in their
markets.
SERVICE MARKS
The Company applied for registration of the service marks "Coast Dental"
and the Company logo with the United States Patent and Trademarks Office in 1996
which application is currently pending.
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EMPLOYEES
At August 1, 1997, the Company had approximately 325 full-time and
part-time employees, of which approximately 25 were employed at the Company's
headquarters and approximately 300 were employed at the Dental Centers. None of
the Company's employees are employed under a collective bargaining agreement.
The Company believes that its relationship with its employees is good.
LITIGATION
There are no material pending legal proceedings other than routine
litigation arising in the ordinary course of business. The Company does not
believe that the results of such litigation, even if the outcome were
unfavorable to the Company, would have a material adverse effect on its
financial position.
PROPERTIES
The Company presently leases an average of between 1,200 to 2,000 square
feet of office space for each of the Dental Centers. The typical lease for
office space is for a term of approximately five years and generally provides
for renewal options for additional years. The average rental payments for a
leased Dental Center are approximately $1,600 per month. The Company plans to
continue to lease rather than purchase space for the Dental Centers to preserve
the Company's available capital.
The Company leases 3,800 square feet of office space in Tampa, Florida for
its Corporate headquarters. This lease is for a term through May 2000 and the
Company believes the facility is adequate for its current needs.
The Company generally anticipates leasing and developing new Dental Centers
in its current market as well as in certain other geographic markets rather than
significantly expanding the size of its existing Dental Centers.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth the names and ages of the Company's
directors, executive officers, and key employees, and the positions they each
hold with the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Terek Diasti, DVM...... 38 Chief Executive Officer and Chairman of the Board
Adam Diasti, DDS....... 36 President, Chief Operating Officer, Dental Director
and Director
Joseph R. Smith, CPA... 45 Chief Financial Officer, Secretary, Treasurer and
Director
Tim Diasti............. 28 Vice President of Operations
John H. Kang........... 34 Director
Donald R. Millard...... 48 Director
</TABLE>
TEREK DIASTI, DVM, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD. Dr.
Diasti is a founder of the Company and has served as Chairman of the Board of
the Company since 1992. From 1989 to 1993, Dr. Diasti operated and managed
Lakeside Animal Hospital, Avalon Animal Hospital, Country Oaks Animal Hospital
and Northdale Animal Hospital, all of which are veterinary hospitals in the
Tampa Bay area. While at the veterinary hospitals, Dr. Diasti was engaged in the
development internal managerial and operational programs. Dr. Diasti received
his Doctorate of Veterinary Medicine from Purdue University. Dr. Diasti is the
brother of Dr. Adam Diasti and Tim Diasti.
ADAM DIASTI, DDS, PRESIDENT, CHIEF OPERATING OFFICER, DENTAL DIRECTOR AND
DIRECTOR. Dr. Diasti is a founder of the Company and has served as the
President of the Company since its inception. Dr. Diasti is also the founder,
president, director and sole shareholder of each Coast P.A. From May 1991 to May
1992, he managed and operated the Sarasota Walk In Dental Clinic, a group
practice of three dentists and denture laboratory in Sarasota, Florida. Prior to
May 1991, Dr. Diasti worked as a dentist in a large group practice of 18 offices
known as Quality Dental in Newman Grove, Nebraska. He served as the Dental
Operations Manager of Quality Dental. Dr. Diasti received his Doctorate of
Dental Surgery from Creighton University in 1990 and is a member of the American
Dental Association. Dr. Diasti is the brother of Dr. Terek Diasti and Tim
Diasti.
JOSEPH R. SMITH, CHIEF FINANCIAL OFFICER, SECRETARY, TREASURER AND
DIRECTOR. Mr. Smith, a Certified Public Accountant, joined Coast Dental as its
Chief Financial Officer in February 1996. He was elected as a director of the
Company in September 1996. Prior to joining Coast and since 1985, he was a
partner with Deloitte & Touche LLP, in the Central Florida practice where he
most recently served as the partner in charge of middle market services for
Central Florida and the partner in charge of services to the Retail industry for
the Florida region. Mr. Smith graduated with a Bachelor of Science in Accounting
in 1975 from the University of Florida.
TIM DIASTI, VICE PRESIDENT OF OPERATIONS. Mr. Diasti is a founder of the
Company and has served as Vice President of Operations of the Company since its
inception. Mr. Diasti graduated with a Bachelor of Arts from the University of
Nebraska's School of Business in 1992. Mr. Diasti is the brother of Dr. Terek
Diasti and Dr. Adam Diasti.
JOHN H. KANG, DIRECTOR. Mr. Kang has served as a director of the Company
since February 1997. He has been President and a director of Medical Manager
Corporation, a public entity, since July 1996. He is the founder of NMS and has
served as its President since its inception in 1994. In 1987, Mr. Kang founded
J. Holdsworth Capital Ltd., a private investment firm, and is currently its
President. He has been a director of Amorphous Technologies International, a
company engaged in the research and development and manufacture of metal alloy,
since May 1995. Mr. Kang also has been a director of Nutcracker Snacks, Inc., a
manufacturer of snack foods, since December 1988. From June 1988 to September
1996, Mr. Kang was the Chairman and a director of Clayton Group, Inc., a
distributor of waterworks materials. Mr. Kang received an A.B. in Economics from
Harvard College in 1985.
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DONALD R. MILLARD, DIRECTOR. Mr. Millard has served as a director of the
Company since February 1997. He has served as Senior Vice President of Finance
and Chief Financial Officer of Matria Healthcare, Inc., a provider of
comprehensive obstetrical homecare and maternity management services, since
March 1996. Previously, Mr. Millard served as Treasurer from 1990 and Vice
President -- Finance and Chief Financial Officer from 1987 for Healthdyne, Inc.,
which merged with Tokos Medical Corporation in March 1996 to form Matria
Healthcare, Inc. Prior to joining Healthdyne, Inc., Mr. Millard served as
President of Dental One, Inc., a dental healthcare provider, from December 1982
to June 1987. Mr. Millard is a Certified Public Accountant.
Pursuant to the terms of the Company's Certificate of Incorporation and
Bylaws, the Board of Directors has the power to set the number of directors. The
number of directors is presently set at five members and there are currently no
vacancies. The directors are divided into three classes. Each director in a
particular class is elected to serve a three-year term or until his or her
successor is duly elected and qualified. The classes are staggered so that their
terms expire in successive years resulting in the election of only one class of
directors each year. The Class I directors are Terek Diasti, John Kang and
Donald Millard, the Class II director is Adam Diasti and the Class III director
is Joseph Smith. The terms of the current Class I, Class II and Class III
directors will expire at the annual meeting of the stockholders of the Company
in 2000, 1998 and 1999, respectively. Officers of the Company are appointed by
the Board of Directors and hold office until the first meeting of directors
following the annual meeting of stockholders and until their successors are
appointed, subject to earlier removal by the Board of Directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Restated Certificate of Incorporation (the "Certificate")
provides that a Director shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a Director,
except: (i) for any breach of duty of loyalty; (ii) for acts or omissions not in
good faith or which involve intentional misconduct or knowing violations of
laws; (iii) for liability under Section 174 of the Delaware GCL (relating to
certain unlawful dividends, stock repurchases or stock redemptions); or (iv) for
any transaction from which the Director derived any improper personal benefit.
Article VIII of the Company's By-laws provides that the Company shall indemnify
each Director and such of the Company's officers, employees and agents as the
Board of Directors shall determine from time to time to the fullest extent
provided by the Delaware GCL.
The Company has entered into indemnification agreements (the
"Indemnification Agreements") with all of its Directors and certain of its
officers. Similar Indemnification Agreements may from time to time be entered
into with additional officers of the Company or certain other employees or
agents of the Company. At present, there is no material pending litigation or
proceeding involving a director, officer, employee or agent of the Company where
indemnification is required or permitted, nor is the Company aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification. The Company is also empowered under its Certificate to purchase
and maintain insurance or furnish similar protection on behalf of any person who
it is required or permitted to indemnify and the Company has acquired such
insurance in connection with such individuals that the Company believes is
warranted.
DIRECTORS' COMPENSATION
Each Director of the Company who is not an employee of the Company receives
$1,000 for each meeting of the Board of Directors or any committee attended plus
out-of-pocket expenses incurred in connection with attendance at such meeting.
In February 1997, the Company granted options to purchase 2,000 shares of Common
Stock under the Incentive Plan to each of its nonemployee directors. These
options were granted at an exercise price of $8.00 per share, none of which are
currently exercisable. In July 1997, the Company granted options to purchase
2,000 shares of Common Stock under the Incentive Plan to each of its nonemployee
directors. These options were granted at an exercise price of $15.25 per share,
none of which are currently exerciseable.
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COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors consists of an Audit Committee, the members of which
are Messrs. Kang, Smith and Millard, a Compensation Committee, the members of
which are Messrs. Kang, Millard and Terek Diasti, and an Executive Committee
consisting of Terek Diasti and Mr. Smith. The functions of the Audit Committee
are to recommend annually to the Board of Directors the appointment of the
independent public accountants of the Company, discuss and review the scope and
the fees of the prospective annual audit, to review the results thereof with the
independent public accounts, review and approve non-audit services of the
independent public accountants, review compliance with existing major accounting
and financial policies of the Company, review the adequacy of the financial
organization of the Company, review management's procedures and policies
relative to the adequacy of the Company's internal accounting controls, review
compliance with federal and state laws relating to accounting practices and
review and approve (with the concurrence of a majority of the disinterested
directors of the Company) transactions, if any, with affiliated parties.
The functions of the Compensation Committee are to review and approve
annual salaries and bonuses for all officers, review, approve and recommend to
the Board of Directors the terms and conditions of all employee benefit plans or
changes thereto, administer the Company's stock option plans, and carry out the
responsibilities required by rules of the Securities and Exchange Commission.
The Executive Committee, to the fullest extent allowed by Delaware law and
subject to the powers and authority delegated to the Audit Committee and the
Compensation Committee by the Board of Directors, is authorized to exercise all
the powers and authority of the Board of Directors in the management of the
business and affairs of the Company during intervals between meetings of the
Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to all compensation
paid or accrued in 1995 and 1996 for services rendered in all capacities to the
Company and its predecessors by the chief executive officer and, in 1996 with
respect to the one other executive officer whose total annual salary and bonus
exceeded $100,000. For the year ended December 31, 1995, no officer of the
Company received compensation in excess of $100,000 and for the year ended
December 31, 1996, Mr. Joseph Smith, Chief Financial Officer, was the only
officer of the Company to receive compensation in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- ------------
RESTRICTED
NAME AND PRINCIPAL POSITION YEAR SALARY STOCK AWARD
- --------------------------- ------ ---------- ------------
<S> <C> <C> <C>
Terek Diasti, Chief Executive Officer....................... 1995 $ 26,833 --
1996 $ 63,442 --
Joseph R. Smith, Chief Financial Officer.................... 1996 $114,423 $27,674(1)
</TABLE>
- ---------------
(1) Represents the dollar amount of compensation expense to the Company
resulting from the issuance of 105,000 shares of restricted Common Stock
granted by the Company to Mr. Smith. Based upon the assumed offering price,
such shares have a total aggregate value of approximately $2.26 million. A
total of 52,500 of these shares automatically vested at the time of
completion of the Initial Public Offering and 26,250 of such shares will
vest on February 12, 1998 and on February 12, 1999, subject to Mr. Smith's
continued employment on such dates. Dividends will not be paid on shares
which are subject to such restrictions.
The Company anticipates that it will pay compensation in excess of $100,000
to both the Chief Executive Officer and Chief Financial Officer for the year
ended December 31, 1997 pursuant to certain employment agreements. See
"-- Employment Agreements." The Company did not grant any stock options or stock
49
<PAGE> 51
appreciation rights to executive officers during 1996 nor were any such options
or rights outstanding for executive officers as of the end of that fiscal year.
EMPLOYMENT AGREEMENTS
Dr. Terek Diasti and Dr. Adam Diasti have each entered into an Employment
Agreement with the Company (the "Employment Agreements"), pursuant to which they
have agreed to serve as the Company's Chief Executive Officer and Chief
Operating Officer, respectively. The Employment Agreements are for a term of
five years ending on September 30, 2001 and are renewable for subsequent one
year terms by mutual agreement of the parties. Dr. Terek Diasti and Dr. Adam
Diasti will receive annual base salaries of not less than $110,000 and $90,000,
respectively, during the first year and not less than $135,000 and $115,000,
respectively, for subsequent years, under the Employment Agreements. Dr. Terek
Diasti agreed to devote substantially all of his time and attention to the
business and affairs of the Company, while Dr. Adam Diasti, because of his
obligations to the Coast P.A.s, has agreed to devote such time and attention as
is reasonably necessary to fulfill his obligations to the Company. Dr. Terek
Diasti and Dr. Adam Diasti will each be eligible for annual incentive bonuses,
up to 100% of their annual base salary, in an amount to be determined by the
Compensation Committee of the Board of Directors in accordance with the Company
achieving certain performance measures set by the Committee. Each of such
Employment Agreements provides that in the event of a termination of employment
by the Company other than (i) for cause, (ii) upon death or disability or (iii)
upon voluntary termination by employee, such employee shall be entitled to
receive from the Company a series of monthly payments equal to one-twelfth of
the employee's annual base salary for each month during the remaining term of
such Employment Agreement, but not less than twenty-four months, plus a payment
for accrued but unpaid wages and expense reimbursements. Such Employment
Agreements provide that in the event such employee's employment terminates other
than for cause within twelve months following a change in control (as defined in
such Employment Agreements) of the Company, the Company shall pay such employee
a series of 36 monthly payments of one-twelfth of the sum of such employee's
base salary plus his previous years' bonus. Each such Employment Agreement
contains a non-competition covenant with the Company for a period of two years
following termination of employment.
The Company and Joseph R. Smith are parties to an Employment Agreement (the
"Employment Agreement"), pursuant to which Mr. Smith has agreed to serve as
Chief Financial Officer of the Company. The term of the Employment Agreement is
for three years ending on February 12, 1999, and is renewable for subsequent one
year terms by mutual agreement of the parties. The Employment Agreement also
provides that Mr. Smith will be employed for at least two years after any public
offering of the Company which occurs during the initial term of the Employment
Agreement. In the event Mr. Smith terminates the Employment Agreement without
cause during the two year period after any public offering, the Employment
Agreement requires Mr. Smith to pay liquidated damages to the Company of
$200,000 for each complete year or portion of a year remaining. The Employment
Agreement provides that Mr. Smith will devote his full time to the business and
affairs of the Company and will receive an annual base salary at a rate equal to
$125,000 during the first six months of employment and $150,000 during the
second six months, $165,000 in the second year and $180,000 in the third year.
In addition, Mr. Smith has received under the Employment Agreement 105,000
shares of restricted Company Common Stock of which one-half of the shares ceased
to be forfeitable at the time of the Initial Public Offering and the remaining
one-half will cease to be forfeitable after the second and third year of
employment. Mr. Smith is also eligible for inclusion, at the Company's expense,
in any health, medical, disability, insurance or pension plan made available by
the Company to its employees. The Employment Agreement terminates automatically
upon death or disability of Mr. Smith and is terminable by the Company "for
cause" as defined in the Employment Agreement. The Employment Agreement provides
that during the period ending one year after termination, Mr. Smith will not
compete with the Company in the dental management business. In January 1997, Mr.
Smith received options to purchase 10,000 shares of the Company's Common Stock
pursuant to the Company's Incentive Plan as described below. These options are
exercisable at $8.00 per share and shall vest pro-rata on an equal basis, over a
three year period. Additionally, in July 1997, Mr. Smith received options to
purchase 3,279 shares of Common Stock pursuant to the Company's Incentive Plan.
The options granted in July are exercisable at $15.25 and shall vest pro-rata on
an equal basis, over a three year period.
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THE PLANS
Effective April 1, 1996, the Board of Directors adopted, and the
stockholders of the Company approved, two stock incentive plans: the Coast
Dental Services, Inc. Stock Option Plan (the "Incentive Plan") and the Coast
Dental Services, Inc. Affiliated Professionals Stock Plan (the "Professionals
Plan," and together with the Incentive Plan, the "Plans"). The purpose of the
Plans is to provide non-employee directors, officers, key employees, and dental
professionals employed by the Coast P.A.s and the Company with additional
incentives by increasing their proprietary interest in the Company or tying a
portion of their compensation to increases in the price of the Company's Common
Stock. The aggregate number of shares of Common Stock subject to the Incentive
Plan and the Professionals Plan is 450,000 shares for each plan.
The Incentive Plan permits the Company to grant incentive stock options
("ISOs"), as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), non-qualified stock options ("Non-qualified Options"),
stock appreciation rights ("SARs") and Restricted Shares of Common Stock
("Restricted Shares") to officers and employees of the Company and effective
June 20, 1997 the stockholders approved an amendment to the Incentive Plan to
include the granting of stock options to non-employee directors of the Company
(individually, an "Award" and collectively, "Awards"). The Professionals Plan
permits the Company to grant Awards of Non-qualified Options, SARs and
Restricted Shares to dental professionals employed by the Coast P.A.s. The
various types of Awards are described in more detail below.
The Incentive Plan is intended to qualify for favorable treatment under
Section 16 of the Exchange Act pursuant to Rule 16b-3 promulgated thereunder
("Rule 16b-3") and Awards under the Incentive Plan are intended to qualify for
treatment as "performance-based compensation" under Section 162(m) of the
Internal Revenue Code ("Section 162(m)"). The Plans are administered by the
Compensation Committee, which is comprised of two or more nonemployee directors
within the meaning of Rule 16b-3 and Section 162(m) (the "Committee"). The
Committee has, subject to the terms of the Plans, the sole authority to grant
Awards under the Plans, to construe and interpret the Plans and to make all
other determinations and take any and all actions necessary or advisable for the
administration of the Plans.
Options. Options for the purchase of shares of the Common Stock may be
granted under both Plans. The exercise price for the ISOs granted under the
Incentive Plan may be no less than the fair market value of the Common Stock on
the date of grant (or 110% in the case of ISOs granted to employees owning more
than 10% of the Common Stock). Only employees of the Company are eligible to
receive ISOs. The exercise price for Non-qualified Options granted under the
Plans will generally be the fair market value of the Common Stock on the date of
grant; however, the Committee will set an exercise price at less than fair
market value if it determines that special circumstances warrant a lower price.
Options will be exercisable during the period specified in each option agreement
and will generally be exercisable in installments pursuant to a vesting schedule
to be designated by the Committee. No option will remain exercisable later than
ten years after the date of grant (or five years from the date of grant in the
case of ISOs granted to holders of more than 10% of the Common Stock).
SARs. Stock appreciation rights may be granted under both Plans in tandem
with options. An SAR represents the right to receive from the Company the
difference (the "Spread"), or a percentage thereof not in excess of 100 percent,
between the exercise price of the related option and the market value of the
Common Stock on the date of exercise of the SAR. SARs may only be exercised at a
time when the related option is exercisable and the Spread is positive, and the
exercise requires the surrender of the related option for cancellation. The
amount payable by the Company upon exercise may be paid in cash, Common Stock or
a combination thereof, as determined by the Committee.
Restricted Shares. Restricted Shares may be granted under both Plans. An
award of Restricted Shares involves the immediate transfer by the Company to a
participating employee of ownership of a specific number of shares of Common
Stock in consideration of the performance of services. The employee is entitled
immediately to voting, dividend and other ownership rights in the shares. The
transfer may be made without additional consideration, or for payment of an
amount that is less than the market value of the shares on the date of grant, as
the Committee may determine. Restricted Shares must be subject to a "substantial
risk of forfeiture" for a period to be determined by the Committee. An example
would be a provision that the
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employee's Restricted Shares would be forfeited if he or she ceased to serve the
Company as an officer at any time before the end of a specified period of years.
In order to enforce these forfeiture provisions, the transferability of
Restricted Shares will be prohibited or restricted in a manner and to the extent
prescribed by the Committee for the period during which the forfeiture
provisions are to continue. The Committee may also condition the vesting of the
Restricted Shares on the achievement of specified performance objectives
("Management Objectives").
The Company has awarded a total of 132,659 Restricted Shares to employees
and affiliated professionals under the Incentive Plans, which vest over three to
five years from the date of grants.
The Company anticipates that upon the consummation of the Offering it will
have outstanding options to purchase a total of approximately 285,000 shares of
Common Stock exercisable at an exercise price equal to fair market value of the
Company's Common Stock on the date of the grant. The outstanding options are
exercisable ratably over three years from the date of the granting of the
options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Executive compensation in the past has been determined by the Company's
chief executive officer. After completion of the Initial Public Offering, the
Company established the Compensation Committee of the Board of Directors, which
is comprised of a majority of non-employee independent directors and is
responsible for establishing salaries, bonuses and other compensation for the
Company's officers.
CERTAIN TRANSACTIONS
The information set forth herein briefly describes transactions over the
past three years between the Company and its directors, officers and 5%
stockholders. These transactions took place prior to the Initial Public Offering
and have been approved by the Company's Board of Directors. Future transactions
after February 1997, if any, with affiliated parties will be approved by a
majority of the Company's independent directors of the Audit Committee and will
be on terms no less favorable to the Company than those that could be obtained
from unaffiliated parties.
THE REORGANIZATION
In March 1996, Coast Dental, Inc. ("CDI"), was merged into the Company for
the purpose of reincorporating the Company in the State of Delaware and changing
its name. Terek Diasti and Adam Diasti, directors and executive officers of the
Company, and Tim Diasti, an executive officer of the Company, collectively owned
100% of the outstanding common stock of CDI and each received 1,120,000 shares
or 100% of the then outstanding shares of Common Stock of the Company as a
result of the merger.
AGREEMENTS WITH THE COAST P.A.
The Company has an agreement to provide dental management, services and
support to the Coast Florida P.A. Dr. Adam Diasti, a director and the President
and Chief Operating Officer of the Company, is the sole owner of the Coast
Florida P.A. and Coast Georgia P.A. Payments made by the Coast Florida P.A. to
the Company for the management services were $1.9 million, $3.3 million and $8.1
million in 1994, 1995 and 1996, respectively, and $9.9 million for the six
months ended June 30, 1997. In October 1996, the Company and the Coast Florida
P.A. entered into a new services and support agreement pursuant to which the
Company provided dental management services to the Coast Florida P.A. for a
management fee equal to 76% of the gross revenue of the Florida Dental Centers.
The Coast Florida P.A. hires and supervises all Coast Dentists and hygienists.
Effective June 1997, the Company agreed to pay $50,000 to a Coast P.A. for each
new internally developed Dental Center it commits to open as an inducement to a
Coast P.A. to extend the Service and Support Agreement to each new internally
developed Dental Center. To date, the Company has paid $550,000 to the Coast
Florida P.A. in connection with the Company's obligation regarding added
internally developed Dental Centers and currently committed internally developed
Dental Center. The Company expects to enter into a services and support
agreement in September 1997 under terms substantially similar to
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the Services and Support Agreement pursuant to which the Company will provide
dental management services to the Coast Georgia P.A. for a management fee equal
to approximately 74% of the gross revenue of the Georgia Dental Centers. See
"Business -- Services and Support Agreement."
AGREEMENT WITH ADAM DIASTI
The Company has an agreement with Dr. Adam Diasti, pursuant to which Dr.
Diasti has agreed to sell all of his shares of Coast Florida P.A. stock to a
licensed dentist designated by the Company if certain events occur. Dr. Diasti
is a Director and the President and Chief Operating Officer of the Company. The
purchase price under the agreement, if the certain event should occur, will be
the fair market value of Dr. Diasti's shares of Coast Florida P.A. stock. The
Company is expected to enter into a similar agreement with Dr. Diasti with
respect to his shares in the Coast Georgia P.A. See "Business -- Services and
Support Agreement."
LOANS TO THE COAST FLORIDA P.A.
The Coast Florida P.A. is indebted to the Company in the aggregate amount
as of June 30, 1997 of approximately $2.0 million which represents service and
support fees payable to the Company and a promissory note dated June 30, 1997,
payable to the Company. The promissory note totalling approximately $598,000
bears interest at 8% per annum and is payable in one balloon payment due July 1,
1999. The funds were loaned in connection with acquisitions by the Coast Florida
P.A. and pursuant to the Services and Support Agreement. The management fee
receivable as of June 30, 1997 of approximately $1.4 million relates to amounts
due to the Company in accordance with the Services and Support Agreement. The
Company's current policy is not to provide financing for any Coast P.A.'s
acquisitions in the future.
CANCELLATION OF PERSONAL GUARANTYS
Terek Diasti and Adam Diasti have personally guaranteed certain notes
payable by the Company, under which $4.4 million was outstanding as of January
1, 1997. The Company repaid certain of these notes out of the net proceeds from
its initial public offering in February 1997, whereupon Terek Diasti and Adam
Diasti were released from the respective guarantys related to the repaid debt.
See Note 6 of the Financial Statements and "Use of Proceeds."
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Company's outstanding Common Stock as of August 25, 1997 and as
adjusted to reflect the sale of the Common Stock offered hereby by (i) each
person or entity known by the Company to be the beneficial owner of more than 5%
of the outstanding shares of Common Stock, (ii) each director of the Company who
owns any shares of Common Stock, (iii) the Selling Stockholders and (iv) all
directors and executive officers of the Company as a group. Except as otherwise
indicated, the persons listed below have sole voting and investment power with
respect to all shares of Common Stock owned by them, except to the extent such
power may be shared with a spouse.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER
OFFERING(2) SHARES OFFERING(2)
-------------------- BEING -------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT OFFERED NUMBER PERCENT
- --------------------------------------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Diasti Nevada Family Limited Partnership(3).... 2,925,000(3) 51.3% 370,000 2,555,000 33.6%
Dr. Terek Diasti............................... 2,925,000(4) 51.3 -- 2,555,000 33.6
Dr. Adam Diasti................................ 2,925,000(4) 51.3 -- 2,555,000 33.6
Tim Diasti..................................... 2,925,000(4) 51.3 -- 2,555,000 33.6
Joseph R. Smith(5)............................. 105,000 1.8 30,000 75,000 1.0
All directors and executive officers as a group
(4 persons).................................. 3,030,000 53.1% 400,000 2,630,000 34.6%
OTHER 5% STOCKHOLDER
Kaufmann Fund Inc. (6)......................... 600,000 10.5% -- 600,000 7.9%
</TABLE>
- ---------------
(1) Unless indicated otherwise, the address of each of the beneficial owners
identified is 6200 Courtney Campbell Causeway, Suite 690, Tampa FL. 33607.
See "Management -- Executive Officers and Directors,"
"Management -- Employment Agreements" and "Certain Transactions" for
discussion of any material relationship which certain of the Selling
Stockholders have had with the Company within the past three years.
(2) Based on 5,698,439 shares of Common Stock outstanding prior to the Offering
and 7,598,439 shares of Common Stock to be outstanding immediately after the
Offering if the underwriters over-allotment options are exercised in full.
(3) Shares are owned by the Diasti Nevada Family Limited Partnership (the
"Diasti Family Partnership"), 1325 Airmotive Way, Suite 130, Reno Nevada,
89502, in which Dr. Terek Diasti, Dr. Adam Diasti and Tim Diasti exercise
equal investment and voting powers as the general partners.
(4) Includes 2,925,000 shares owned by the Diasti Family Partnership, over which
Dr. Terek Diasti, Dr. Adam Diasti, and Tim Diasti share voting control.
(5) Excludes 10,000 and 3,279 shares issuable upon exercise of stock options
which were granted by the Company to Mr. Smith in January and July 1997,
respectively. Such stock options vest equally over a three year period
beginning from the grant date.
(6) Kaufmann Fund Inc.'s address is 140 East 45th Street, 43rd floor, New York,
New York, 10017.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 50,000,000 shares of Common Stock, $.001
par value per share, and 2,000,000 shares of preferred stock, $.001 par value
per share (the "Preferred Stock"). At September 2, 1997, 5,699,871 shares of
Common Stock were issued and outstanding and no shares of Preferred Stock were
outstanding.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to the prior rights of the
holders of Preferred Stock, holders of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors from funds legally
available therefor, and to share ratably in the assets of the Company legally
available for distribution to the stockholders in the event of liquidation or
dissolution. The Common Stock has no preemptive rights and no subscription or
redemption privileges. Stockholders of the Company are not entitled to
cumulative voting rights, which means the holder or holders of a majority of the
shares of Common Stock entitled to vote in any election of directors can elect
all of the Directors standing for election. All the outstanding shares of Common
Stock are, and the shares to be issued in the Offering when issued will be,
fully paid and not liable for further call or assessment. Upon a liquidation of
the Company, holders of Common Stock will be entitled to a pro rata distribution
of the assets of the Company, after payment of all amounts owed to the Company's
creditors, and subject to any preferential amount payable to holders of
Preferred Stock, if any.
PREFERRED STOCK
The Board of Directors is authorized to issue 2,000,000 shares of Preferred
Stock from time to time in one or more series, and to fix the rights,
preferences, privileges and restrictions, including voting rights, of these
shares without any further vote or action by the stockholders. The rights of the
holders of the Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company, thereby delaying,
deferring or preventing a change in control of the Company. Furthermore, such
Preferred Stock may have other rights, including economic rights senior to the
Common Stock, and, as a result, the issuance of such Preferred Stock could have
a material adverse effect on the market value of the Common Stock. The Company
has no present plan to issue shares of Preferred Stock.
DIRECTORS' LIABILITY
As authorized by the Delaware General Corporation Law ("DGCL"), the
Restated Certificate of Incorporation of the Company (the "Certificate") limits,
to the fullest extent permitted by Delaware law, the liability of Directors to
the Company for monetary damages. The effect of this provision in the
Certificate is to eliminate the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages against Directors for breaches of their fiduciary duties
(including breaches resulting from negligent behavior), except in certain
circumstances involving wrongful acts, such as the breach of a director's duty
of loyalty or acts or omissions which involve intentional misconduct or a
knowing violation of law. Further, the Bylaws contain provisions to indemnify
the Company's Directors and officers to the fullest extent permitted by the
General Corporation Law of Delaware. These provisions do not limit or eliminate
the rights of the Company or any stockholder to seek non-monetary relief such as
an injunction or rescission in the event of a breach of a Director's fiduciary
duty. These provisions will not alter the liability of Directors under federal
securities laws. The Company believes that these provisions will assist the
Company in attracting and retaining qualified individuals to serve as directors.
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CERTAIN PROVISIONS OF DELAWARE LAW
The Company is subject to the provisions of Section 203 of the DGCL.
Section 203 prevents an "interested stockholder" (defined in Section 203,
generally, as a person owning 15% or more of a corporation's outstanding voting
stock) from engaging in a "business combination" (as defined in Section 203)
with a publicly-held Delaware corporation for three years following the date
such person became an interested stockholder unless (i) before such person
became an interested stockholder, the board of directors of the corporation
approved the transaction in which the interested stockholder became an
interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the corporation and by employee stock plans that do not provide employees
with the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer); or (iii) following the
transaction in which such person became an interested stockholder, the business
combination is approved by the board of directors of the corporation and
authorized at a meeting of stockholders by the affirmative vote of the holders
of 66 2/3% of the outstanding voting stock of the corporation not owned by the
interested stockholder. Generally, a "business combination" includes a merger,
asset or stock sale or other transaction resulting in a financial benefit to the
interested stockholder. This provision may have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the stockholders.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE AND BYLAWS
Certain provisions of the Certificate of Incorporation (the "Certificate")
and the Bylaws (the "Bylaws") of the Company could have an anti-takeover effect.
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors of the Company and in the
policies formulated by the Board of Directors and to discourage certain types of
transactions, described below, which may involve an actual or threatened change
of control of the Company. The provisions are designed to reduce the
vulnerability of the Company to an unsolicited proposal for a takeover of the
Company that does not contemplate the acquisition of all of its outstanding
shares or an unsolicited proposal for the restructuring or sale of all or part
of the Company. The provisions are also intended to discourage certain tactics
that may be used in proxy fights. The Board of Directors believes that, as a
general rule, such takeover proposals would not be in the best interests of the
Company and its stockholders.
CERTIFICATE OF INCORPORATION
Classified Board of Directors. The Certificate provides for the Board of
Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of Directors
will be elected each year. The Board of Directors believes that a classified
Board of Directors will help to assure the continuity and stability of the Board
of Directors and the business strategies and policies of the Company as
determined by the Board of Directors, because the likelihood of continuity and
stability in the composition of the Company's Board of Directors and in the
policies formulated by the Board will be enhanced by staggered three-year terms.
The classified board provision could have the effect of discouraging a third
party from making a tender offer or otherwise attempting to obtain control of
the Company, even though such an attempt might be beneficial to the Company and
its stockholders. In addition, the classified board provision could delay
stockholders who do not agree with the policies of the Board of Directors from
removing a majority of the Board for two years, unless they can show cause and
obtain the requisite vote. See "Number of Directors; Removal" below.
Special Meetings of Stockholders. The Certificate prohibits the taking of
stockholder action by written consent without a meeting if there are more than
25 stockholders of record. The Certificate provides that special meetings of
stockholders of the Company may be called only by the Chairman, the President or
by a majority of the members of the Board of Directors. Furthermore, if a
proposal requiring stockholder action is made by or on behalf of an Interested
Stockholder (as defined) or a Director affiliated with an Interested Stockholder
or where an Interested Stockholder otherwise seeks action requiring stockholder
approval, the
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affirmative vote of a majority of the Continuing Directors (as defined) will
also be required to call a special meeting of stockholders. This provision will
make it more difficult for stockholders to take action opposed by the Board of
Directors.
Special Voting Requirements for Certain Transactions. The Certificate
provides that (i) any merger or consolidation of the Company or any Subsidiary
(as defined) with (a) any Interested Stockholder or (b) any other corporation
which is, or after such merger or consolidation would be, an Affiliate (as
defined) or Associate (as defined) of an Interested Stockholder, (ii) any sale,
lease or other disposition to or with or on behalf of any Interested Stockholder
or any Affiliate or Associate of any Interested Stockholder of 5% of the book
value of the total assets of the Company or 5% of stockholders' equity, (iii)
certain liquidations or dissolutions of the Company and any proposal to amend
the Certificate made on behalf of an Interested Stockholder or any Affiliate or
Associate of an Interested Stockholder, or (iv) certain reclassifications and
recapitalizations or other transactions that have the effect of increasing an
Interested Stockholder's proportionate share of the Company's capital stock
(collectively "Business Combinations") require, subject to certain exceptions,
the affirmative vote of the holders of at least 66 2/3% of the outstanding
shares of capital stock entitled to vote on matters generally submitted to
stockholders ("Voting Stock") other than the Voting Stock of which an Interested
Stockholder is the beneficial owner. The term "Interested Stockholder" generally
means any person who is a beneficial owner of or has announced a plan to acquire
10% or more of the outstanding Voting Stock and an Affiliate or Associate which,
at any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the outstanding Voting Stock.
The above requirements generally do not apply to a Business Combination
approved by a disinterested majority of the Continuing Directors if certain
other requirements are met. Such other requirements are designed to provide an
incentive to an Interested Stockholder to treat the stockholders within a class
equally, to discourage discriminatory two-tiered transactions and to encourage
an Interested Stockholder to furnish timely information regarding such Business
Combination.
Amendment of Certain Provisions of the Certificate. The Certificate
generally requires the affirmative vote of the holders of at least 80% of the
outstanding Voting Stock in order to amend its provisions, including any
provisions concerning (i) the classified board, (ii) the amendment of the
Bylaws, (iii) any proposed compromise or arrangement between the Company and its
creditors, (iv) the authority of stockholders to act by written consent, (v) the
liability of Directors, (vi) the calling of special meetings of the
stockholders, and (vii) the supermajority voting requirements described in this
paragraph. These voting requirements will make it more difficult for
stockholders to make changes in the Certificate which would be designed to
facilitate the exercise of control over the Company. In addition, the
requirement for approval by at least an 80% stockholder vote will enable the
holders of a minority of the voting securities of the Company to prevent the
holders of a majority or more of such securities from amending such provisions
of the Certificate.
Number of Directors; Removal. The Certificate provides that the Board of
Directors will consist of between two and 15 members, the exact number to be
fixed from time to time by resolution adopted by a majority of the Directors
then in office. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, the Certificate provides that Directors of the Company
may be removed only for cause and only by the affirmative vote of holders of a
majority of the outstanding shares of Voting Stock. Additionally, if the
proposal to remove a Director is made by or on behalf of an Interested
Stockholder or a Director affiliated with an Interested Stockholder, removal
will also require the affirmative vote of holders of a majority of Disinterested
Shares (as defined). These provisions will preclude a stockholder from removing
incumbent directors without cause and simultaneously gaining control of the
Board of Directors by filling the vacancies created by such removal with its own
nominees.
BYLAWS
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Bylaws establish an advance notice procedure for the
nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as Director as well as for other
stockholder proposals to be considered at stockholders' meetings.
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Notice of stockholder proposals and director nominations must be timely
given in writing to the Secretary of the Company prior to the meeting at which
the matters are to be acted upon or the Directors are to be elected. To be
timely, notice must be received at the principal executive offices of the
Company not less than 60 nor more than 90 days prior to the meeting of
stockholders; provided, however, that in the event that less than 70 days'
notice or prior public disclosure of the date of the meeting is given or made to
the stockholders, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth day following the day
on which such notice of the date of the meeting was mailed or public disclosure
of the date of the meeting was made, whichever first occurs.
A stockholders' notice to the Secretary with respect to a stockholder
proposal, shall set forth as to each matter the stockholder proposes to bring
before the meeting (i) a brief description of the business desired to be brought
before the meeting, (ii) the reasons for conducting such business at the
meeting, (iii) the name and record address of the stockholder proposing such
business, (iv) the class or series and number of shares of the Company which are
owned beneficially or of record by such stockholder, (v) a description of all
arrangements or understandings between such stockholder and any other person or
persons (including their names) in connection with the proposal of such business
by such stockholder and any material interest of such stockholder in such
business, and (vi) a representation that such stockholder intends to appear in
person or by proxy at the annual meeting to bring such business before the
meeting, A stockholders' notice to the Secretary with respect to a Director
nomination, shall set forth (i) certain information about the nominee, (ii) the
consent of the nominee to serve as a Director if elected, (iii) the name and
record address of the nominating stockholder, (iv) the class or series and
number of shares of the Company which are beneficially owned by such
stockholder, (v) a description of all arrangements or understandings between
such stockholder and each proposed nominee and any other person pursuant to
which the nominations are to be made, (vi) a representation that such
stockholder intends to appear in person or by proxy at the meeting to nominate
the persons named, and (vii) certain other information.
The purpose of requiring advance notice is to afford the Board of Directors
an opportunity to consider the qualifications of the proposed nominees or the
merits of other stockholder proposals and, to the extent deemed necessary or
desirable by the Board of Directors, to inform stockholders about those matters.
Amendment to Bylaw Provisions. The Certificate provides that the Bylaws
are subject to adoption, amendment, repeal or rescission either by (a) a
majority of the authorized number of Directors and, if one or more Interested
Stockholders exists, by a majority of the Directors who are Continuing Directors
or (b) the affirmative vote of the holders of not less than 80% of the
outstanding shares of Voting Stock and, if such adoption, amendment, repeal or
rescission is proposed by or on behalf of an Interested Stockholder or a
Director affiliated with an Interested Stockholder, by a majority of the
Disinterested Shares. These provisions will make it more difficult for
stockholders to make changes in the Bylaws. The 80% vote will allow the holders
of a minority of the voting securities to prevent the holders of a majority or
more of voting securities from amending the Bylaws.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 7,299,871 shares of
Common Stock outstanding. Of these shares, the 2,000,000 shares offered hereby
(2,300,000 if the Underwriters' over-allotment option is exercised in full), the
2,530,000 shares sold in the Initial Public Offering and an additional 106,415
shares will be freely tradeable without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act") unless
purchased by "affiliates" of the Company as that term is defined in Rule 144
under the Securities Act. The remaining 2,663,456 shares outstanding are
"Restricted Securities" as that term is defined in Rule 144 and fall into three
categories: (i) 2,630,000 shares held by "affiliates" whom have already held
their shares for more than one year (ii) 27,659 shares held by non-affiliates
whom have already held their shares for more than one year and (iii), 5,797
shares held by a non-affiliate who has not held his shares for more than one
year. In addition, 900,000 shares of Common Stock are reserved under the Plans
for exercise of stock options granted by the Company, of which options to
purchase approximately 87,000 and 198,000 shares have been granted under the
Incentive Plan and the Professionals Plan, respectively.
The Restricted Securities may not be sold unless they are registered under
the Securities Act or are sold pursuant to an exemption from registration, such
as the exemption provided by Rule 144. Rule 144 imposes certain restrictions and
limitations on resale. In general, under Rule 144 as currently in effect, any
affiliate of the Company or any person (or persons whose shares are aggregated
in accordance with the Rule), who has beneficially owned Restricted Securities
for at least one year would be entitled to sell, within any three-month period a
number of such shares that does not exceed the greater of 1% of the then
outstanding shares of Common Stock (approximately 73,000 shares after the
Offering), or the reported average weekly trading volume of the Common Stock on
the Nasdaq National Market during the four calendar weeks preceding the date on
which notice of the sale is filed with the Commission. Sales under Rule 144 are
also subject to certain manner of sale restrictions and notice requirements and
to the availability of current public information concerning the Company. A
person (or persons whose shares are aggregated) who is not an "affiliate" of the
Company at any time during the 90 days preceding a sale, and who has
beneficially owned such shares for at least two years, is currently entitled to
sell such shares under Rule 144(k) without regard to the availability of current
public information, volume limitations, manner of sales provisions or notice
requirements. 2,630,000 Restricted Shares held by affiliates are eligible for
sale in the public market pursuant to Rule 144, but are subject to certain
"lock-up" agreements described below. Currently 27,659 Restricted Shares held by
non-affiliates are and, beginning on July 11, 1998, 5,797 Restricted Shares held
by a non-affiliate will be, eligible for sale on the public market pursuant to
Rule 144.
The Company, its officers and directors and the Selling Stockholders,
including affiliates holding 2,630,000 Restricted Shares, have entered into
lock-up agreements providing that they will not, directly or indirectly, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of any option to purchase or other sale or disposition)
of any shares of Common Stock or any other securities convertible into, or
exercisable or exchangeable for, Common Stock or other capital stock of the
Company or any right to purchase or acquire Common Stock or other capital stock
of the Company, for a period of 180 days after the date of this Prospectus,
without the prior written consent of Prudential Securities Incorporated, on
behalf of the Underwriters, except for bona fide gifts or transfers effected by
such stockholders other than on any securities exchange or in the
over-the-counter market to donees or transferees that agree to be bound by
similar agreements and except for any registration statement that may be filed
by the Company relating to shares issuable under the Professionals Plan.
Prudential Securities Incorporated may, at any time and without notice, release
all or any portion of the Shares subject to such agreements.
The Option Shares are subject to all the limitations on resale imposed by
Rule 701. In general, shares subject to Rule 701 are subject to the resale
restrictions of Rule 144. However, with respect to resales by non-affiliates,
the Option Shares may be resold without conformance with Rule 144 except for its
manner of sale limitation. With respect to resale of Option Shares by
affiliates, all Rule 144 limitations continue to apply except the one-year
holding period. Additionally, the Company filed a Form S-8 registration
statement under the Securities Act to register the shares of Common Stock
subject to then outstanding stock options and the
59
<PAGE> 61
450,000 shares of Common Stock issuable pursuant to the Incentive Plan. Shares
covered by this registration statement will thereafter be eligible for sale in
the public markets, subject to lock-up agreements, to the extent applicable. See
"Management -- The Plans."
Sales of substantial amounts of Common Stock, or the perception that such
sale could occur, could adversely affect market prices for the Common Stock and
could impair the Company's future ability to obtain capital through offerings of
equity securities.
60
<PAGE> 62
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated, Smith Barney Inc. and Robert W. Baird & Co.
Incorporated are acting as representatives (the "Representatives"), have
severally agreed, subject to the terms and conditions contained in the
Underwriting Agreement, to purchase from the Company the number of shares of
Common Stock set forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Prudential Securities Incorporated..........................
Smith Barney Inc............................................
Robert W. Baird & Co. Incorporated..........................
---------
Total............................................. 2,000,000
=========
</TABLE>
The Company and the Selling Stockholders are obligated to sell, and the
Underwriters are obligated to purchase, all the shares of Common Stock offered
hereby if any are purchased.
The Underwriters, through their Representatives, have advised the Company
and the Selling Stockholders that they propose to offer the Common Stock
initially at the public offering price set forth on the cover page of this
Prospectus; that the Underwriters may allow to selected dealers a concession of
$ per share; and that such dealers may reallow a concession of
$ per share to certain other dealers. After the public offering, the
offering price and the concessions may be changed by the Representatives.
The Company has granted the Underwriters options, exercisable for 30 days
from the date of this Prospectus, to purchase up to 300,000 additional shares of
Common Stock at the public offering price, less underwriting discounts and
commissions, as set forth on the cover page of this Prospectus. The Underwriters
may exercise such options solely for the purpose of covering over-allotments
incurred in the sale of the shares of Common Stock offered hereby. To the extent
such options are exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares as the number set forth next to such Underwriter's name in the
preceding table bears to 2,000,000.
The Company's officers and directors, who in the aggregate will
beneficially own approximately 2,630,000 shares of Common Stock upon the
completion of the Offering (assuming the Underwriters' over-allotment options
are exercised in full), the Company, the Selling Stockholders and certain other
stockholders of the Company, have agreed not to, directly or indirectly, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of any option to purchase or other sale or disposition)
of any shares of Common Stock or other capital stock or any securities
convertible into, or exercisable or exchangeable for, any share of Common Stock
or other capital stock of the Company or any right to purchase or acquire Common
Stock or other capital stock of the Company, for a period of 180 days after the
date of this Prospectus without the prior written consent of Prudential
Securities Incorporated, on behalf of the Underwriters, other than pursuant to
the exercise of currently outstanding stock options and except for bona fide
gifts or transfers effected by such stockholders other than on any securities
exchange or in the over-the-counter market to donees or transferees that agree
to execute and be bound by such agreements. Prudential Securities Incorporated
may, at any time and without notice, release all or any portion of the Shares
subject to such agreements.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
In connection with this offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified market makers
on the Nasdaq National Market may engage in passive market making transactions
in the Common Stock of the Company on the Nasdaq National Market in accordance
with Rule 103 of Regulation M under the Exchange Act during the business day
prior to the pricing of the Offering before the commencement of offers and sales
of Common Stock. Passive market makers must comply with applicable volume and
price limitations and must be identified as such. In general, a
61
<PAGE> 63
passive market maker must display its bid at a price in excess of the highest
independent bid for such security; if all independent bids are lowered below the
passive market maker's bid, however, such bid must then be lowered when certain
purchase limits are exceeded.
In connection with the Offering, certain Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company and the Selling Shareholder, and
in such case may purchase Common Stock in the open market following completion
of the Offering to cover all or a portion of such short position. The
Underwriters may also cover all or a portion of such short position, up to
300,000 shares of Common Stock, by exercising the Underwriters' over-allotment
option referred to above. In addition, Prudential Securities Incorporated, on
behalf of the Underwriters, may impose "penalty bids" under contractual
arrangements with the Underwriters whereby it may reclaim from an Underwriter
(or any selling group member participating in the Offering) for the account of
the other Underwriters, the selling concession with respect to Common Stock that
is distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph are required and, if they are
undertaken, then they may be discontinued at any time.
LEGAL MATTERS
Certain legal matters in connection with the sale of the shares of Common
Stock offered hereby will be passed upon for the Company by Shumaker, Loop &
Kendrick, LLP, Tampa, Florida, and for the Underwriters by King & Spalding,
Atlanta, Georgia. Members in the law firm of Shumaker, Loop & Kendrick, LLP own
an aggregate of approximately 105,000 shares of Common Stock as of August 25,
1997.
EXPERTS
The Company's financial statements as of December 31, 1995 and 1996 and for
each of the three years in the period ended December 31, 1996 included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein and are so included in reliance upon the
report of such firm given upon their authority as experts in auditing and
accounting. During May 1996 the Company's Board of Directors approved of a
change in accountants and the Company's former accountants were dismissed. The
independent accounting firm of Deloitte & Touche LLP was engaged by the Company
on June 18, 1996. The former accountant's report on the financial statements for
the years ended December 31, 1995 and 1994 did not contain an adverse opinion,
disclaimer opinion, and was not qualified or modified as to uncertainty, audit
scope, or accounting principles. In addition, there were no disagreements
between the Company and its former accountants on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure during the two most recent fiscal years ended December 31, 1995 and
1994 and any subsequent interim period preceding such dismissal.
The balance sheet of West Coast Dental, P.A. as of March 31, 1997 and the
related statements of operations, stockholder's equity and cash flows for the
year ended March 31, 1997, included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein and are so included in reliance upon the reports of such firm
given upon their authority as experts in auditing and accounting.
62
<PAGE> 64
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission.
The Company has filed with the Commission a Registration Statement on Form
S-1 (herein, together with all amendments, exhibits and schedules, referred to
as the "Registration Statement"), under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Common Stock offered hereby. This
Prospectus omits certain of the information contained in the Registration
Statement, and reference is hereby made to the Registration Statement for
further information with respect to the Company and the Common Stock offered
hereby. Any statements contained herein concerning the provisions of any
document are not necessarily complete, and in each such instance reference is
made to the copy of such document filed as an exhibit to the Registration
Statement. Each such statement is qualified in its entirety by such reference.
Reports and other information filed by the Company with the Commission and
copies of the Registration Statement can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, DC 20549, and should also be available for inspection
and copying at the following regional offices of the Commission: 7 World Trade
Center, Suite 1300, New York, New York 10048; and Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such material also may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates,
and through the Commission's Internet address at "http://www.sec.gov".
63
<PAGE> 65
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION OF COAST DENTAL
SERVICES, INC.
Basis of Presentation....................................... F-2
Pro Forma Combined Balance Sheet -- June 30, 1997
(Unaudited)............................................... F-3
Pro Forma Combined Statement of Operations -- Six Months
Ended June 30, 1997 (Unaudited)........................... F-4
Pro Forma Combined Statement of Operations -- Year Ended
December 31, 1996 (Unaudited)............................. F-4
Notes to Pro Forma Combined Financial Information
(Unaudited)............................................... F-5
FINANCIAL STATEMENTS OF COAST DENTAL SERVICES, INC.
Independent Auditors' Report................................ F-7
Balance Sheets -- December 31, 1995 and 1996 and (Unaudited)
June 30, 1997............................................. F-8
Statements of Operations -- Years Ended December 31, 1994,
1995 and 1996 and (Unaudited) Six Months Ended June 30,
1996 and 1997............................................. F-9
Statements of Stockholders' Equity -- Years Ended December
31, 1994, 1995 and 1996 and (Unaudited) Six Months Ended
June 30, 1997............................................. F-10
Statements of Cash Flows -- Years Ended December 31, 1994,
1995 and 1996 and (Unaudited) Six Months Ended June 30,
1996 and 1997............................................. F-11
Notes to Financial Statements............................... F-12
FINANCIAL STATEMENTS OF WEST COAST DENTAL, P.A.
Independent Auditor's Report................................ F-25
Balance Sheet -- March 31, 1997............................. F-26
Statement of Operations -- Year Ended March 31, 1997........ F-27
Statement of Stockholder's Equity -- Year Ended March 31,
1997...................................................... F-28
Statement of Cash Flows -- Year Ended March 31, 1997........ F-29
Notes to Financial Statements............................... F-30
</TABLE>
F-1
<PAGE> 66
COAST DENTAL SERVICES, INC.
BASIS OF PRESENTATION
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited Pro Forma Combined Statement of Operations Data for the year
ended December 31, 1996 give effect to the following, as if each had occurred on
January 1, 1996: (i) the 1996 Acquisitions and 1997 Acquisitions, (ii) the
Company's entering into the Services and Support Agreement with the Coast
Florida P.A. on October 1, 1996 and (iii) the Company's Initial Public Offering
and the application of the estimated net proceeds therefrom, as if they had
occurred at January 1, 1996. The Pro Forma Combined Statement of Operations Data
for the six months ended June 30, 1997 give effect to (i) the 1997 Acquisitions
and (ii) the Initial Public Offering as if they had occurred at January 1, 1997.
The unaudited Pro Forma Combined Balance Sheet as of June 30, 1997 gives effect
to the following: (i) the Recent Acquisitions and (ii) the consummation of the
Offering, as described under "Use of Proceeds" as if they had occurred as of
June 30, 1997. The 1996 and 1997 Acquisitions have been accounted for using the
purchase method of accounting, so that the Company's historical statement of
operations data include results of operations of the acquired Dental Centers
from their respective acquisition dates.
The unaudited Pro Forma Combined Financial Information has been prepared by
the Company based on the Company's audited Statements of Operations for the year
ended December 31, 1996, the Company's unaudited Statement of Operations for the
six months ended June 30, 1997, the Company's unaudited Balance Sheet as of June
30, 1997, and the financial statements of the entities involved in the 1996 and
1997 Acquisitions. The audited historical financial statements of West Coast
Dental, P.A., as of and for the year ended March 31, 1997, are included
elsewhere in this Prospectus. The Pro Forma Combined Financial Information
should be read in conjunction with the complete historical Financial Statements
of the Company and the notes thereto and the historical financial statements of
West Coast Dental, P.A., and the notes thereto included elsewhere in this
Prospectus. The Pro Forma Combined Financial Information does not purport to be
indicative of the combined results of operations that actually would have
occurred if the transactions described above had been effected at the dates
indicated or to project future results of operations for any period.
F-2
<PAGE> 67
COAST DENTAL SERVICES, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------------------------------------------------
PRO FORMA
COMBINED
HISTORICAL 1997 PRO FORMA OFFERING AFTER
COMPANY ACQUISITIONS COMBINED ADJUSTMENTS OFFERING
---------- ------------ --------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................... $ 8,108 $ (645)(A) $ 7,463 $32,000(B) $39,463
Management fee receivable from P.A............. 2,002 -- 2,002 2,002
Notes Receivable from P.A. and Manrique........ -- -- -- --
Supplies....................................... 178 -- 178 178
Prepaid expenses and other assets.............. 375 14(A) 389 389
------- ------- ------- ------- -------
Total current assets.................... 10,663 (631) 10,032 32,000 42,032
------- ------- ------- ------- -------
Property and equipment, net...................... 3,086 216(A) 3,302 3,302
Non-Compete agreement, net of amortization....... 1,015 -- 1,015 1,015
Dental service agreement......................... 4,601 767(A) 5,368 5,368
Other assets..................................... 131 -- 131 131
------- ------- ------- ------- -------
Total assets............................ $19,496 $ 352 $19,848 $32,000 $51,848
======= ======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................... $ 351 $ -- $ 351 $ 351
Accrued offering costs......................... 338 -- 338 338
Other accrued expenses......................... 694 -- 694 694
Current maturities of long-term debt and
current...................................... 259 54(A) 313 313
Current portion of capital lease obligations... 31 -- 31 31
------- ------- ------- -------
Total current liabilities............... 1,673 54 1,727 1,727
Long-term debt excluding current maturities...... 441 198(A) 639 639
Lease obligations excluding current portion...... 82 -- 82 82
Deferred tax liability........................... 75 -- 75 75
------- ------- ------- -------
Total liabilities....................... 2,271 252 2,523 2,523
------- ------- ------- -------
STOCKHOLDERS' EQUITY:
Common stock................................... 6 -- 6 $ 2(B) 8
Additional paid-in capital..................... 16,233 100(A) 16,333 31,998(B) 48,331
Retained earnings.............................. 986 -- 986 986
------- ------- ------- ------- -------
Total stockholders' equity.............. 17,225 100 17,325 32,000 49,325
------- ------- ------- ------- -------
Total................................... $19,496 $ 352 $19,848 $32,000 $51,848
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to unaudited pro forma combined financial information.
F-3
<PAGE> 68
COAST DENTAL SERVICES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
------------------------------------------------------------------------------------------
PRO FORMA
COMBINED
HISTORICAL 1997 ACQUISITION PRO FORMA OFFERING AFTER
COMPANY ACQUISITIONS ADJUSTMENTS COMBINED ADJUSTMENTS (I) OFFERING
---------- ------------ ----------- ---------- --------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenue..................... $7,936 $2,866 $ (688)(C) $ 10,114 $ 10,114
Dental Center expenses:
Dentist and hygienist
salaries.................... 879 (879)(D)
Staff salaries................ 2,414 623 -- 3,037 3,037
Dental supplies and lab
fees........................ 1,160 466 -- 1,626 1,626
Advertising................... 507 46 -- 553 553
Rent.......................... 766 407 -- 1,173 1,173
Depreciation and other........ 363 233 (45)(G) 551 551
------ ------ ------- ---------- ----------
Total Dental Center expenses.... 5,210 2,654 (924) 6,940 6,940
------ ------ ------- ---------- ----------
Gross profit.................... 2,726 212 236 3,174 3,174
General and administrative
expenses...................... 751 145 (75)(H) 821 821
Depreciation and amortization... 143 -- 36(E) 179 179
------ ------ ------- ---------- ----------
Operating income................ 1,832 67 275 2,174 2,174
Interest (expense)
income -- net............... 114 (8) (9)(F) 97 97
------ ------ ------- ---------- ----------
Income before income taxes...... 1,946 59 266 2,271 2,271
Income tax expense............ (617) (23) (104)(L) (744) (744)
------ ------ ------- ---------- ----------
Net income...................... $1,329 $ 36 $ 162 $ 1,527 $ 1,527
====== ====== ======= ========== ==========
Pro forma income tax expense.... (142) (142) (142)
------ ---------- ----------
Pro forma net income............ $1,187 $ 1,385 $ 1,385
====== ========== ==========
Pro forma earnings per share.... 0.27 0.26(L)
========== ==========
Pro forma weighted average
shares outstanding............ 5,210,797 5,270,205(L)
========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------------------------------------
PRO FORMA
1996 AND COMBINED
HISTORICAL 1997 ACQUISITION PRO FORMA OFFERING AFTER
COMPANY ACQUISITIONS ADJUSTMENTS COMBINED ADJUSTMENTS OFFERING
---------- ------------ ----------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenue........................ $8,128 $12,727 $(2,985)(C) $ 17,870 $ 17,870
Dental Center expenses:
Dentist and hygienist salaries... 3,632 (3,632)(D) -- --
Staff salaries................... 2,324 3,130 -- 5,454 5,454
Dental supplies and lab fees..... 1,203 1,672 -- 2,875 2,875
Advertising...................... 675 301 -- 976 976
Rent............................. 811 1,391 -- 2,202 2,202
Depreciation and other........... 438 985 (99)(G) 1,324 1,324
------ ------- ------- ---------- ----------
Total Dental Center expenses....... 5,451 11,111 (3,731) 12,831 12,831
------ ------- ------- ---------- ----------
Gross profit....................... 2,677 1,616 746 5,039 5,039
General and administrative
expenses......................... 950 753 (273)(H) 1,430 1,430
Depreciation and amortization...... 140 3 203(E) 346 346
------ ------- ------- ---------- ----------
Operating income................... 1,587 860 816 3,263 3,263
Interest (expense)
income -- net.................. (184) (28) (218)(F) (430) $ 136(J) (294)
------ ------- ------- ---------- ------- ----------
Income before income taxes......... 1,403 832 598 2,833 136 2,969
Pro forma income tax expense....... (547) (324) (233)(K) (1,104) (53)(K) (1,157)
------ ------- ------- ---------- ------- ----------
Pro forma net income............... $ 856 $ 508 $ 365 $ 1,729 $ 83 $ 1,812
====== ======= ======= ========== ======= ==========
Pro forma earnings per share....... 0.49 0.45(L)
========== ==========
Pro forma weighted average shares
outstanding...................... 3,500,000 4,028,875(L)
========== ==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial information.
F-4
<PAGE> 69
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The accompanying pro forma combined information presents the pro forma
financial position of Coast Dental Services, Inc. as of June 30, 1997 and the
pro forma results of its operations for the year ended December 31, 1996 and the
six months ended June 30, 1997.
From January 1, 1996 through June 30, 1997, the Company acquired 29 Dental
Centers. The accompanying pro forma combined balance sheet includes the acquired
assets, assumed liabilities and effects of financing of the three Dental Centers
acquired since June 30, 1997, as if they had been acquired on June 30, 1997. The
accompanying pro forma combined statements of operations reflect the pro forma
results of operations of the Company, as adjusted, as if the 32 acquired Dental
Centers had been acquired on January 1, 1996.
PRO FORMA COMBINED BALANCE SHEET
The pro forma adjustments reflected in the pro forma combined balance sheet
are as follows:
(A) Reflects the three Dental Centers acquired after June 30, 1997.
The three Dental Centers were acquired at a total cost to the Company of
$997,000 of which $14,000 has been allocated to accounts receivable,
$216,000 to the property and equipment acquired and $767,000 to the
intangible assets. The purchase of the three Dental Centers was financed
with available cash resources of the Company, seller financing and Common
Stock. See Note 12 of the Notes to the historical Financial Statements of
the Company.
(B) Reflects the net proceeds from the sale of 1,600,000 shares of
Common Stock in the Offering at $22.50 per share, estimated to be
approximately $32,000,000 (after deducting underwriting discounts and
commissions and estimated offering expenses).
PRO FORMA COMBINED STATEMENTS OF INCOME
The pro forma adjustments reflected in the pro forma combined statements of
income are as follows:
(C) To reflect the impact of applying the percentage management fee of
76% to the historical gross revenue of each dental practice in accordance
with the services and support agreement entered into between the Company
and the Coast Florida P.A. as of October 1, 1996, as if that services and
support agreement was in place at the beginning of the periods presented.
(D) To reflect the reversal of historical dentists and hygienists
salaries as those costs will be borne by the P.A.
(E) To reflect the increased amortization amounts for the noncompete
agreements of $1,015,000 over nine years and dental service agreements of
$5,367,000 over 25 years.
(F) To reflect the increased interest expense for both the notes
payable to banks and notes payable issued to sellers to complete all the
1996 and 1997 acquisitions.
(G) To reflect the decreased depreciation based on the fair value of
the fixed assets acquired of $1,046,000 over seven years.
(H) To reflect elimination of nonrecurring general and administrative
expenses not to be incurred by the Company.
(I) The pro forma savings on interest expense due to the repayment of
debt is not significant and is, therefore, excluded.
F-5
<PAGE> 70
(J) To reflect the savings on interest expense due to the repayment of
$4.1 million of debt from the proceeds of the initial public offering
completed on February 11, 1997.
(K) To reflect the estimated income tax effect of the pro forma
adjustments (D) through (J) utilizing a 39% combined federal and state
rate.
(L) To reflect the proforma earnings per share assuming an increase in
the weighted average number of outstanding shares to the extent necessary
to repay the existing indebtedness as shown in proforma adjustment (J),
representing an increase in 528,875 and 59,408 shares for the year ended
December 31, 1996 and the six months ended June 30, 1997, respectively.
F-6
<PAGE> 71
INDEPENDENT AUDITORS' REPORT
Coast Dental Services, Inc.:
We have audited the accompanying balance sheets of Coast Dental Services,
Inc. (the Company) as of December 31, 1995 and 1996, and the related statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Coast Dental Services, Inc.
as of December 31, 1995 and 1996 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Tampa, Florida
March 11, 1997
F-7
<PAGE> 72
COAST DENTAL SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 241,403 $ 540,790 $ 8,108,172
Management fee receivable from P.A...................... 130,113 818,370 2,002,216
Notes receivable from P.A. and Manrique................. -- 354,568 --
Supplies................................................ 41,250 106,500 178,021
Prepaid expenses and other assets....................... 2,786 26,560 374,440
---------- ---------- -----------
Total current assets............................ 415,552 1,846,788 10,662,849
Property and equipment, net............................... 602,070 1,802,285 3,085,646
Notes receivable from stockholders........................ 125,579 177,898 --
Non-compete agreement -- net of amortization of $82,778
and $147,027, respectively.............................. -- 1,028,622 1,014,870
Dental service agreement -- net of amortization of $18,363
and $78,717, respectively............................... -- 2,117,742 4,600,971
Capitalized offering costs................................ -- 938,481 --
Other assets.............................................. 54,351 57,410 131,561
---------- ---------- -----------
Total........................................... $1,197,552 $7,969,226 $19,495,897
========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 352,166 $ 664,050 $ 350,428
Accrued offering costs.................................. -- 787,981 338,172
Other accrued expenses.................................. 62,647 403,747 694,158
Current maturities of long-term debt.................... 99,161 731,127 259,352
Current portion of capital lease obligations............ 69,578 75,874 30,473
---------- ---------- -----------
Total current liabilities....................... 583,552 2,662,779 1,672,583
Long-term debt, excluding current maturities.............. 254,812 3,714,446 440,813
Capital lease obligations, excluding current portion...... 184,529 127,850 82,089
Deferred tax liability.................................... -- -- 75,362
---------- ---------- -----------
Total liabilities............................... 1,022,893 6,505,075 2,270,847
---------- ---------- -----------
Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares
authorized, none issued.............................. -- -- --
Common stock, $.001 par value; 50,000,000 shares
authorized, 3,360,000, 3,500,000 and 5,700,000,
shares issued and outstanding, respectively.......... 336 3,500 5,700
Additional paid-in capital.............................. 664 25,174 16,232,941
Retained earnings....................................... 173,659 1,435,477 986,409
---------- ---------- -----------
Total stockholders' equity...................... 174,659 1,464,151 17,225,050
---------- ---------- -----------
Total........................................... $1,197,552 $7,969,226 $19,495,897
========== ========== ===========
</TABLE>
See notes to financial statements.
F-8
<PAGE> 73
COAST DENTAL SERVICES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------ ------------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue.......................... $1,867,765 $3,324,668 $8,128,148 $3,350,512 $7,936,437
Dental Center expenses:
Staff salaries..................... 445,385 863,142 2,324,496 946,815 2,413,732
Dental supplies and lab fees....... 385,311 556,574 1,202,986 444,107 1,159,947
Advertising........................ 221,071 350,659 674,918 261,613 506,714
Rent............................... 218,017 295,982 811,210 305,161 765,872
Depreciation....................... 106,179 138,213 203,753 76,296 195,441
Other.............................. 56,575 148,506 234,130 137,770 168,163
---------- ---------- ---------- ---------- ----------
Total Dental Center expenses......... 1,432,538 2,353,076 5,451,493 2,171,762 5,209,869
---------- ---------- ---------- ---------- ----------
Gross profit....................... 435,227 971,592 2,676,655 1,178,750 2,726,568
General and administrative
expenses........................... 580,298 681,815 950,006 432,935 751,137
Depreciation and amortization........ 5,043 15,127 139,395 53,015 143,390
---------- ---------- ---------- ---------- ----------
Operating income (loss)............ (150,114) 274,650 1,587,254 692,800 1,832,041
Interest (expense) income -- net..... (31,677) (50,339) (184,290) (60,280) 114,381
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.... (181,791) 224,311 1,402,964 632,520 1,946,422
Income tax expense................... -- -- -- -- (617,084)
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ (181,791) $ 224,311 $1,402,964 $ 632,520 $1,329,338
========== ========== ========== ========== ==========
Pro forma income tax (expense)
benefit............................ 72,716 (89,725) (547,156) (246,683) (142,021)
---------- ---------- ---------- ---------- ----------
Pro forma net income (loss).......... $ (109,075) $ 134,586 855,808 385,837 $1,187,317
========== ========== ========== ========== ==========
Earnings per share................... $ .40 $ .18 $ .26
========== ========== ==========
Pro forma earnings per share......... $ .24 $ .11 $ .23
========== ========== ==========
Weighted average number of shares
outstanding........................ 3,500,000 3,500,000 5,210,797
========== ========== ==========
</TABLE>
See notes to financial statements.
F-9
<PAGE> 74
COAST DENTAL SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
------------------ PAID-IN EARNINGS EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIENCY)
--------- ------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994.......... 3,360,000 $ 336 $ 664 $ (50,652) $ (49,652)
Net income............................ -- -- -- 224,311 224,311
--------- ------ ----------- ----------- -----------
Balance at December 31, 1995.......... 3,360,000 336 664 173,659 174,659
Net income............................ -- -- -- 1,402,964 1,402,964
Change in par value of stock.......... -- 3,150 (3,150) -- --
Issuance of common stock.............. 140,000 14 27,660 -- 27,674
Distribution to stockholders.......... -- -- -- (141,146) (141,146)
--------- ------ ----------- ----------- -----------
Balance at December 31, 1996.......... 3,500,000 3,500 25,174 1,435,477 1,464,151
Net proceeds from issuance of common
stock*.............................. 2,200,000 2,200 15,071,997 -- 15,074,197
Undistributed retained earnings from S
corporation*........................ -- -- 1,435,477 (1,435,477) --
Net income for six months ended June
30, 1997*........................... -- -- -- 1,329,338 1,329,338
Net income from S corporation prior to
February 11, 1997*.................. -- -- 342,929 (342,929) --
Distributions to shareholders*........ -- -- (642,636) -- (642,636)
--------- ------ ----------- ----------- -----------
Balance at June 30, 1997*............. 5,700,000 $5,700 $16,232,941 $ 986,409 $17,225,050
========= ====== =========== =========== ===========
</TABLE>
- ---------------
* Six months ended June 30, 1997 is unaudited.
See notes to financial statements.
F-10
<PAGE> 75
COAST DENTAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------- -------------------------
1994 1995 1996 1996 1997
--------- --------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss).......................... $(181,791) $ 224,311 $1,402,964 $ 632,520 $1,329,338
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation............................. 111,222 153,341 238,504 102,466 214,228
Amortization of noncompete and dental
service agreements..................... -- -- 101,141 26,389 124,603
Compensation in the form of common
stock.................................. -- -- 27,674 27,674 --
Reduction of notes receivable from
stockholders........................... -- -- -- -- 177,898
Deferred income tax expense.............. -- -- -- -- 75,362
Changes in operating assets and
liabilities:
Increase in management fee receivable
and notes receivable from P.A. and
Manrique............................ (13,142) (130,113) (1,042,825) (346,648) (959,805)
(Increase) decrease in prepaids and
other assets........................ (11,648) 8,862 (23,774) (4,104) (347,880)
Increase in supplies................... (15,000) (11,250) (65,250) (26,250) (71,521)
Increase (decrease) in accounts payable
and accrued expenses................ 245,417 (14,189) 1,440,965 232,770 (23,211)
--------- --------- ---------- ---------- ----------
Net cash provided by operating
activities........................ 135,058 230,962 2,079,399 644,817 519,012
--------- --------- ---------- ---------- ----------
Cash Flows From Investing Activities:
Purchases of property and equipment........ (192,155) (119,770) (466,119) (65,708) (387,176)
Acquired assets, including intangible
assets................................... -- -- (5,158,586) (1,651,398) (3,573,966)
(Increase) decrease in other assets........ (7,572) (37,008) (3,059) 19,155 (74,151)
--------- --------- ---------- ---------- ----------
Net cash used in investing
activities........................ (199,727) (156,778) (5,627,764) (1,697,951) (4,035,293)
--------- --------- ---------- ---------- ----------
Cash Flows From Financing Activities:
Proceeds from offering..................... -- -- -- -- 16,368,000
Payment of capitalized costs............... -- -- -- -- (805,131)
Proceeds from long-term debt............... 131,947 231,500 4,418,813 1,639,292 --
Principal payments on long-term debt....... (68,648) (44,225) (327,213) (161,421) --
Proceeds from notes payable................ 150,000 -- -- 17,208 351,000
Payments on notes payable.................. (35,000) (150,000) -- -- (4,096,408)
Proceeds from capital leases............... -- 8,065 -- -- --
Principal payments on capital leases....... (21,993) (24,036) (50,383) (34,374) (91,162)
(Increase) decrease in notes receivable
stockholders............................. (9,051) 24,512 (52,319) (40,262) --
Distributions to shareholders.............. -- -- (141,146) (101,546) (642,636)
--------- --------- ---------- ---------- ----------
Net cash provided by financing
activities........................ 147,255 45,816 3,847,752 1,318,897 11,083,663
--------- --------- ---------- ---------- ----------
Net increase in cash and cash
equivalents....................... 82,586 120,000 299,387 265,763 7,567,382
Cash and cash equivalents at beginning of
period..................................... 38,817 121,403 241,403 241,403 540,790
--------- --------- ---------- ---------- ----------
Cash and cash equivalents at end of period... $ 121,403 $ 241,403 $ 540,790 $ 507,166 $8,108,172
========= ========= ========== ========== ==========
Supplemental schedule of cash flow
information:
Cash paid for interest..................... $ 36,307 $ 70,554 $ 108,460 $ 49,254 $ 113,702
========= ========= ========== ========== ==========
Cash paid for income taxes................. $ -- $ -- $ -- $ -- $ 666,000
========= ========= ========== ========== ==========
</TABLE>
Noncash investing and financing activities:
During the years ended 1994, 1995 and 1996 and the six months ended
June 30, 1996 and 1997, the Company recorded approximately $134,000,
$60,000, $18,000, $18,000 and $0, respectively, of capital leases.
See notes to financial statements.
F-11
<PAGE> 76
COAST DENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
AND (UNAUDITED) THE SIX MONTHS ENDED JUNE 30, 1997
1. DESCRIPTION OF BUSINESS
Sunshine Health Services, Inc. was incorporated in August 1992, as a
Florida corporation and subsequently changed its name to Coast Dental, Inc.
Effective March 31, 1996, Coast Dental, Inc. was merged into Coast Dental
Services, Inc. (the "Company"), a Delaware corporation. The Company's sole
business is to provide practice management services to the Coast Florida, P.A.
(the "P.A."), an affiliated company. The Company has entered into a services and
support agreement with the P.A. whereby the Company will provide certain
management support services to the P.A. in return for a fee. The P.A. employs
the dentists and the professional hygienists and provides all of the dental
services to the patients. As of December 31, 1996, and June 30, 1997, the
Company operated 29 and 43 dental centers in Florida, respectively.
The Company provides administrative and technical support for professional
services rendered by the dental professionals under the service agreement and
receives a management fee from the P.A. The Company does not employ dentists and
hygienists and, accordingly, "Dental Center Staff Salaries" presented on the
face of the Statement of Operations do not include the salaries of dentists and
hygienists. Prior to October 1, 1996 the fee was based on revenues earned by the
P.A. reduced by certain costs incurred by the P.A. and a negotiated return to
the P.A., however, effective October 1, 1996 the fee is equal to seventy six
(76%) percent of revenue of the P.A. The costs incurred by the P.A. include
primarily dentists and hygienists salaries and bad debts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying financial statements have been
prepared on the accrual basis of accounting. The Company does not own any
interests in or control the activities of the P.A. Accordingly, the financial
statements of the P.A. are not consolidated with those of the Company.
Unaudited Information. The financial statements as of June 30, 1997 and
for the six month period ended June 30, 1996 and 1997 and the related
information included in the notes to the financial statements are unaudited.
These financial statements should be read in connection with the annual audited
financial statements and the footnotes thereto. Results for the six months ended
June 30, 1997 are not necessarily indicative of the results for the year ending
December 31, 1997. However, the accompanying unaudited June 30, 1997 financial
statements reflect all adjustments which are, in the opinion of management, of a
normal and recurring nature necessary for a fair presentation of the financial
position and results of operations of the Company.
Cash Equivalents. The Company considers all highly liquid investments with
an original maturity of three months or less to be cash equivalents.
Management Fee Receivable from P.A. Management fee receivable represents
the receivable from the P.A. for management services provided by the Company
(See Note 3.)
Supplies. Supplies are stated at the lower of FIFO cost or market.
Property and Equipment. Property and equipment are stated at cost.
Equipment held under capital leases is stated at the present value of minimum
lease payments at the inception of the related leases. Depreciation of property
and equipment is calculated using the straight-line method over the estimated
useful lives of the assets ranging from 5 to 7 years. Equipment held under
capital leases and leasehold improvements are amortized on a straight-line basis
over the shorter of the lease term or estimated useful life of the assets.
When assets are retired or otherwise disposed of, the costs and related
accumulated depreciation are removed from the accounts. The difference between
the net book value of the assets and proceeds from
F-12
<PAGE> 77
COAST DENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
disposition is recognized as gain or loss. Routine maintenance and repairs are
charged to expenses as incurred, while costs of improvements and renewals are
capitalized.
Non-Compete Agreement. Costs incurred in connection with the non-compete
agreements are being amortized over their estimated life of three to nine years
on a straight line basis.
Dental Service Agreement. Costs of acquisitions in excess of the estimated
fair value of property and equipment and any noncompete agreements is allocated
to the dental service agreement because the Company has effectively acquired the
right to manage the practice and to earn 76% of patient revenues for that
service. The dental service agreement with the P.A. represents the Company's
exclusive right to operate the dental centers during the term of the agreement.
The assigned value of the dental service agreement is amortized using the
straight-line method over its estimated life of twenty five years.
Capitalized Offering Costs. The Company has capitalized all costs related
to the initial public offering. Upon completion of the offering, such costs were
netted against the proceeds.
Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimated.
Dependence on the P.A. and the Coast Dentists. The Company receives fees
for services provided to the P.A. under a services and support agreement, but
does not employ dentists or hygienists or control the practices of the Coast
Dentists. The Company's revenue is dependent on revenue generated by the Coast
Dentists and, therefore, effective and continued performance of the Coast
Dentists during the term of the Services and Support Agreement is essential to
the Company's long term success. Under the current Services and Support
Agreement, the Company receives a monthly fee from the P.A. equal to 76.0% of
the Dental Centers' gross revenue. Prior to October 1, 1996, the services and
support fee paid by the P.A. to the Company averaged 78.5% of the Dental
Centers' gross revenue from which the Company paid the operating expenses
incurred by the Dental Centers excluding certain costs incurred by the P.A. As a
result of the change in the services and support fee, there can be no assurance
that the prior economic performance of the Company will be indicative of future
results. The Company pays all of the operating and nonoperating expenses
incurred by the P.A. at the Dental Centers, except for the salaries and benefits
of the Coast Dentists and hygienists, federal and state income taxes, bad debt
and other expense designated as an expense of the P.A. Any material loss of
revenue by the P.A. would have a material adverse effect on the Company.
Stock-Based Compensation. In October 1995 the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("SFAS No. 123"), which is
effective for fiscal years beginning after December 15, 1995. Under SFAS No.
123, the Company may elect to recognize stock-based compensation expense based
on the fair value of the awards or continue to account for stock-based
compensation under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees and disclose in the financial statements the effects
of SFAS No. 123 as if the recognition provisions were adopted. The Company has
not adopted the recognition provisions of SFAS No. 123.
Earnings Per Share. Earnings per share for the year ended December 31,
1996 and for the six months ended June 30, 1997 are based on the actual net
income of the Company. The Company was an S Corporation until February 11, 1997
and therefore income taxes were paid by the individual shareholders. The Company
automatically became a C Corporation upon the consummation of the public
offering.
The earnings per share of common stock for the year ended December 31, 1996
and for the six months ended June 30, 1997 is computed on the basis of the
weighted average shares of common stock outstanding
F-13
<PAGE> 78
COAST DENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
plus common stock equivalent shares arising from dilutive stock options, using
the treasury stock method. During the period, dual presentation of earnings per
share was not required because they were either immaterial or antidilutive.
In February 1997, the FASB issued Statement No. 128 (SFAS 128), Earnings
Per Share, which establishes new standards for computing and presenting earnings
per share. SFAS 128 is effective for financial statements issued for periods
after December 15, 1997, including interim periods. Management currently
anticipates that the effect of adoption will be the exclusion of common stock
equivalents as defined under existing accounting rules from the calculation of
basic earnings per share, as defined in SFAS 128.
Fair Value of Financial Instruments. The estimated fair value of amounts
reported in the financial statements has been determined by using available
market information and appropriate valuation methodologies. The carrying value
of all current assets and current liabilities approximates the fair value
because of their short-term nature. The fair value of long-term debt
approximates its carrying value.
Pro Forma Income Taxes. Upon completion of the public offering, the
Company terminated its status as an S Corporation and became subject to federal
income taxes. As such, the financial statements include a pro forma adjustment
for federal income taxes as if the Company had not been treated as an S
Corporation. The effective rate utilized of 39% approximates the combined
statutory federal and state income tax rate.
Pro Forma Earnings Per Share. The pro forma earnings per share is based on
the weighted average number of common shares outstanding during each period
adjusted for actual shares issued during the period. The weighted average number
of shares outstanding reflects all shares issued within one year of the initial
public offering as if the shares were issued on January 1, 1996.
New Pronouncements. In July, 1997, the FASB issued Statement No. 130 (SFAS
130), Reporting Comprehensive Income and Statement No. 131 (SFAS 131),
Disclosures about Segments of an Enterprise and Related Information. Management
has determined that the adoption of SFAS 130 and 131 will not have a significant
effect on the financial statement amounts or disclosures of the Company.
3. NET REVENUE
Revenue for all dental centers is recorded at established rates reduced by
amounts retained by the P.A. The Company has a 40 year evergreen dental service
agreement with the P.A. whereby the Company receives fees for services provided
to the P.A. Net revenue represents the aggregate fee charged to the P.A. under
the agreement during the year. Prior to October 1, 1996, the fee was based on
revenues earned by the P.A. reduced by certain costs incurred by the P.A. and a
negotiated return to the P.A. The costs incurred by the P.A. include primarily
dentists and hygienists salaries, see Note 1. All arrangements for fees to date
have been agreed between the principal and sole owner of the P.A., Dr. Adam
Diasti, (who is also a major shareholder and the President of the Company) and
the Chief Executive Officer of the Company, Terek Diasti. The factors considered
in setting those fees included the Company's evaluation of the services it
provides, the costs incurred by the Company in connection with providing the
services, and the Company's negotiated return, balanced against the P.A's
requirement for a retained amount which ensured its financial viability,
contemplated an anticipated long-term relationship with the Company and
reflected the future business opportunity related thereto. The following table
sets forth for the periods prior to October 1, 1996 the amount
F-14
<PAGE> 79
COAST DENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of gross Dental Center revenue received by the P.A., the amounts retained by the
P.A., and the management fee earned by the Company:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------
1994 1995 1996
----------- ----------- -------------
<S> <C> <C> <C>
Dental Center revenue............................. $2,286,265 $4,281,340 $7,009,516
P.A. Dentist's salaries and benefits............ 246,878 623,028 1,180,680
P.A. Hygienist's salaries and benefits.......... 121,622 288,811 431,312
Amounts Retained by the P.A.(1)................. 50,000 44,833 55,709
---------- ---------- ----------
Total................................... $ 418,500 $ 956,672 $1,667,701
---------- ---------- ----------
Fees earned by the Company.............. $1,867,765 $3,324,668 $5,341,815
========== ========== ==========
</TABLE>
- ---------------
(1) The amounts set forth are net of bad debt expense for estimated
uncollectible accounts which amounted to $1,000, $58,890 and $56,346 for
each of the two years ended December 31, 1994 and 1995 and for the nine
months ended September 30, 1996, respectively. The P.A. has incurred in the
past and currently incurs, all risks regarding bad debts in connection with
its arrangement with the Company.
Only the fees earned by the Company for its services to the P.A. and the
actual expenses of the Company are reflected in the financial statements of the
Company. Neither the P.A. nor any of the amounts retained by the P.A. are
reflected in the financial statements of the Company. For the period 1994
through September 30, 1996, the services and support fee paid by the P.A. to the
Company varied, but averaged 78.5% of P.A.'s gross revenue for the entire
period. The fee was based on revenues earned by the P.A. reduced by certain
costs incurred by the P.A. and an agreed upon payment to the P.A. In the event
the current fee of 76.0% had been charged by the Company instead of the previous
agreed fee for the years ended 1994 and 1995, the fees earned by the Company
would have been reduced by approximately $128,000 and $74,000, respectively, and
would have remained approximately the same for the nine months ended September
30, 1996. Any future changes to the current Services and Support Agreement and
the related 76% fee must be approved in advance by the independent outside
directors of the Company's Audit Committee.
Effective October 1, 1996, under the current Services and Support
Agreement, the P.A. began paying a fee to the Company equal to 76% of the Dental
Centers' gross revenue, net of refunds and discounts. The costs incurred by the
P.A. include primarily dentists and hygienists salaries and bad debt expense, as
described in Note 1. The management fee earned from October 1, 1996 through
December 31, 1996 under the current Services and Support Agreement was
$2,786,333. The management fee earned in 1997 was $7,936,437.
4. ACQUISITIONS
The Company and the P.A. periodically have jointly entered into asset
purchase agreements with existing dental practices. In all cases, the P.A.
acquires the patient lists and any other professional assets and the Company
acquires certain tangible assets, principally the dental equipment and assumes
certain liabilities such as the lease agreement for the facility. The fair value
of the patient lists is determined based upon general market information
received from an independent dental practice transition consultant regarding
traditional dental practice acquisitions. In addition to the purchase price
allocations for tangible assets, there are allocations for identifiable
intangible assets and unidentifiable intangible assets. The identifiable
intangible asset allocation relates to non-compete agreements which are
partially allocated to the Company and partially allocated to the P.A. The total
value of the non-compete agreements is based upon arms-length negotiations
between the sellers and the Company and P.A. as buyers. The value of such
acquired identifiable intangible asset is allocated between the P.A. and the
Company. The non-compete protection acquired by the Company typically relates to
agreements between the selling professional association and its dentist(s)
jointly, and the
F-15
<PAGE> 80
COAST DENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company, whereby the selling professional association and its dentist(s) agree
not to engage in competition with the Company's practice management business or
utilize any other practice management group, in the immediate vicinity of the
acquired Dental Center; and also relates to the Company's third party
contractual rights refraining the selling professional association and its
dentist(s) from competing with the P.A. within a specified area surrounding the
acquired Dental Office. The amount allocated to the P.A., on the other hand, is
limited to the value of the P.A.'s right to prohibit the selling professional
association and its dentist(s) from competing in the dental business within the
specified area surrounding the acquired Dental Office. That portion of the
amount of the purchase price attributable to such non-compete agreements in
acquisitions has historically been allocated on average, 77% to the Company, and
23% to the P.A. In the future, the Company policy is that the allocation for the
purchase price attributable to the non-compete agreements, unless unique
circumstances dictate otherwise, will be approximately 76% and 24% to the
Company and P.A., respectively. The historical allocation to the Company is
larger because in an early acquisition unique circumstances existed which
justified a greater allocation of such total value to the Company. For
acquisitions after January 1, 1997, after a determination of the value of the
tangible assets and identifiable intangible assets acquired, the total remaining
purchase price representing unidentifiable intangible assets will be allocated
on the basis of 76% to the Company and 24% to the P.A. (value of the Service and
Support Agreement attributable to the Dental Center). Historically, the
allocation of value for unidentifiable intangible assets acquired amounted to
approximately 80% and 20% to the Company and the P.A., respectively. Had the
allocations set forth above been allocated pursuant to the Company's current
standard policy, there would not have been a significant effect herein. All
acquisitions are purchases of assets and the operating results of the Company
only include the effects of the operations of the acquired assets from the date
of acquisition.
On January 18, 1996, the Company entered into an asset purchase agreement
with Dr. Manrique, P.A. ("Manrique"), whereby the Company acquired all of the
tangible assets of the dental practice entity and entered into a services and
support agreement with Manrique to provide management services. The total
purchase price was $40,000. In connection with the purchase, the Company loaned
$60,000 to Manrique at 9% repayable in sixty equal installments. The P.A. had
the option to acquire Manrique's patient lists for a price ranging from $222,000
to $322,000 depending on an appraisal as to their value, subject to adjustment
based on future revenue from the acquired practice. On April 1, 1997 the P.A.
exercised its option to acquire Manrique's patient lists for $222,000.
Additionally, Manrique repaid the Company for the $60,000 note payable.
On April 1, 1996, the Company and the P.A. entered into a purchase
agreement with Richard J. Shawn, DMD, P.A. ("Volusia"), whereby the Company
acquired all of the tangible assets and assumed certain liabilities of Volusia
and the P.A. acquired the patient files of Volusia for a total purchase price of
$1,800,000. The Company's portion of the purchase was approximately $1,500,000
($300,000 paid in cash and the balance in seller financed notes) of which
$950,000 has been allocated to the contractually assigned value of the not to
compete agreement and the balance of $550,000 to property and equipment. The
P.A.'s portion of the purchase price, $300,000 (seller financed), relates to the
value of the professional assets principally the patient lists and goodwill. The
Company has entered into a services and support agreement with the P.A. to
provide management services and support to the Volusia practice. Two of the
Company's majority shareholders are guarantors of the $300,000 debt of the P.A.
On September 27, 1996 the Company and the P.A. entered into a purchase
agreement with Juan A. Soler ("Soler") whereby the Company acquired all of the
tangible assets of Soler's dental practice and the P.A. acquired the
professional assets, principally patient lists of the practice for a combined
purchase price of $110,000. The Company's portion of the purchase is
approximately $85,000 of which $35,000 has been allocated to the tangible assets
acquired and $50,000 has been allocated to the dental service agreement.
On September 30, 1996 the Company and the P.A. entered into a purchase
agreement with Dan Steele, P.A. ("Steele") whereby the Company acquired all of
the tangible assets of Steele's dental practice and the
F-16
<PAGE> 81
COAST DENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
P.A. acquired the professional assets, principally patient lists of Steele for a
combined purchase price of $285,000. The Company's portion of the purchase is
approximately $251,000 of which $68,450 has been allocated to the tangible
assets acquired and $182,550 has been allocated to the dental service agreement
and a covenant not to compete.
On September 30, 1996 the Company and the P.A. entered into a purchase
agreement with Jerry L. Reynolds, P.A. ("Reynolds") whereby the Company acquired
all of the tangible assets of Reynolds' dental practice and the P.A. acquired
the professional assets, principally patient lists of Reynolds for a combined
purchase price of $225,000. The Company's portion of the purchase is $190,000 of
which $30,000 has been allocated to the tangible assets acquired and $160,000
has been allocated to the dental service agreement and a covenant not to
compete.
On November 7, 1996 the Company and the P.A. entered into a purchase
agreement with Seminole Dental Center, Seminole Dental South, Seminole Dental
West and Seminole Dental Services, Inc. (collectively the "Seminole Dental
Center") whereby the Company acquired all of the tangible assets of the Seminole
Dental Centers dental practices and the P.A. acquired the professional assets,
principally patient lists and goodwill, of Seminole Dental Center for a combined
purchase price of $2,500,000. The Company's portion of the purchase is
$1,900,000 of which $250,000 has been allocated to the estimated fair value of
the tangible assets acquired and $1,650,000 has been allocated to the dental
service agreement and a covenant not to compete.
On December 14, 1996, the Company and the P.A. entered into a Purchase
Agreement with Gerber Dental, Inc. ("Gerber") whereby the Company acquired all
of the tangible assets of Gerber's dental practice and the P.A. acquired the
professional assets, principally patient lists, of Gerber for a combined
purchase price of $170,000. The Company's portion of the purchase price is
$135,000, of which $43,500 has been allocated to the tangible assets acquired
and $91,500 has been allocated to the dental service agreement and covenant not
to compete.
On December 31, 1996, the Company and the P.A. entered into a purchase
agreement with Patrick Wayne O'Brien, DMD, P.A. ("O'Brien"), whereby the Company
acquired all of the tangible assets of O'Brien's dental practice and the P.A.
acquired the professional assets, principally patient lists, of O'Brien for a
combined purchase price of $120,000. The Company's portion of the purchase price
is $95,000 of which $40,000 has been allocated to the tangible assets acquired
and $55,000 has been allocated to the dental service agreement.
On December 31, 1996, the Company and the P.A. entered into a purchase
agreement with William Glover, DMD, P.A. ("Glover"), whereby the Company
acquired all of the tangible assets of Glover's dental practice and the P.A.
acquired the professional assets, principally patient lists, of Glover for a
combined purchase price of $85,000. The Company's portion of the purchase price
is $70,000 of which $40,000 has been allocated to the tangible assets acquired
and $30,000 has been allocated to the dental service agreement.
On March 31, 1997, the Company and the P.A. entered into a purchase
agreement with Anthony Di Re, DMD, ("Di Re") whereby the Company acquired all of
the tangible assets of Di Re's dental practice and the P.A. acquired the
professional assets, principally patient lists, of Di Re for a combined purchase
price of $225,000. The Company's portion of the purchase price is approximately
$180,000 of which $75,000 has been allocated to the tangible assets acquired and
$105,000 has been allocated to the dental service agreement.
On March 31, 1997, the Company and the P.A. entered into a purchase
agreement with Mark T. Dreyer, DMD, ("Dreyer") whereby the Company acquired all
of the tangible assets of Dreyer's dental practice and the P.A. acquired the
professional assets, principally patient lists, of Dreyer for a combined
purchase price of $700,000. The Company's portion of the purchase price is
approximately $525,000 of which $80,000 has been allocated to the tangible
assets acquired and $445,000 has been allocated to the dental service agreement.
F-17
<PAGE> 82
COAST DENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On April 1, 1997, the Company and the P.A. entered into a purchase
agreement with West Coast Dental, P.A., ("West Coast") whereby the Company
acquired all of the tangible assets of West Coast's dental practice and the P.A.
acquired the professional assets, principally patient lists, of West Coast for a
combined purchase price of $1,140,000. The Company's portion of the purchase
price is $880,000 of which $200,000 has been allocated to the tangible assets
acquired and $680,000 has been allocated to the dental service agreement.
On April 7, 1997, the Company and the P.A. entered into a purchase
agreement with F.M.O. Inc., Guardian Dental Service -- Palm Harbor, P.A.,
Guardian Dental Center -- McMullen Booth, P.A. and Guardian Dental
Center -- Seven Springs, P.A., ("Guardian") whereby the Company acquired all of
the tangible assets of Guardian's dental practice and the P.A. acquired the
professional assets, principally patient lists, of Guardian for a combined
purchase price of $450,000. The Company's portion of the purchase price is
approximately $359,000 of which $140,000 has been allocated to the tangible
assets acquired and $219,000 has been allocated to the dental service agreement.
On April 23, 1997, the Company and the P.A. entered into a purchase
agreement with Milton C. Van Meter, DDS, ("Van Meter") whereby the Company
acquired all of the tangible assets of Van Meter's dental practice and the P.A.
acquired the professional assets, principally patient lists, of Van Meter for a
combined purchase price of $155,000. The Company's portion of the purchase price
is approximately $122,000 of which $40,000 has been allocated to the tangible
assets acquired and $82,000 has been allocated to the dental service agreement.
On June 1, 1997, the Company and the P.A. entered into a purchase agreement
with Dr. J.W. Smith, Jr., DDS, P.A., ("Smith") whereby the Company acquired all
of the tangible assets of Smith's dental practice and the P.A. acquired the
professional assets, principally patient lists, of Smith for a combined purchase
price of $300,000. The Company's portion of the purchase price is $240,000 of
which $70,000 has been allocated to the tangible assets acquired and $170,000
has been allocated to the dental service agreement.
On June 27, 1997, the Company and the P.A. entered into a purchase
agreement with Eric Zendell, DDS, ("Zendell") whereby the Company acquired all
of the tangible assets of Zendell's dental practice and the P.A. acquired the
professional assets, principally patient lists, of Zendell for a combined
purchase price of $900,000. The Company's portion of the purchase price is
approximately $806,000 of which $300,000 has been allocated to the tangible
assets acquired, $353,000 has been allocated to assumed liabilities and $153,000
has been allocated to the dental service agreement.
During June 1997, the Company has opened two internally developed Dental
Centers at an aggregate cost of approximately $222,000, which includes the cost
of equipment, $100,000 of fees paid to the P.A., leasehold improvements and
working capital. Effective June, 1997, the Company has agreed to pay the P.A.
the sum of $50,000 in connection with each internally developed Dental Center as
inducement to the P.A. to extend the Services and Support Agreement.
The unaudited pro forma results of all current, continuing operations,
assuming the 1996 and 1997 acquisitions completed on or prior to June 30, 1997
had been consummated on January 1, 1996 are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
<S> <C> <C>
Net revenue.............................................. $16,412 $9,385
Earnings before income taxes............................. 2,831 2,203
Net earnings............................................. 1,728 1,343
Net earnings per share................................... .43 .26
</TABLE>
F-18
<PAGE> 83
COAST DENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Furniture fixtures and equipment................... $ 405,676 $1,711,005 $3,184,847
Leasehold improvements............................. 251,159 365,871 395,251
Capitalized leases -- equipment.................... 287,227 305,905 300,387
--------- ---------- ----------
Total.................................... 944,062 2,382,781 3,880,485
Less accumulated depreciation and amortization..... (341,992) (580,496) (794,839)
--------- ---------- ----------
Total.................................... $ 602,070 $1,802,285 $3,085,646
========= ========== ==========
</TABLE>
Accumulated depreciation on capitalized leases of equipment amounted to
approximately $113,000, $172,632 and $224,857 at December 31, 1995, December 31,
1996 and June 30, 1997, respectively.
6. LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
-------- ---------- ----------
<S> <C> <C> <C>
Note payable in varying monthly installments at
interest rates ranging from 7.75% to 13.0%.
Collateralized by dental equipment................ $ 27,137 $ 13,746
Notes payable to banks in varying monthly
installments at interest rates ranging from 7.75%
to 10.25%. Collateralized by bank accounts, a
portion of which guaranteed by the majority
stockholders of the Company....................... 326,836 524,700
Notes payable issued in connection with various
acquisitions with varying installments at interest
rates ranging from 8.0% to 9.0%................... 3,112,127 $ 700,165
Revolving line of credit agreement for $5,000,000 at
an interest rate of Barnett Bank of Tampa's prime
rate or LIBOR + 1.75%, payable on demand. This
agreement contains covenants requiring maintenance
of certain financial ratios and restrictions on
distributions of assets, capital expenditures and
payment of dividends.............................. 795,000 --
-------- ---------- ----------
Total long-term debt................................ 353,973 4,445,573 700,165
Less current maturities............................. (99,161) (731,127) (259,352)
-------- ---------- ----------
Long-term debt; excluding current maturities........ $254,812 $3,714,446 $ 440,813
======== ========== ==========
</TABLE>
Included above in the December 31, 1996 notes payable issued in connection
with the various acquisitions is $1,200,000 of notes payable issued to Dr.
Shawn. The notes are secured by the Company's interest in the Dr. Shawn business
and the goodwill associated therewith along with a collateral assignment of
F-19
<PAGE> 84
COAST DENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
leases for the related offices. Each of the notes is also personally guaranteed
by two of the majority shareholders of Coast. As of June 30, 1997 all amounts
payable to Shawn were satisfied.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Capital lease obligations, at varying rates of imputed
interest from 15% to 21%, collateralized by lease
equipment, with an amortized cost of approximately
$174,000, $148,000 and $90,000 at December 31, 1995,
December 31, 1996 and June 30, 1997, respectively........ $254,107 $203,724 $112,562
Less current portion of capital lease obligations.......... (69,578) (75,874) (30,473)
-------- -------- --------
Capital lease obligations, net of current portion.......... $184,529 $127,850 82,089
======== ======== ========
</TABLE>
Scheduled maturities of long-term debt and payments on capital lease
obligations as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
OBLIGATIONS
LONG-TERM UNDER
DEBT CAPITAL LEASES
---------- --------------
<S> <C> <C>
1997....................................................... $ 731,127 $105,238
1998....................................................... 1,742,935 84,558
1999....................................................... 697,645 64,559
2000....................................................... 550,062 9,349
2001....................................................... 522,900 --
Thereafter................................................. 200,904 --
---------- --------
$4,445,573 263,704
==========
Less amounts representing interest..................................... 59,980
--------
$203,724
========
</TABLE>
Scheduled maturities of long-term debt and payments on capital lease
obligations as of June 30, 1997 are as follows:
<TABLE>
<CAPTION>
OBLIGATIONS
LONG-TERM UNDER
DEBT CAPITAL LEASES
--------- --------------
<S> <C> <C>
1997........................................................ $259,352 $ 28,523
1998........................................................ 108,638 54,139
1999........................................................ 114,198 49,613
2000........................................................ 123,767 3,703
2001........................................................ 92,418 --
Thereafter.................................................. 1,792 --
-------- --------
$700,165 135,978
========
Less amounts representing interest..................................... 23,416
--------
$112,562
========
</TABLE>
7. INCOME TAXES
Since October 1992, the Company has elected to be treated as an S
Corporation for federal income tax purposes, with profits and losses generally
reportable by the stockholders in their individual income tax returns. Upon
completion of the public offering, the Company terminated its status as an S
Corporation.
F-20
<PAGE> 85
COAST DENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma income tax adjustment represents a provision for federal and
state income taxes at the statutory rate in effect for the periods presented (at
an effective rate of 39%) as if the Company had not been treated as an S
Corporation.
On February 11, 1997, the Company completed its initial public offering of
Common Stock. At this time, the Company converted from an S Corporation to a C
Corporation and became obligated to pay federal and state income taxes.
The Company is required to use SFAS No. 109 Accounting for Income Taxes.
Under SFAS No. 109, the liability method is used in accounting for income taxes.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and are measured using
the enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
For the six months ended June 30, 1997, the provision for income taxes
consisted of the following:
<TABLE>
<S> <C>
Current:
Federal................................................... $ 462,544
State..................................................... 79,178
---------
Total current income tax expense.................. 541,722
Deferred:
Federal................................................... 64,347
State..................................................... 11,015
---------
Total deferred income tax expense................. 75,362
---------
Total actual income tax expense................... 617,084
Pro forma income tax expense...................... 142,021
---------
Total pro forma income tax expense................ $ 759,105
=========
</TABLE>
The components of deferred tax assets (liabilities) as of June 30, 1997 are
as follows:
<TABLE>
<S> <C>
Deferred tax asset:
State taxes............................................... $ 3,745
Allowance for doubtful accounts........................... 42,449
---------
Total deferred tax asset.......................... 46,194
=========
Deferred tax liability:
Basis difference in fixed assets and intangibles.......... (121,556)
---------
Total deferred tax liability...................... $ (75,362)
=========
</TABLE>
A reconciliation of the statutory federal income tax rate with the
Company's effective income tax rate as of June 30, 1997 is as follows:
<TABLE>
<S> <C>
Statutory federal rate...................................... 34.00%
State income taxes, net of federal income tax benefit....... 3.83%
Miscellaneous............................................... 1.37%
-----
Effective tax rate (utilizing pro forma income tax
expense).................................................. 38.00%
=====
</TABLE>
8. RELATED PARTY TRANSACTIONS
The Company periodically advances funds to/from the majority stockholders
and the P.A. The P.A. is wholly-owned by a majority shareholder and director of
the Company. See Notes 1 and 3 for a further description of the relationship
with the P.A. Advances are reflected on the balance sheet as notes receivable
from stockholders for $125,579, $177,898 and $0, at December 31, 1995, 1996 and
June 30, 1997, respectively. The notes have a maturity of five years and are
being repaid in varying installments plus interest at 5% to 8%
F-21
<PAGE> 86
COAST DENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
per annum. The notes receivable from stockholders were entirely repaid prior to
June 30, 1997. Interest income relating to these amounts was insignificant for
all periods presented. Additionally, at December 31, 1996, the Company advanced
funds on a short-term basis to Manrique (see Note 4) and to the P.A. totalling
$354,568. These advances bear interest at 8%. As of June 30, 1997 these amounts
were satisfied in full.
As of June 30, 1997, the P.A. has incurred $1,069,000 of acquisition debt
in connection with the acquisitions completed through such date. Through
December 31, 1996, the Company has advanced $224,000 to the P.A. to assist the
P.A. in making its required principal repayments on this acquisition debt. The
Company was not required to make these advances, is not a guarantor or party to
any of the P.A.'s debt, and has not pledged any assets to secure the P.A.'s
debt. Additionally, the balance of the management fee receivable from the P.A.
increased to approximately $818,370 and $2,002,216 at December 31, 1996 and June
30, 1997, respectively. This increase is directly attributed to the increase in
patient revenues earned by the P.A. for which the Company is due its 76%
management fee. These advances and receivable are unsecured and represent a
concentration of credit risk and expose the Company to risk of loss for these
amounts should the P.A. be unable to pay its debts.
9. COMMITMENTS AND CONTINGENCIES
The Company primarily leases space for operation of its clinics under
several noncancelable operating leases expanded over the next seven years.
Rental expense for the years ended December 31, 1994, 1995 and 1996 and the six
months ended June 30, 1996 and 1997 was $117,432, $195,664, $489,827, $185,751
and $465,694, respectively.
Future minimum lease payments under these agreements are:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
<S> <C> <C>
1997........................................................ $ 696,606 $ 557,952
1998........................................................ 556,137 1,027,176
1999........................................................ 440,373 795,024
2000........................................................ 255,666 561,265
2001........................................................ 206,677 520,902
Thereafter.................................................. 501,920 1,110,571
---------- ----------
$2,657,379 $4,572,890
========== ==========
</TABLE>
The Company has entered into employment agreements with four of its
officers, three of whom are the majority shareholders of the Company. The terms
of the agreements are from three to five years.
10. STOCKHOLDERS' EQUITY
Effective April 1, 1996, the Board of Directors adopted, and the
stockholders of the Company approved, two stock incentive plans: the Stock
Option Plan (the "Incentive Plan") and the Affiliated Professionals Stock Plan
(the "Professionals Plan," and together with the Incentive Plan, the "Plans").
The purpose of the Plans is to provide directors, officers, key employees,
advisors and dental professionals employed by the P.A.'s (subject to approval
and reimbursement by the P.A.) with additional incentives by increasing their
proprietary interest in the Company or tying a portion of their compensation to
increases in the price of the Company's common stock. The aggregate number of
shares of common stock subject to the Incentive Plan and the Professionals Plan
is 450,000 shares and 450,000 shares, respectively. During 1996, the Company has
granted approximately 140,000 options under the Professionals Plan and
approximately 46,000 options under the Incentive Plan with an exercise price
equal to $8 per share, the price of stock in the initial public offering of the
Company's stock. The options vest over three years, some are exercisable as of
January 1, 1997. The fair value of the options granted is not significant. The
effect on compensation expense and net income had compensation costs for the
Company's stock option plans been determined based on the fair value at the
grant
F-22
<PAGE> 87
COAST DENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
date consistent with the provisions of SFAS No. 123, is not material. The
Company estimated the fair value of options utilizing an option pricing model
assuming a market price and exercise price of $8 per share, a risk free interest
rate of 7.5%, a four year expected life, 0% expected volatility, and no
dividends. The fair value of the options, totalling $185,000, issued to the
dental professionals employed by the P.A. are charged to the P.A. and reimbursed
to the Company.
In February, 1996 the Company reached a mutual understanding with an
officer that the officer would be entitled to 105,000 shares as compensation and
in January 1996 reached a mutual understanding with certain other employees of
the Company that they would be entitled to an aggregate of 35,000 shares as
compensation for which the Company recognized compensation expense of $27,674.
The fair market value of the Common Stock used to determine compensation expense
recorded was determined based on an independent valuation of the Company's stock
as of February 11, 1996. The above described shares were formally issued in May
and April, respectively.
On October 1, 1996 and December 29, 1996 the Company approved stock splits
resulting in an exchange of 1 share for approximately 3.86 shares of Common
Stock issued and outstanding. Simultaneously, the par value of the common stock
was changed from $.00001 to $.001. All share and per share amounts have been
retroactively adjusted for these splits. Additionally, the Company increased the
authorized number of common shares to 50,000,000.
During 1997, the Company granted approximately 58,000 options under the
Professionals Plan and approximately 39,500 options under the Incentive Plan
with a weighted average exercise price equal to $11.45 per share, the fair value
at the date of grant. The options vest over three years. The effect on
compensation expense and net income had compensation costs for the Company's
stock option plans been determined based on the fair value at the grant date
utilizing similar assumptions as at December 31, 1996 and consistent with
provisions of SFAS No. 123, is not material. The fair value of the options
issued to the dental professionals employed by the P.A. are charged to the P.A.
and reimbursed to the Company.
11. INITIAL PUBLIC OFFERING
On February 11, 1997, the Company completed its initial public offering of
Common Stock. The net proceeds to the Company from the sale of the 2,200,000
shares of Common Stock offered by the Company were $15.1 million (after
deducting underwriting discounts and commissions and offering expenses).
As of March 11, 1997, the Company used a portion of the net proceeds from
its initial public offering for the repayment of: (i) $1.2 million for notes
payable to banks utilized as consideration for acquisitions by the Company; (ii)
$1.3 million for notes payable issued as part of the consideration for the
Seminole Acquisitions; (iii) $136,000 for notes payable as part consideration
for the addition of six acquired Dental Centers occurring after June 30, 1996;
and (iv) $228,000 for equipment lease and note obligations.
The Company made a distribution to existing founding shareholders of
$464,738 which constitutes approximately 34% of the S Corporation earnings.
Additionally, the Company forgave by way of dividend, the notes receivable from
shareholders of $177,898. The remaining undistributed S Corporation retained
earnings of $1,135,770 was reclassified as additional paid-in capital.
At completion of the initial public offering, the Company converted from an
S Corporation to a C Corporation and became obligated to pay federal and state
income taxes.
12. SUBSEQUENT EVENTS
On July 11, 1997, the Company and the P.A. entered into an agreement to
purchase substantially all of the assets of a dental practice located in New
Smyrna Beach, Florida, for a combined purchase price of $585,000. The Company's
portion of the purchase price is approximately $285,000 in cash, $100,000 of the
F-23
<PAGE> 88
COAST DENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company's common stock (5,797 shares of Common Stock), and $55,750 in the form
of a note payable. Additionally, the Company simultaneously expanded its Service
and Support Agreement with the P.A. to manage the acquired Dental Center.
During July 1997, the Company has opened two internally developed Dental
Centers at an aggregate cost of approximately $200,000, which includes the cost
of equipment, fees paid to the P.A., leasehold improvements and working capital.
Additionally in August, the Company has signed leases and commitments to develop
seven additional internally developed Dental Centers.
During August 1997, the Company received a commitment letter from Barnett
Bank of Florida to enter into a new revolving line of credit agreement which
would increase the available borrowings to $15.0 million subject to various
customary contingencies and the successful completion of a secondary public
offering of its Common Stock.
During August 1997, the Company and the P.A. entered into agreements to
purchase substantially all of the assets of a dental center located in Punta
Gorda, Florida and a dental center located in Cape Coral, Florida, for a
combined purchase price of $720,000. The Company's portion of the purchase price
is approximately $360,000 in cash and $196,000 in the form of notes payable.
Additionally, the Company simultaneously expanded its Service and Support
Agreement with the P.A. to manage the acquired Dental Centers.
F-24
<PAGE> 89
INDEPENDENT AUDITORS' REPORT
Coast Dental Services, Inc.:
We have audited the accompanying balance sheet of West Coast Dental, P.A.
(the "Practice") as of March 31, 1997, and the related statements of operations,
stockholder's equity and cash flows for the year ended March 31, 1997. The
financial statements are the responsibility of the Practice's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Practice as of March 31, 1997, and the
results of its operations and its cash flows for the year ended March 31, 1997,
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Tampa, Florida
May 23, 1997
F-25
<PAGE> 90
WEST COAST DENTAL, P.A.
BALANCE SHEET
MARCH 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 69,720
Trade receivables, net of allowance for bad debts of
$34,550................................................ 34,553
--------
Total current assets.............................. 104,273
Property and equipment, net................................. 225,177
Other assets................................................ 30,481
--------
Total............................................. $359,931
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accounts payable.......................................... $ 4,260
Accrued payroll and related taxes......................... 5,440
Notes payable............................................. 204,602
Shareholder loan.......................................... 2,700
--------
Total current liabilities......................... 217,002
Stockholders' equity:
Common stock, $1.00 par value, 10,000,000 shares issued
and outstanding, 10,000 shares authorized.............. 10,000
Additional paid-in capital................................ 75,100
Retained earnings......................................... 57,829
--------
Total stockholder's equity........................ 142,929
--------
Total............................................. $359,931
========
</TABLE>
See notes to financial statements.
F-26
<PAGE> 91
WEST COAST DENTAL, P.A.
STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1997
<TABLE>
<S> <C>
Revenue..................................................... $1,829,256
Dental Center expenses:
Salaries.................................................. 1,122,919
Dental supplies and lab fees.............................. 247,903
Advertising............................................... 2,857
Rent...................................................... 74,184
Depreciation and amortization............................. 51,110
Bad debt expense.......................................... 34,550
----------
Total Dental Center expenses................................ 1,533,523
----------
Gross profit.............................................. 295,733
General and administrative expenses......................... 205,225
----------
Operating income.......................................... 90,508
Interest expense............................................ 8,951
----------
Net income........................................ $ 81,557
==========
</TABLE>
See notes to financial statements.
F-27
<PAGE> 92
WEST COAST DENTAL, P.A.
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
------- ---------- --------- --------
<S> <C> <C> <C> <C>
Balance, April 1, 1996................................. $10,000 $75,100 $(12,200) $ 72,900
Net earnings........................................... 81,557 81,557
Distributions.......................................... (11,528) (11,528)
------- ------- -------- --------
Balance, March 31, 1997................................ $10,000 $75,100 $ 57,829 $142,929
======= ======= ======== ========
</TABLE>
See notes to financial statements.
F-28
<PAGE> 93
WEST COAST DENTAL, P.A.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 1997
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net income................................................ $ 81,557
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization.......................... 51,110
Allowance for bad debts................................ 17,275
Increase in prepaid and other assets................... (20,000)
Decrease in accounts payable and accrued payroll and
related taxes......................................... (44,649)
---------
Net cash provided by operating activities......... 85,293
---------
Cash Flows from Investing Activities:
Property additions........................................ (22,837)
---------
Net cash used in investing activities............. (22,837)
---------
Cash Flows from Financing Activities:
Partner and shareholder distributions..................... (11,528)
Proceeds from notes payable............................... 94,000
Repayments of notes payable............................... (126,408)
---------
Net cash used in financing activities............. (43,936)
---------
Increase in cash.................................. 18,520
Cash at Beginning of Period................................. 51,200
---------
Cash at End of Period....................................... $ 69,720
=========
</TABLE>
See notes to the financial statements.
F-29
<PAGE> 94
WEST COAST DENTAL, P.A.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED MARCH 31, 1997
1. DESCRIPTION OF BUSINESS
West Coast Dental, P.A., (the "Practice") is a professional association of
dentists doing business through two dental centers in Southwest Florida. The
Practice entities are owned by Dr. Lawrence E. Fendrich, DMD.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying financial statements have been
prepared on the accrual basis of accounting.
Supplies. Supplies are stated at the lower of cost determined under the
first-in, first-out method, or market.
Property and Equipment. Property and equipment are stated at cost.
Depreciation of property and equipment is calculated using the straight-line
method over the estimated useful lives of the assets, which range from 6 to 7
years. Leasehold improvements are amortized on a straight-line basis over the
shorter of the lease term or the estimated useful life of the assets.
When assets are retired or otherwise disposed of, the costs and related
accumulated depreciation are removed from the accounts. The difference between
the net book value of the assets and proceeds from disposition is recognized as
gain or loss. Routine maintenance and repairs are charged to expenses as
incurred, while costs of improvements and renewals are capitalized.
Other Assets. The Practice was established by acquisition of the two
dental centers in October 1993 whereby certain intangible assets, including a
non-compete agreement, goodwill and patient records were acquired. The original
cost assigned to these assets was approximately $12,000, net of approximately
$1,800 of amortization through March 31, 1997. All intangibles are being
amortized over their estimated useful lives on a straight-line basis. The
goodwill and patient records are being amortized over 25 years, and the
non-compete agreements are being amortized over three to nine years.
Use of Estimates. The preparation of financial statements in conformity
with general accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimated.
Revenue Recognition. The Practice recognizes revenue upon delivery of
service.
3. INCOME TAXES
West Coast Dental, P.A. has elected to be treated as an S corporation for
federal income tax purposes, with profits and losses generally reportable by the
sole stockholder in his individual tax return. Accordingly, no income taxes are
reflected in the financial statements.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<S> <C>
Medical equipment........................................... $338,822
Office furniture and equipment.............................. 25,721
Leasehold improvements...................................... 78,029
--------
442,572
Less accumulated depreciation............................... 217,395
--------
Total............................................. $225,177
========
</TABLE>
F-30
<PAGE> 95
WEST COAST DENTAL, P.A.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE
Notes payable in the amount of $204,602 as of March 31, 1997 consist of
capital lease obligations, totaling approximately $136,000, and a note payable
to the previous owner of the Practice. The carrying amounts of these capital
leases approximate fair value.
6. COMMITMENTS AND CONTINGENCIES
The Company primarily leases space for operation of its clinics under two
noncancelable operating leases expiring over the next 5 to 10 years. Rental
expense for the year ended March 31, 1997 was approximately $74,000. These
leases have renewal clauses of five years. Future minimum annual lease payments
under these agreements as of March 31, 1997 are:
<TABLE>
<S> <C>
1998........................................................ $ 71,363
1999........................................................ 74,580
2000........................................................ 77,340
2001........................................................ 80,217
2002........................................................ 83,206
Thereafter.................................................. 182,406
--------
Total............................................. $569,112
========
</TABLE>
7. SUBSEQUENT EVENTS
Certain assets of the Practice were purchased as of April 1, 1997 by Coast
Dental Services, Inc. and the Coast Florida P.A. In connection with this
purchase, Coast Dental Services, Inc. and the Coast Florida P.A. paid the
outstanding notes payable totaling $204,602 and obtained ownership of the
related dental equipment that had been under capital leases.
F-31
<PAGE> 96
[Description
of
Inside back Cover Page]
[Pictures of individuals smiling.]
<PAGE> 97
============================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS, OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 7
The Company............................... 17
The Acquisitions.......................... 17
Relationship Between the Company and the
Coast P.A............................... 18
Use of Proceeds........................... 19
Price Range of Common Stock............... 19
Dividend Policy........................... 19
Capitalization............................ 20
Selected Pro Forma Financial Data......... 21
Selected Financial Data................... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 23
Business.................................. 33
Management................................ 47
Certain Transactions...................... 52
Principal and Selling Stockholders........ 54
Description of Capital Stock.............. 55
Shares Eligible for Future Sale........... 59
Underwriting.............................. 61
Legal Matters............................. 62
Experts................................... 62
Available Information..................... 63
Index to Financial Statements............. F-1
</TABLE>
============================================================
============================================================
2,000,000 Shares
[Coast DENTAL LOGO]
Common Stock
---------------------
PROSPECTUS
---------------------
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
ROBERT W. BAIRD & CO.
INCORPORATED
, 1997
============================================================
<PAGE> 98
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company estimates that expenses payable by it in connection with the
Offering described in this registration statement (other than underwriting
discounts and commissions) will be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 15,247
NASD filing fee............................................. 5,531
Nasdaq National Market additional listing fee............... 17,500
Printing expenses........................................... 161,722
Accounting fees and expenses................................ 100,000
Legal fees and expenses..................................... 200,000
Fees and expenses (including legal fees) for qualifications
under state securities laws...............................
Registrar and Transfer Agent's fees and expenses............
Miscellaneous...............................................
--------
Total............................................. $500,000
========
</TABLE>
All amounts except the Securities and Exchange Commission registration fee,
the NASD filing fee and the Nasdaq National Market listing fee are estimated.
The Company intends to pay all expenses of registration with respect to shares
being sold by the Selling Stockholders hereunder, with the exception of
underwriting discounts and commissions.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") empowers a
corporation, subject to certain limitations, to indemnify its directors and
officers against expenses (including attorneys' fees, judgments, fines and
certain settlements) actually and reasonably incurred by them in connection with
any suit or proceeding to which they are a party so long as they acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to a criminal action or
proceeding, so long as they had no reasonable cause to believe their conduct to
have been unlawful. The Company's By-laws provide that the Company shall
indemnify its directors and such of its officers, employees and agents as it may
from time to time designate, to the fullest extent permitted by Section 145 of
the DGCL, as now existing or as may hereafter be amended.
Section 102 of the DGCL permits a Delaware corporation to include in its
certificate of incorporation a provision eliminating or limiting a director's
liability to a corporation or its stockholders for monetary damages for breaches
of fiduciary duty. The enabling statute provides, however, that liability for
breaches of the duty of loyalty, acts or omissions not in good faith or
involving intentional misconduct or knowing violation of the law, and the
unlawful purchase or redemption of stock or payment of unlawful dividends or the
receipt of improper personal benefits cannot be eliminated or limited in this
manner. The Company's Certificate of Incorporation includes a provision which
eliminates, to the fullest extent permitted by the DGCL, director liability for
monetary damages for breaches of fiduciary duty. In addition, the Board of
Directors of the Company has approved the execution by the Company of
indemnification agreements with the Directors and certain officers of the
Company, the form of which has been filed as an exhibit to this Registration
Statement.
The Company maintains directors' and officers' liability insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In March 1996, the Company issued an aggregate of 3,360,000 shares of
Common Stock in connection with its corporate reorganization. See "Certain
Transactions." This transaction was exempt from the
II-1
<PAGE> 99
registration requirements of the Securities Act pursuant to Section 4(2) because
it did not involve any public offering.
In January and February 1996, the Company reached mutual understandings to
provide restricted shares of Common Stock and in April and May 1996 issued
35,000 and 105,000 shares, respectively, as compensation to certain employees,
executive officers, and affiliated professionals pursuant to the Plans. These
transactions were exempt from the registration requirements of the Securities
Act pursuant to Rule 701.
In October, November and December 1996, and in January 1997, the Company
granted options to purchase approximately 186,000 shares of Common Stock under
the Plans to certain employees, executive officers and affiliated professionals.
These transactions are exempt from the registration requirements of the
Securities Act pursuant to Rule 701.
The Company has issued non-negotiable promissory notes to sellers as part
of the purchase price in connection with the Company's purchase of the allowable
assets of certain dental practices as follows. On April 24, 1996 the Company
issued non-negotiable promissory notes totalling $1.2 million to Richard J.
Shawn, D.M.D.; on September 27, 1996 and September 30, 1996, the Company issued
non-negotiable promissory notes totalling $341,250 to Juan A. Soler, D.D.S.,
Jerry L. Reynolds, D.D.S. and Dan Steele, P.A.; on October 31, 1996, the Company
issued non-negotiable promissory notes totalling $1.5 million to Seminole Dental
Center, Seminole Dental West, Seminole Dental South, Michael D. Whitcher, D.D.S.
and C. M. Garcia, D.M.D.; on March 31, 1997 the Company issued non-negotiable
notes in the amount of $35,000 and $75,000 to Anthony Di Re, D.M.D. and Mark T.
Dreyer, D.M.D., respectively; on April 1, 1997 the Company issued a
non-negotiable promissory note in the amount of $130,000 to Lawrence E.
Fendrich, D.M.D.; on April 23, 1997 the Company issued a non-negotiable
promissory note in the amount of $22,000 to Milton C. Van Meter, D.D.S.; on June
30, 1997 the Company issued a non-negotiable promissory note in the amount of
$89,000 to Eric Zendell, D.D.S.; on July 11, 1997 the Company issued a
non-negotiable promissory note in the amount of $55,750 to James R. Davis,
D.D.S.; and on August 7, 1997 the Company issued a non-negotiable promissory
note in the amount of $86,000 to Damon & Greider, P.A. The Company does not
believe that the promissory notes issued in these transactions are a "security"
as defined by Section 2(1) of the Securities Act. However, in the event the
promissory notes are deemed to be a security these transactions were exempt from
the registration requirements of the Securities Act pursuant to Section 4(2)
because they did not involve any public offering.
On July 11, 1997, the Company issued 5,797 shares of Common Stock to James
R. Davis, D.D.S. as part of the purchase price in connection with the Company's
purchase of the allowable assets of his dental practice. This transaction was
exempt from the requirements of the Securities Act pursuant to section 4(2)
because it did not involve a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- -------------- -------------------
<C> <S> <C>
1.1********* -- Form of Underwriting Agreement
2.1** -- Asset Purchase Agreement dated April 1, by and among Adam
Diasti, D.D.S., P.A., Coast Dental Services, Inc., Richard
J. Shawn D.M.D., P.A., East Coast Dental Management, Inc.
and Richard J. Shawn, D.M.D.
2.2** -- Asset Purchase Agreement dated October 31, 1996 by and among
the Coast Florida P.A., Coast Dental Services, Inc.,
Seminole Dental Services, Inc., Seminole Dental Center,
Seminole Dental West, Seminole Dental South, Michael D.
Witcher, D.D.S., P.A., Milo R. Novotny, D.D.S., P.A., and
C.M. Garcia, D.M.D., P.A.
2.3***** -- Asset Purchase Agreement dated as of April 1, 1997 by and
among Coast Dental Services, Inc., Coast Florida, P.A., West
Coast Dental, Inc. and Lawrence E. Fendrich, D.M.D.
3.1**** -- Restated Certificate of Incorporation of Coast Dental
Services, Inc.
3.2* -- Bylaws of Coast Dental Services, Inc.
</TABLE>
II-2
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- -------------- -------------------
<C> <S> <C>
4.1* -- Specimen of Coast Dental Services, Inc. Common Stock
Certificate
4.2* -- Business Loan Agreement dated August 15, 1996 between Coast
Dental Services, Inc. and Barnett Bank, N.A.
4.3**** -- First Amendment to Business Loan Agreement dated March 7,
1997 between Coast Dental Services, Inc. and Barnett Bank,
N.A.
(The Company is not filing any instrument with respect to
long-term debt that does not exceed 10 percent of the total
assets of the Company and the Company agrees to furnish a
copy of such instrument to the Commission upon request.)
4.4******** -- Loan Commitment Letter dated August 1, 1997 between Coast
Dental Services, Inc. and Barnett Bank N.A.
5.1********* -- Opinion of Shumaker, Loop & Kendrick, LLP, as to the Common
Stock being registered
10.1** -- Employment Agreement between Coast Dental Services, Inc. and
Terek Diasti
10.2** -- Employment Agreement between Coast Dental Services, Inc. and
Adam Diasti, D.D.S
10.3* -- Employment Agreement between Coast Dental Services, Inc. and
Joseph R. Smith
10.4* -- Coast Dental Services, Inc. Stock Option Plan
10.5* -- Coast Dental Services, Inc. Affiliated Professional Stock
Plan
10.6* -- Services and Support Agreement dated October 1, 1996 between
Coast Dental Services, Inc. and Coast Florida, P.A.
10.7** -- Asset Purchase Agreement dated April 1, 1996 by and among
Adam Diasti, D.D.S., P.A., Coast Dental Services, Inc.,
Richard J. Shawn D.M.D., P.A., East Coast Dental Management,
Inc. and Richard J. Shawn, D.M.D.
10.8* -- Promissory Note from Adam Diasti, DDS, P.A., dated June 30,
1996, payable to Coast Dental Services, Inc.
10.9* -- Business Loan Agreement dated August 15, 1996 between Coast
Dental Services, Inc. and Barnett Bank, N.A.
10.10* -- Form of Indemnification Agreement with officers and
directors
10.11** -- Asset Purchase Agreement dated October 31, 1996 by and among
Coast Florida P.A., Coast Dental Services, Inc., Seminole
Dental Services, Inc., Seminole Dental Center, Seminole
Dental West, Seminole Dental South, Michael D. Witcher,
D.D.S., P.A., Milo R. Novotny, D.D.S., P.A., and C.M. Garcia
D.M.D. P.A.
10.12** -- Agreement to Transfer Stock and Stock Pledge dated November
1, 1996, by and between Adam Diasti, D.D.S. and Coast Dental
Services, Inc.
10.13**** -- First Amendment to Business Loan Agreement dated March 7,
1997 between Coast Dental Services, Inc. and Barnett Bank,
N.A.
10.14****** -- Amendment No. 1 to Coast Dental Services, Inc. Stock Option
Plan
10.15***** -- Asset Purchase Agreement dated as of April 1, 1997 by and
among Coast Dental Services, Inc., Coast Florida P.A., West
Coast Dental, Inc. and Lawrence E. Fendrich, D.M.D.
10.16******** -- Loan Commitment Letter dated August 1, 1997 between Coast
Dental Services, Inc. and Barnett Bank N.A. filed as Exhibit
4.4 to this Registration Statement and incorporated herein
by reference.
16.1*** -- Letter from KPMG Peat Marwick LLP
23.1******** -- Consent of Shumaker, Loop & Kendrick, LLP (included in their
opinion filed as Exhibit 5.1).
23.2 -- Consent of Deloitte & Touche LLP, independent certified
public accountants.
27.1******* -- Financial Data Schedule for six months ended June 30, 1997
(for SEC use only).
</TABLE>
II-3
<PAGE> 101
- ---------------
* Previously filed as an exhibit with the same exhibit number
identification in the Company's Registration Statement on Form S-1
filed on October 7, 1996 (File No. 333-13613) and incorporated herein
by reference.
** Previously filed as an exhibit with the same exhibit number
identification in the Company's Amendment No. 1 to Form S-1
Registration Statement filed on November 12, 1996 and incorporated
herein by reference.
*** Previously filed as an exhibit with the same exhibit number
identification in the Company's Amendment No. 4 to Form S-1
Registration Statement filed on January 21, 1997 and incorporated
herein by reference.
**** Previously filed as Exhibit 4.3 to the Company's Form 10-K filed on
March 31, 1997 and incorporated herein by reference.
***** Previously filed as Exhibit 2.1 to the Company's Form 8-K dated April
16, 1997 and incorporated herein by reference.
****** Previously filed as Exhibit 4.2 in the Company's Form S-8/A filed on
July 31, 1997 and incorporated herein by reference.
******* Previously filed as Exhibit 27 to the Company's Form 10-Q filed on
August 8, 1997 and incorporated herein by reference.
******** Previously filed as Exhibit 4.4 in the Company's Form S-1 filed on
August 26, 1997.
********* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 102
SIGNATURES
Pursuant to the requirements of the Securities act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Tampa, State of Florida
on September 3, 1997.
COAST DENTAL SERVICES, INC.
By: /s/ TEREK DIASTI
------------------------------------
Terek Diasti
Chief Executive Officer
(The Principal Executive Officer)
By: /s/ JOSEPH R. SMITH
------------------------------------
Joseph R. Smith
Chief Financial Officer
(The Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September 3, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ TEREK DIASTI Chief Executive Officer, and Chairman of the
- ----------------------------------------------------- Board
Dr. Terek Diasti, DVM
* President, Chief Operating Officer and
- ----------------------------------------------------- Director
Dr. Adam Diasti, DDS
/s/ JOSEPH R. SMITH Chief Financial Officer, Secretary, Treasurer
- ----------------------------------------------------- and Director
Joseph R. Smith
* Director
- -----------------------------------------------------
Donald R. Millard
* Director
- -----------------------------------------------------
John H. Kang
*By: /s/ TEREK DIASTI as attorneys in fact pursuant to the power of
- ----------------------------------------------------- attorney included in the Registration
Terek Diasti Statement as originally filed on August 26,
1997.
*By: /s/ JOSEPH R. SMITH
- -----------------------------------------------------
Joseph R. Smith
</TABLE>
II-5
<PAGE> 103
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- -------------- -------------------
<C> <S> <C>
1.1********* -- Form of Underwriting Agreement
2.1** -- Asset Purchase Agreement dated April 1, by and among Adam
Diasti, D.D.S., P.A., Coast Dental Services, Inc., Richard
J. Shawn D.M.D., P.A., East Coast Dental Management, Inc.
and Richard J. Shawn, D.M.D
2.2** -- Asset Purchase Agreement dated October 31, 1996 by and among
the Coast Florida P.A., Coast Dental Services, Inc.,
Seminole Dental Services, Inc., Seminole Dental Center,
Seminole Dental West, Seminole Dental South, Michael D.
Witcher, D.D.S., P.A., Milo R. Novotny, D.D.S., P.A., and
C.M. Garcia, D.M.D., P.A
2.3***** -- Asset Purchase Agreement dated as of April 1, 1997 by and
among Coast Dental Services, Inc., Coast Florida, P.A., West
Coast Dental, Inc. and Lawrence E. Fendrich, D.M.D.
3.1**** -- Restated Certificate of Incorporation of Coast Dental
Services, Inc.
3.2* -- Bylaws of Coast Dental Services, Inc.
4.1* -- Specimen of Coast Dental Services, Inc. Common Stock
Certificate
4.2* -- Business Loan Agreement dated August 15, 1996 between Coast
Dental Services, Inc. and Barnett Bank, N.A.
4.3**** -- First Amendment to Business Loan Agreement dated March 7,
1997 between Coast Dental Services, Inc. and Barnett Bank,
N.A.
4.4******** -- Loan Commitment Letter dated August 1, 1997 between Coast
Dental Services, Inc. and Barnett Bank N.A.
(The Company is not filing any instrument with respect to
long-term debt that does not exceed 10 percent of the total
assets of the Company and the Company agrees to furnish a
copy of such instrument to the Commission upon request.)
5.1********* -- Opinion of Shumaker, Loop & Kendrick, LLP, as to the Common
Stock being registered
10.1** -- Employment Agreement between Coast Dental Services, Inc. and
Terek Diasti
10.2** -- Employment Agreement between Coast Dental Services, Inc. and
Adam Diasti, D.D.S
10.3* -- Employment Agreement between Coast Dental Services, Inc. and
Joseph R. Smith
10.4* -- Coast Dental Services, Inc. Stock Option Plan
10.5* -- Coast Dental Services, Inc. Affiliated Professional Stock
Plan
10.6* -- Services and Support Agreement dated October 1, 1996 between
Coast Dental Services, Inc. and Coast Florida, P.A
10.7** -- Asset Purchase Agreement dated April 1, 1996 by and among
Adam Diasti, D.D.S., P.A., Coast Dental Services, Inc.,
Richard J. Shawn D.M.D., P.A., East Coast Dental Management,
Inc. and Richard J. Shawn, D.M.D.
10.8* -- Promissory Note from Adam Diasti, DDS, P.A., dated June 30,
1996, payable to Coast Dental Services, Inc.
10.9* -- Business Loan Agreement dated August 15, 1996 between Coast
Dental Services, Inc. and Barnett Bank, N.A.
10.10* -- Form of Indemnification Agreement with officers and
directors
10.11** -- Asset Purchase Agreement dated October 31, 1996 by and among
Coast Florida P.A., Coast Dental Services, Inc., Seminole
Dental Services, Inc., Seminole Dental Center, Seminole
Dental West, Seminole Dental South, Michael D. Witcher,
D.D.S., P.A., Milo R. Novotny, D.D.S., P.A., and C.M. Garcia
D.M.D. P.A.
</TABLE>
<PAGE> 104
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- -------------- -------------------
<C> <S> <C>
10.12** -- Agreement to Transfer Stock and Stock Pledge dated
November 1, 1996, by and between Adam Diasti, D.D.S. and
Coast Dental Services, Inc.
10.13**** -- First Amendment to Business Loan Agreement dated March 7,
1997 between Coast Dental Services, Inc. and Barnett Bank,
N.A.
10.14****** -- Amendment No. 1 to Coast Dental Services, Inc. Stock Option
Plan
10.15***** -- Asset Purchase Agreement dated as of April 1, 1997 by and
among Coast Dental Services, Inc., Coast Florida P.A., West
Coast Dental, Inc. and Lawrence E. Fendrich, D.M.D.
10.16******** -- Loan Commitment Letter dated August 1, 1997 between Coast
Dental Services, Inc. and Barnett Bank N.A. filed as Exhibit
4.4 to this Registration Statement and incorporated herein
by reference.
16.1*** -- Letter from KPMG Peat Marwick LLP
23.1******** -- Consent of Shumaker, Loop & Kendrick, LLP (included in their
opinion filed as Exhibit 5.1)
23.2 -- Consent of Deloitte & Touche LLP, independent certified
public accountants
27.1******* -- Financial Data Schedule for six months ended June 30, 1997
(for SEC use only)
</TABLE>
- ---------------
* Previously filed as an exhibit with the same exhibit number
identification in the Company's Registration Statement on Form S-1
filed on October 7, 1996 (File No. 333-13613) and incorporated
herein by reference.
** Previously filed as an exhibit with the same exhibit number
identification in the Company's Amendment No. 1 to Form S-1
Registration Statement filed on November 12, 1996 and incorporated
herein by reference.
*** Previously filed as an exhibit with the same exhibit number
identification in the Company's Amendment No. 4 to Form S-1
Registration Statement filed on January 21, 1997 and incorporated
herein by reference.
**** Previously filed as Exhibit 4.3 to the Company's Form 10-K filed on
March 31, 1997 and incorporated herein by reference.
***** Previously filed as Exhibit 2.1 to the Company's Form 8-K dated April
16, 1997 and incorporated herein by reference.
****** Previously filed as Exhibit 4.2 in the Company's Form S-8/A filed on
July 31, 1997 and incorporated herein by reference.
******* Previously filed as Exhibit 27 to the Company's Form 10-Q filed on
August 8, 1997 and incorporated herein by reference.
******** Previously filed as Exhibit 4.4 in the Company's Form S-1 filed on
August 26, 1997.
********* To be filed by amendment.
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Coast Dental
Services, Inc. on Form S-1 of our report relating to the financial statements of
Coast Dental Services, Inc. dated March 11, 1997, and our report relating to the
financial statements of West Coast Dental, P.A. dated May 23, 1997, appearing in
the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected
Financial Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Tampa, Florida
September 3, 1997
