COAST DENTAL SERVICES INC, 10-Q, 1998-05-15

COAST DENTAL SERVICES INC
10-Q, 1998-05-15
OFFICES & CLINICS OF DOCTORS OF MEDICINE

Previous: MEDICAL ALLIANCE INC, 10-Q, 1998-05-15

Next: STEINER LEISURE LTD, 10-Q, 1998-05-15

<PAGE> 1
- --------------------------------------------------------------------------------

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
- --------------------------------------------------------------------------------

FORM 10-Q

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

For the quarter ended March 31, 1998

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

For the transition period from________ to _________

Commission File No. 000-21501

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

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

2502 ROCKY POINT DRIVE NORTH, SUITE 1000, TAMPA, FLORIDA 33607
(Address of principal executive offices) (Zip Code)

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

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

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

Total number of shares of outstanding Common Stock as of May 4, 1998: 7,621,676

<PAGE> 2

PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
COAST DENTAL SERVICES, INC.
CONDENSED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------
UNAUDITED
DECEMBER 31, MARCH 31,
1997 1998
- -----------------------------------------------------------------------------------------------------------------

ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................ $46,343,591 $44,177,091
Management fee receivable from Coast P.A............................. 2,418,689 2,738,625
Supplies, inventory and small tools.................................. 799,869 1,097,060
Prepaid expenses and other assets.................................... 268,253 846,021
----------- -----------
Total current assets............................................... 49,830,402 48,858,797
Property and equipment, net............................................ 6,047,993 8,526,549
Non-compete agreement, net of amortization of $208,763
and $239,631, respectively........................................... 949,393 916,655
Dental services agreement, net of amortization of $228,140
and $334,672, respectively........................................... 7,744,098 9,593,389
Other assets........................................................... 246,989 786,042
----------- -----------
Total assets....................................................... $64,818,875 $68,681,432
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable..................................................... $ 1,053,310 $ 1,534,241
Other accrued expenses............................................... 699,778 2,972,748
Current maturities of debt.......................................... 454,330 305,648
----------- -----------
Total current liabilities.......................................... 2,207,418 4,812,637
Long-term debt, excluding current maturities........................... 1,040,623 958,414
Deferred tax liability................................................. 176,742 176,742
----------- -----------
Total liabilities.................................................. 3,424,783 5,947,793
Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares authorized,
none issued........................................................ -- --
Common stock, $.001 par value; 50,000,000 shares authorized,
7,613,354 and 7,615,055, shares issued and outstanding,
respectively....................................................... 7,613 7,615
Additional paid-in capital........................................... 58,322,926 58,375,062
Retained earnings.................................................... 3,065,953 4,383,103
----------- -----------
61,396,492 62,765,780
Less: treasury stock.............................................. 2,400 32,141
----------- -----------
Total stockholders' equity......................................... 61,394,092 62,733,639
----------- -----------
Total liabilities and stockholders' equity......................... $64,818,875 $68,681,432
=========== ===========
</TABLE>

See Condensed Notes to Financial Statements.

<PAGE> 3

<TABLE>
<CAPTION>
COAST DENTAL SERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------
QUARTER ENDED
MARCH 31,
---------------------------
1997 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net revenue............................................................ $3,519,798 $7,288,379
Dental Center expenses:
Staff salaries....................................................... 1,041,176 2,172,508
Dental supplies and lab fees......................................... 575,099 1,043,514
Advertising.......................................................... 240,197 456,071
Rent................................................................. 295,902 757,670
Depreciation......................................................... 91,914 243,202
Other................................................................ 56,450 189,650
---------- ----------
Total Dental Center expenses....................................... 2,300,738 4,862,615
---------- ----------
Gross profit....................................................... 1,219,060 2,425,764
General and administrative expenses.................................... 390,044 884,537
---------- ----------
Operating profit................................................... 829,016 1,541,227
Interest income, net................................................... 5,749 533,640
---------- ----------
Income before income taxes............................................. 834,765 2,074,867
Income tax expense..................................................... 183,538 757,717
---------- ----------
Net income............................................................. $ 651,227 $1,317,150
========== ==========

Pro forma income tax expense........................................... 142,020 --
---------- ----------
Pro forma net income................................................... $ 509,207 $1,317,150
========== ==========

Basic earnings per share............................................... $ .14 $ .17
========== ==========
Pro forma basic earnings per share..................................... $ .11 $ .17
========== ==========

Diluted earnings per share............................................. $ .14 $ .17
========== ==========
Pro forma diluted earnings per share................................... $ .11 $ .17
========== ==========

Weighted average number of shares outstanding:
Basic................................................................ 4,697,778 7,608,055
========== ==========
Diluted.............................................................. 4,755,786 7,736,228
========== ==========
</TABLE>

See Condensed Notes to Financial Statements.

<PAGE> 4

<TABLE>
<CAPTION>
COAST DENTAL SERVICES, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------

ADDITIONAL
COMMON STOCK PAID-IN CAPITAL TOTAL
------------ COMMON RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT STOCK EARNINGS STOCK EQUITY
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE ON DECEMBER 31, 1997... 7,613,354 $7,613 $58,322,926 $ 3,065,953 $ (2,400) $61,394,092
Net income for the quarter
ended March 31, 1998......... -- -- -- 1,317,150 -- 1,317,150
Issuance of common stock upon
exercise of stock options.... 1,701 2 52,136 -- -- 52,138
Purchase of common stock....... -- -- -- -- (29,741) (29,741)
--------- ------ ----------- ----------- -------- -----------
Balance on March 31, 1998...... 7,615,055 $7,615 $58,375,062 $ 4,383,103 $(32,141) $62,733,639
========= ====== =========== =========== ======== ===========
</TABLE>

See Condensed Notes to Financial Statements.

<PAGE> 5

<TABLE>
<CAPTION>
COAST DENTAL SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
QUARTER ENDED
MARCH 31,
-----------------------------
1997 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 651,227 $ 1,317,150
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation........................................................... 95,386 264,928
Amortization........................................................... 52,860 137,400
Forgiveness of notes receivable from stockholders...................... 177,898 --
Changes in operating assets and liabilities:
Increase in management fee receivable from Coast P.A................. (252,410) (319,936)
Decrease in notes receivable from Coast P.A.......................... 133,652 --
Increase in supplies, inventory and small tools...................... (3,553) (297,191)
Increase in prepaid expenses and other assets........................ (335,234) (577,768)
Increase in accounts payable and accrued expenses.................... 459,535 2,753,901
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......................... 979,361 3,278,484

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................................... (127,918) (2,533,484)
Acquired assets, including intangible assets............................. (686,513) (2,163,953)
Increase in other assets................................................. (34,712) (539,053)
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES.............................. (849,143) (5,236,490)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial offering........................................... 16,368,000 --
Payment of capitalized costs............................................. (774,218) --
Proceeds from exercise of stock options.................................. -- 52,138
Proceeds from notes payable.............................................. 111,037 25,000
Payments on notes payable................................................ (2,873,704) (235,516)
Payments on capital leases............................................... (77,110) (20,375)
Purchase of treasury stock............................................... -- (29,741)
Distribution to stockholders............................................. (642,636) --
----------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................ 12,111,369 (208,494)
----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... 12,241,587 (2,166,500)
Cash and cash equivalents at beginning of period........................... 540,790 46,343,591
----------- ------------
Cash and cash equivalents at end of period................................. $12,782,377 $ 44,177,091
=========== ============
Supplemental schedule of cash flow information:
Cash paid for interest................................................... $ 86,660 $ 28,766
=========== ============
Cash paid for income taxes............................................... $ -- $ 80,000
=========== ============
</TABLE>

See Condensed Notes to Financial Statements.

<PAGE> 6

COAST DENTAL SERVICES, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

The accompanying Condensed Financial Statements are unaudited and should
be read in conjunction with the audited Financial Statements and notes thereto
for the year ended December 31, 1997.

In the opinion of management, all adjustments necessary for a fair
presentation of such Condensed Financial Statements have been included. Such
adjustments consist only of normal recurring items. Certain amounts in the
Condensed Statements of Operations for the three months ended March 31, 1997
have been reclassified to conform to the March 31, 1998 presentation. Interim
results are not necessarily indicative of results for a full year. The Condensed
Financial Statements and notes thereto are presented as permitted by the
Securities and Exchange Commission and do not contain certain information
included in the Coast Dental Services, Inc. (the "Company") annual Financial
Statements and notes thereto.

NOTE 2 - EARNINGS PER SHARE

The Company has adopted Statement of Financial Accounting Standards No.
128, Earnings per Share ("Statement 128"). Statement 128 requires that the
primary and fully diluted earnings per share be replaced by basic and diluted
earnings per share, respectively. The basic calculation computes earnings per
share based only on the weighted average number of shares outstanding as
compared to primary earnings per share which included common stock equivalents.
The diluted earnings per share calculation is computed similarly to fully
diluted earnings per share.

The basic earnings per common 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 though the shares were issued on January 1, 1996.

The diluted earnings per common share is equal to the basic shares plus
the incremental shares outstanding as if all issued options were exercised as of
the end of the period. The number of incremental shares is determined using the
treasury stock methodology described in Statement 128.

NOTE 3 - INCOME TAXES

Upon completion of the initial public offering, the Company terminated
its status as an S Corporation. The Pro forma income tax adjustment represents a
provision for federal and state income taxes at the statutory rate in effect for
the period 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 and automatically converted from a S
Corporation to a C Corporation becoming obligated to pay federal and state
income taxes.

The Company is required to use Statement of Financial Accounting
Standards No. 109 ("Statement 109"), Accounting for Income Taxes. Under
Statement 109, the asset and 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.

<PAGE> 7

NOTE 4 - SIGNIFICANT EVENTS

The Company, the Coast Florida P.A. and Coast Dental Services of
Tennessee, P.C. (the "Coast Tennessee P.A.") entered into purchase agreements
with the following dental practices whereby the Company acquired all of the
tangible assets of the dental practices and the respective professional
association acquired the professional assets, principally patient lists:

<TABLE>
<CAPTION>
ALLOCATION
COMBINED ALLOCATION TO SERVICES
ACQUISITION PURCHASE COMPANY'S TO TANGIBLE AND SUPPORT
DATE LOCATION PRICE PORTION ASSETS AGREEMENT
---- -------- ----- ------- ------ ---------
<S> <C> <C> <C> <C> <C>
02/25/98 Brooksville, FL $252,000 $215,000 $ 60,000 $ 155,000
03/01/98 Lakeland, FL 435,236 385,236 75,000 310,236
03/01/98 Nashville, TN* 800,000 750,000 75,000 675,000
</TABLE>

*Six locations in the Nashville, Tennessee acquisition.

In conjunction with the Company's expansion into Nashville, Tennessee,
the Company entered into a Services and Support Agreement with the Coast
Tennessee P.A to manage the Dental Centers in Tennessee. The terms of the
Services and Support Agreement between the Company and Coast Tennessee P.A. are
substantially similar to the terms of the Company's current Services and Support
Agreements with the Coast Florida P.A. and Coast Dental Services of Georgia P.A.
(the "Coast Georgia P.A."). The Coast Tennessee P.A.'s services and support fee
is approximately 74% of the Coast Tennessee P.A.'s gross revenue, less refunds
and discounts.

On March 6, 1998, the Company announced that it had reached an
agreement with Mid-Coast Dental Services, Inc., a Virginia corporation ("MCDS")
to provide financing for the development of Dental Centers in Virginia. In
exchange for providing financing for the building and acquisition of Dental
Centers, the Company received an option to acquire MCDS beginning on December
31, 1999. The purchase price under the option agreement is to be based on an
agreed upon formula which is expected to approximate the fair value of MCDS. As
of March 31, 1998, no advances have been made by the Company to MCDS in
connection with the agreement.

During the quarter ended March 31, 1998, the Company opened nine
internally developed Dental Centers, four in Florida and five in Georgia, at an
estimated cost of approximately $200,000 each. This cost includes the cost of
equipment, leasehold improvements and an agreed upon $50,000 payment (per Dental
Center) to a Coast P.A. ("Coast P.A." refers collectively to the Coast Florida
P.A., the Coast Georgia P.A. and the Coast Tennessee P.A.) to open the
additional Dental Centers thus expanding the Services and Support Agreements to
include the new internally developed Dental Centers.

NOTE 5 - SUBSEQUENT EVENTS

During April 1998, the Company opened one internally developed Dental
Center in Georgia at an estimated cost of approximately $200,000. This cost
includes the cost of equipment, leasehold improvements and an agreed upon
$50,000 payment (per Dental Center) to the Coast Georgia P.A. to open the
additional Dental Center thus expanding the Services and Support Agreement to
include the new internally developed Dental Center.

<PAGE> 8

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

A. OVERVIEW

The Company opened its first dental center (dental centers managed, or
to be managed by the Company are collectively referred to herein as the "Dental
Centers") in May 1992 and since then, has added 29 internally developed and 45
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, located in central and northern Florida, Georgia and Tennessee. As of
March 31, 1998, 83 licensed Dentists (the "Coast Dentists') were employed by the
Coast P.A., serving over 430,000 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. The services and support
fees paid to the Company by the Coast P.A. ranged from 76.0% of the Dental
Centers' gross revenue, net of refunds and discounts to 74.0%. The Company is
dependent upon the future success of the Coast P.A. and the ability of the Coast
P.A. to grow with the Company. The services and support fees between the parties
may be revised from time to time due to changes in anticipated financial results
of the contracting parties. The Company pays, out of the services and support
fee, all of the operating and non-operating expenses incurred at the Dental
Centers, except for the salaries and benefits of the Coast Dentists and dental
hygienists, federal and state income taxes, bad debts and other expenses
designated as an expense of a Coast P.A. Effective June 1, 1997, the Company
agreed to pay a Coast P.A. the sum of $50,000 in connection with each internally
developed Dental Center it commits to open, in consideration for such Coast
P.A.'s agreement to expand the Services and Support Agreement to include the new
internally developed Dental Centers.

The Company opened 12 internally developed Dental Centers prior to 1997,
nine in 1997 and nine during the first quarter of 1998 in Florida and Georgia.
The average cost to the Company of an internally developed Dental Center has
been approximately $200,000, which includes the cost of equipment, leasehold
improvements and an agreed upon $50,000 payment (per Dental Center) to a Coast
P.A. to open the additional Dental Centers thus expanding the Services and
Support Agreement to include the new internally developed Dental Centers. At
internally developed Dental Centers, profitability to the Company has been
attained in an average of three to four months from opening. The Company's
growth strategy will continue to include acquisitions in select areas, however,
the percentage of internally developed Dental Centers, as a percentage of all
Dental Centers, is expected to increase during the remainder of 1998. Management
believes that this strategy is an effective use of its working capital and
provides for low cost expansion.

The Company and the Coast P.A. added 17 acquired Dental Centers in 1996,
20 in 1997 and eight during the first quarter of 1998 located in central and
northern Florida and the Nashville, Tennessee market. The combined purchase
price for these acquired Dental Centers was $13.9 million, consisting of $7.1
million in cash , $6.5 million in promissory notes, $.2 million in assumed
liabilities and $.1 million of the Company's common stock (5,979 shares).

<PAGE> 9

B. 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
quarters indicated. The performance of the Company during these quarters are not
indicative of future financial results or conditions.

<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
---------------------
1997 1998
---------------------
<S> <C> <C>
Net revenue..................................................................... 100.0% 100.0%
Dental Center expenses:
Staff salaries................................................................ 29.6 29.8
Dental supplies and lab fees.................................................. 16.3 14.3
Advertising................................................................... 6.8 6.3
Rent.......................................................................... 8.5 10.4
Depreciation.................................................................. 2.6 3.3
Other......................................................................... 1.6 2.6
----- -----
Total Dental Center expenses................................................ 65.4 66.7
----- -----
Gross profit................................................................ 34.6 33.3
General and administrative...................................................... 11.1 12.1
----- -----
Operating profit............................................................ 23.5 21.2
Interest income, net............................................................ .2 7.3
----- -----
Income before income tax expense................................................ 23.7 28.5
Income tax expense.............................................................. 5.2 10.4
----- -----
Net income...................................................................... 18.5 18.1
===== =====

Pro forma income tax expense.................................................... 4.0 --
----- -----
Pro forma net income............................................................ 14.5% 18.1%
===== =====
</TABLE>

QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997

Net Revenue. Net revenue increased 107.1% from $3.5 million for the
quarter ended March 31, 1997 to $7.3 million for the quarter ended March 31,
1998. This increase was caused by an increase in net revenue of $.4 million for
the 29 comparable Dental Centers (Dental Centers that were open throughout the
periods being compared), an increase of $2.4 million at the 20 acquired Dental
Centers in 1997, an increase of $.7 million for the nine internally developed
Dental Centers in 1997, an increase of $.2 million in the eight acquired Dental
Centers during the first quarter of 1998 and an increase of $.1 million in the
nine internally developed Dental Centers during the first quarter of 1998.
Increases in net revenue are primarily driven by increases in patient visits.
Patient visits increased 105.3% from 41,424 for the quarter ended March 31, 1997
to 85,061 for the quarter ended March 31, 1998.

Staff Salaries. Staff salaries increased 108.7% from $1.0 million for
the quarter ended March 31, 1997 to $2.2 million for the quarter ended March 31,
1998. This increase in staff salaries was caused by an increase in salaries of
$.6 million at the 20 acquired Dental Centers in 1997, an increase of $.2
million for the nine internally developed Dental Centers in 1997, an increase of
$.1 million in the nine internally developed Dental Centers during the first
quarter of 1998 and a combined increase of $.3 million in the 29 comparable
Dental Centers, the eight acquired Dental Centers during the first quarter of
1998 and the Company's internal lab. 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 29.6% for the
quarter ended March 31, 1997 to 29.8% for the quarter ended March 31, 1998. 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 29 comparable Dental Centers remaining relatively constant,
while net

<PAGE> 10

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 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
81.5% from $.6 million for the quarter ended March 31, 1997 to $1.0 million for
the quarter ended March 31, 1998. This increase was caused by the increase in
patient visits and dental services. As a percentage of net revenue, dental
supplies and lab fees decreased from 16.3% for the quarter ended March 31, 1997
to 14.3% for the quarter ended March 31, 1998. This decrease was caused
primarily by increased economies of scale associated with centralized
purchasing.

Advertising. Advertising expense increased 89.9% from $.2 million for
the quarter ended March 31, 1997 to $.5 million for the quarter ended December
31, 1998. This increase was caused primarily by implementation of a more
aggressive advertising program during the first quarter of 1998. As a percentage
of net revenue, advertising expense decreased from 6.8% for the quarter ended
March 31, 1997 to 6.3% for the quarter ended March 31, 1998. 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 156.1% from $.3 million for the quarter
ended March 31, 1997 to $.8 million for the quarter ended March 31, 1998. This
increase was caused primarily by the addition of the 18 internally developed
Dental Centers and the 45 acquired Dental Centers. As a percentage of net
revenue, rent expense increased from 8.5% for the quarter ended March 31, 1997
to 10.4% for the quarter ended March 31, 1998. This increase was caused
primarily by higher rent expense associated with the addition of 45 acquired
Dental Centers.

Depreciation. Depreciation expense at the Dental Centers increased
164.6% from $.1 million for the quarter ended March 31, 1997 to $.2 million for
the quarter ended March 31, 1998. The increase was primarily associated with the
addition of the 18 internally developed Dental Centers and the 28 acquired
Dental Centers. As a percentage of net revenue, depreciation expense increased
from 2.6% for the quarter ended March 31, 1997 to 3.3% for the quarter ended
March 31, 1998.

Other Expenses. Other expenses increased 236.0% from $.1 million for
the quarter ended March 31, 1997 to $.2 million for the quarter ended March 31,
1998. This increase was caused primarily by increases in insurance costs, credit
card discounts and other costs. As a percentage of net revenue, other expenses
increased from 1.6% for the quarter ended March 31, 1997 to 2.6% for the quarter
ended March 31, 1998. This increase was caused primarily by the addition of the
18 internally developed Dental Centers and the 28 acquired Dental Centers.

General and Administrative Expenses. General and administrative
expenses, including corporate depreciation and amortization, increased 126.8%
from $.4 million for the quarter ended March 31, 1997 to $.9 million for the
quarter ended March 31, 1998. This increase was caused primarily by professional
fees increasing due to the change from a private to a publicly-held company and
corporate administrative salaries, rent and insurance costs due to the growth of
the Company. As a percentage of net revenue, general and administrative expenses
increased from 11.1% for the quarter ended March 31, 1997 to 12.1% for the
quarter ended March 31, 1998. General and administrative expenses primarily
consist of expenses incurred at the corporate office.

Interest income, net. Interest income, net increased from $5,749
for the quarter ended March 31, 1997 to $.5 million for the quarter ended March
31, 1998. The increase in interest income and the decrease in interest expense
was caused primarily by an increase in interest earned on the Company's
invested cash equivalents and the reduction of interest paid due to the
repayment of notes payable issued as part of the consideration for certain
acquisitions.

Income Taxes. Income taxes increased $.6 million. This increase was
attributable to the change in corporate

<PAGE> 11

status. 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 its public offering.

C. LIQUIDITY AND CAPITAL RESOURCES

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 approximately $15.1 million
(after deducting underwriting discounts and commissions and offering expenses).
On September 22, 1997, the Company completed its secondary public offering of
Common Stock. The net proceeds to the Company from the sale of 1,900,000 shares
of Common Stock offered by the Company were approximately $41.9 million (after
deducting underwriting discounts and commissions and offering expenses). As of
March 31, 1998, the Company used a portion of the net proceeds from the two
offerings for the repayment of: (i) $3.9 million for notes payable utilized and
issued as consideration for acquisitions by the Company prior to the initial
public offering; (ii) $449,000 for equipment lease and working capital; (iii)
$5.9 million for acquisitions; and (iv) $2.8 million for internally developed
Dental Centers. As of March 31, 1998, the Company had net proceeds of
approximately $43.9 million remaining from the two offerings including $2.0
million from the Company's initial public offering.

The Company has a revolving credit facility with Barnett Bank of
Florida ("Barnett") which provides an aggregate of $15.0 million for general
working capital needs and expansion of Dental Centers. As of March 31, 1998, the
Company had available the entire $15.0 million for borrowing.

During the first quarter ended March 31, 1998, the Company and the
Coast P.A. added eight acquired Dental Centers located in central Florida and
the Nashville, Tennessee market. The combined purchase price for these acquired
Dental Centers was $1.5 million, consisting of $1.3 million in cash and $.2
million in promissory notes. Had these acquisitions occurred at the beginning of
1997, the additional net revenue earned by the Company would have been $1.3
million for 1997.

During the first quarter ended March 31, 1998, the Company added nine
internally developed Dental Center in Florida and Georgia at an average cost of
approximately $200,000, which includes the cost of equipment, leasehold
improvements and an agreed upon $50,000 payment (per Dental Center) to the Coast
P.A. to open the additional Dental Centers thus expanding the Services and
Support Agreement to include the new internally developed Dental Centers.

The cost of an acquired Dental Center is typically based upon in part 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, issuance of Common Stock, cash flow from operations
and net proceeds from the initial and secondary public offerings of the
Company's Common Stock.

The Company does not believe inflation has had a material impact on
earnings during the past three years. Substantial increases in future costs
could have a significant impact on the Company. If operating expenses increase,
management believes it can recover increased costs by increasing prices to the
extent deemed advisable considering competition.

Many computer systems in use today were designed and developed using
two digits, rather than four, to specify the year. As a result, such systems
will recognize the year 2000 as 00. This could cause many computer

<PAGE> 12

applications to fail completely or to create erroneous results unless corrective
measures are taken. The Company utilizes software and related computer
technologies essential to its operations that will be affected by the Year 2000
issue. The Company has implemented a plan of action which it believes will make
its computer systems Year 2000 compliant. The Company believes that the expense
associated with these actions is immaterial in respect to the Company's
financial condition.

Based upon the Company's anticipated capital needs for operations of
its business, general corporate purposes, the addition of Dental Centers and
repayment of certain debts, management believes that the combination of the
funds expected to be available under the Company's current cash reserves,
revolving line of credit and cash flow from operations should be sufficient to
meet the Company's funding requirements to conduct its operations and for
further implementation of its growth strategy and current plans through at least
1999. Thereafter, it is anticipated by the Company that through at least such
time future acquisitions and expansion will be funded primarily with cash on
hand, cash flow from operations and borrowings under the revolving line of
credit. Thereafter, or in the event the Company expands at a more rapid rate,
the Company would finance growth through other credit sources, and where
desirable, funding from the sale of debt or equity securities.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

SPECIAL NOTICE REGARDING FORWARD LOOKING STATEMENTS

This Form 10-Q, press releases and certain information provided
periodically in writing or orally by the Company's officers or its agents
contain statements which constitute forward-looking statements within the
meaning of Section 27A of the Securities Act, as amended and Section 21E of the
Securities Exchange Act of 1934. The words expect, believe, goal, plan, intend,
estimate and similar expressions and variations thereof if used are intended to
specifically identify forward-looking statements. Those statements appear in a
number of places in this Form 10-Q and in other places, particularly,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and include statements regarding the intent, belief or current
expectations of the Company, its directors or its officers with respect to,
among other things: (i) the successful expansion of the Coast Dental network in
new and existing markets through the addition of internally developed and
acquired Dental Centers in accordance with the Company's growth strategy; (ii)
the Company's liquidity and capital resources; (iii) the Company's financing
opportunities and plans and (iv) the Company's future performance and operating
results. Investors and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors. The factors that might cause such differences include, among others,
the following: (i) any material inability of the Company to successfully
identify, consummate and integrate acquisitions at reasonable and anticipated
costs to the Company; (ii) any material inability of the Company to successfully
internally develop Dental Centers; (iii) any adverse effect or limitations
caused by Governmental regulations; (iv) any adverse effect on the Company's
continued positive cash flow and abilities to obtain acceptable financing in
connection with its growth plans; (v) any increased competition in business and
in acquisitions; (vi) any inability of the Company to successfully conduct its
business in new markets; (vii) any adverse impact on the Company's margins due
to an expected increase in the percentage of internally developed Dental Centers
as a percentage of all Dental Centers, or to costs associated with increased
growth or increased managed care business having lower margins (viii) the
continued relationship with and success of the Company's professional
association customers and their continued ability to grow in conjunction with
the Company's growth; (ix) any inability of the Company to meet or exceed
analysts expectations in any future period; (x) any decrease in overall average
Dental Center revenue of the Company resulting from internally developed Dental
Centers and (xi) other risks including those identified in the Company's filings
with the Securities and Exchange Commission. The Company undertakes no
obligation to publicly update or revise the forward looking statements made in
this Form 10-Q to reflect events or circumstances after the date of this Form
10-Q or to reflect the occurrence of unanticipated events.

<PAGE> 13

PART II - OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

During the quarter ended March 31, 1998, the Company issued a
non-negotiable promissory note in the amount of $25,000 to Sunrise Dental as
part of the purchase price in connection with the Company's purchase of the
allowable assets on February 25, 1998. The Company does not believe that the
promissory note issued in this transaction is a security as defined by Section
2(1) of the Securities Act. However, in the event the promissory note is deemed
to be a security this transaction was exempt from the registration requirements
of the Securities Act pursuant to Section 4(2) because it did not involve any
public offering.

(d) Use of Proceeds

Incorporated herein by reference to Section C, Liquidity and Capital
Resources, of Part I, Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, of this Form 10-Q with respect to the
Company's use of proceeds for its February and September 1997 public offerings.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

See Exhibit Index.

(B) REPORTS ON FORM 8-K.

None.

<PAGE> 14

COAST DENTAL SERVICES, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Tampa, State of Florida
on May 14, 1998.

COAST DENTAL SERVICES, INC.

By: /s/ DR. TEREK DIASTI, DVM
---------------------------------------------------
DR. TEREK DIASTI, DVM
Chief Executive Officer and Chairman of the Board
Officer (Principal Executive Officer)
(Principal Executive Officer)

By: /s/ JOSEPH R. SMITH
---------------------------------------------------
JOSEPH R. SMITH
Chief Financial Officer, Secretary, Treasurer and
Director (Principal Accounting Officer)

<PAGE> 15

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- -------------- -------------------
<S> <C>
27 Financial Data Schedule for the quarter ended March 31,
1998 (for SEC use only)
</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COAST DENTAL SERVICES, INC. FOR THE 3 MONTHS ENDED
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 44,177,091
<SECURITIES> 0
<RECEIVABLES> 2,738,625
<ALLOWANCES> 0
<INVENTORY> 1,097,060
<CURRENT-ASSETS> 48,858,797
<PP&E> 9,964,516
<DEPRECIATION> 1,437,967
<TOTAL-ASSETS> 68,681,432
<CURRENT-LIABILITIES> 4,812,638
<BONDS> 958,414
0
0
<COMMON> 7,615
<OTHER-SE> 62,726,024
<TOTAL-LIABILITY-AND-EQUITY> 68,681,432
<SALES> 7,288,379
<TOTAL-REVENUES> 7,288,379
<CGS> 0
<TOTAL-COSTS> 4,862,615
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,766
<INCOME-PRETAX> 2,074,867
<INCOME-TAX> 757,717
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,317,150
<EPS-PRIMARY> .17
<EPS-DILUTED> .17

</TABLE>