<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________ to _________
Commission File No. 000-21501
COAST DENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-3136131
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2502 NORTH ROCKY POINT DRIVE, SUITE 1000
TAMPA, FLORIDA 33607
(Address of principal executive offices) (Zip Code)
(813)288-1999
(Registrant's telephone number, including area code)
Indicated 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 August 6,
1998: 7,621,758
<PAGE> 2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COAST DENTAL SERVICES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(UNAUDITED)
DECEMBER 31, JUNE 30,
1997 1998
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ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................ $46,343,591 $37,616,584
Management fee receivable from P.A................................... 2,418,689 3,357,261
Supplies, inventory, and small tools................................. 799,869 1,659,910
Prepaid expenses and other assets.................................... 268,253 694,211
----------- -----------
Total current assets............................................... 49,830,402 43,327,966
Property and equipment, net............................................ 6,047,993 11,478,747
Non-compete agreement, net of amortization of $208,763
and $274,239, respectively........................................... 949,393 883,917
Dental services agreement, net of amortization of $228,140
and $466,887, respectively........................................... 7,744,098 12,332,825
Note receivable from P.A............................................... -- 210,218
Other assets........................................................... 246,989 747,624
----------- -----------
Total assets....................................................... $64,818,875 $68,981,297
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 1,053,310 $ 1,916,357
Other accrued expenses............................................... 699,778 1,216,544
Current maturities of debt........................................... 454,330 395,705
----------- -----------
Total current liabilities.......................................... 2,207,418 3,528,606
Long-term debt, excluding current maturities........................... 1,040,623 1,330,685
Deferred tax liability................................................. 176,742 176,742
----------- -----------
Total liabilities.................................................. 3,424,783 5,036,033
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 7,621,758, shares issued and outstanding,
respectively....................................................... 7,613 7,622
Additional paid-in capital........................................... 58,322,926 58,426,104
Retained earnings.................................................... 3,065,953 5,600,287
----------- -----------
61,396,492 64,034,013
Less: treasury stock.............................................. 2,400 88,749
----------- -----------
Total stockholders' equity......................................... 61,394,092 63,945,264
----------- -----------
Total liabilities and stockholders' equity......................... $64,818,875 $68,981,297
=========== ===========
</TABLE>
See Condensed Notes to Financial Statements.
2
<PAGE> 3
COAST DENTAL SERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30,
--------------------------- ----------------------------
1997 1998 1997 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue.................................. $4,414,346 $8,072,108 $7,936,437 $15,360,487
Dental Center expenses:
Staff salaries............................. 1,382,696 2,655,601 2,413,732 4,828,109
Dental supplies and lab fees............... 589,726 1,168,428 1,159,947 2,211,942
Advertising................................ 266,516 487,992 506,714 944,063
Rent....................................... 452,210 962,034 765,872 1,719,704
Depreciation............................... 102,604 268,601 195,441 511,803
Other...................................... 111,625 206,530 168,163 396,180
---------- ---------- ---------- -----------
Total Dental Center expenses............. 2,905,377 5,749,186 5,209,869 10,611,801
---------- ---------- ---------- -----------
Gross profit............................. 1,508,969 2,322,922 2,726,568 4,748,686
General and administrative expenses.......... 418,903 807,683 751,136 1,533,094
Depreciation and amortization................ 87,042 190,853 143,391 349,979
---------- ---------- ---------- -----------
Operating profit ........................ 1,003,024 1,324,386 1,832,041 2,865,613
Interest income, net......................... 108,633 455,279 114,381 988,919
---------- ---------- ---------- -----------
Income before income taxes................... 1,111,657 1,779,665 1,946,422 3,854,532
Income tax expense........................... 433,546 562,481 617,084 1,320,198
---------- ---------- ---------- -----------
Net income................................... $ 678,111 $1,217,184 $1,329,338 $ 2,534,334
========== ========== ========== ===========
Pro forma income tax expense................. -- -- 142,021 --
---------- ---------- ---------- -----------
Pro forma net income......................... $ 678,111 $1,217,184 $1,187,317 $ 2,534,334
========== ========== ========== ===========
Basic earnings per share..................... $ .12 $ .16 $ .26 $ .33
========== ========== ========== ===========
Pro forma basic earnings per share........... $ .12 $ .16 $ .23 $ .33
========== ========== ========== ===========
Diluted earnings per share................... $ .12 $ .16 $ .25 $ .33
========== ========== ========== ===========
Pro forma diluted earnings per share......... $ .12 $ .16 $ .23 $ .33
========== ========== ========== ===========
Weighted average number of shares outstanding:
Basic........................................ 5,731,420 7,621,084 5,210,797 7,616,034
========== ========== ========== ===========
Diluted...................................... 5,802,045 7,713,029 5,274,344 7,717,675
========== ========== ========== ===========
</TABLE>
See Condensed Notes to Financial Statements.
3
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COAST DENTAL SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1997 1998
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 1,329,338 $ 2,534,334
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation........................................................... 214,228 561,322
Amortization........................................................... 124,603 300,459
Forgiveness of notes receivable from stockholders...................... 177,898 --
Deferred income tax expense............................................ 75,362 --
Changes in operating assets and liabilities:
Increase in management fee receivable from Coast P.A................. (586,007) (938,572)
Increase in notes receivable from Coast P.A.......................... (373,798) (210,218)
Increase in supplies, inventory and small tools...................... (71,521) (860,041)
Increase in prepaid expenses and other assets........................ (347,880) (425,958)
Increase (decrease) in accounts payable and accrued expenses......... (23,211) 1,379,813
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......................... 519,012 2,341,139
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................................... (387,176) (5,217,953)
Acquired assets, including intangible assets............................. (3,573,966) (5,597,833)
Increase in other assets................................................. (74,151) (500,635)
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES.............................. (4,035,293) (11,316,421)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial offering........................................... 16,368,000 --
Payment of capitalized costs............................................. (805,131) --
Proceeds from exercise of stock options.................................. -- 103,187
Proceeds from notes payable.............................................. 351,000 678,230
Payments on notes payable................................................ (4,096,408) (405,208)
Payments on capital leases............................................... (91,162) (41,585)
Purchase of treasury stock............................................... -- (86,349)
Distribution to stockholders............................................. (642,636) --
----------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......................... 11,083,663 248,275
----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... 7,567,382 (8,727,007)
Cash and cash equivalents at beginning of period........................... 540,790 46,343,591
----------- ------------
Cash and cash equivalents at end of period................................. $ 8,108,172 $ 37,616,584
=========== ============
Supplemental schedule of cash flow information:
Cash paid for interest................................................... $ 113,702 $ 48,123
=========== ============
Cash paid for income taxes............................................... $ 666,000 $ 952,500
=========== ============
</TABLE>
See Condensed Notes to Financial Statements.
4
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COAST DENTAL SERVICES, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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 six months ended June 30, 1997 have
been reclassified to conform to the June 30,1998 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 38.5%) 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 an 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.
5
<PAGE> 6
NOTE 4. SIGNIFICANT EVENTS
The Company and the Coast Florida 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 Coast Florida P.A.
acquired the professional assets, principally patient lists:
<TABLE>
<CAPTION>
THE ALLOCATION
COMPANY'S ALLOCATION TO SERVICES
ACQUISITION PURCHASE TO TANGIBLE AND SUPPORT
DATE LOCATION PRICE ASSETS AGREEMENT
----------- ------------------ --------- ----------- -----------
<S> <C> <C> <C> <C>
04/22/98 Cape Coral, FL $ 382,500 $ 60,000 $ 322,500
05/04/98 Fort Myers, FL 215,000 75,000 140,000
05/29/98 St. Augustine, FL 148,000 45,000 103,000
06/01/98 Homosassa, FL* 800,000 100,000 700,000
06/01/98 Leesburg, FL 350,000 60,000 290,000
06/15/98 Sebring, FL 467,100 75,000 392,100
</TABLE>
*Two locations in the Homosassa, FL acquisition.
During the quarter ended June 30, 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 the 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.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
A. OVERVIEW
The Company opened its first Dental Center in May 1992 and since then
has opened 38 internally developed Dental Centers and added 52 acquired Dental
Centers located in Florida, Georgia and Tennessee. The Company derives its
revenue through fees earned from the 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.) for providing management services and support at the Dental
Centers. As of June 30, 1998, 80 licensed Dentists (the "Affiliated Dentists")
were employed by the Coast P.A. servicing over 500,000 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 Affiliated 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 through mutual agreement
due to changes in anticipated financial operating expenses incurred at the
Dental Centers or the 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 Agreements to include the new
internally developed Dental Centers.
The Company opened 12 internally developed Dental Centers prior to 1997,
nine in 1997 and 18 during the first six months 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. If the Company adds a significant number of internally developed Dental
Centers during a quarter, the Company's margins may be impacted. However, at
internally developed Dental Centers, profitability to the Company has been
attained in an average of three to four months from the 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 a more cost effective form of expansion.
The Company and the Coast P.A. added 17 acquired Dental Centers in 1996,
20 in 1997, 15 during the first six months of 1998 located in Florida and the
Nashville, Tennessee market. The purchase price for these Dental Centers
consisted of $8.8 million in cash, $4.8 million in promissory notes, $.2 million
in assumed liabilities and $.1 million of the Company's Common Stock (5,979
shares). Had the 1997 and 1998 acquisitions occurred at the beginning of 1997,
the additional net revenue earned by the Company would have been $8.2 million
and $1.2 million for 1997 and the six months ended June 30, 1998, respectively.
7
<PAGE> 8
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
Agreements), certain items in the Company's statements of operations for
periods indicated. The performance of the Company during these periods are not
indicative of future financial results or conditions.
<TABLE>
<CAPTION>
Percentage of Net Revenue
Quarter Ended June 30, Six Months Ended June 30,
---------------------- ---------------------------
1997 1998 1997 1998
------ ------- --------- -------
<S> <C> <C> <C> <C>
Net revenue.................................... 100.0% 100.0% 100.0% 100.0%
Dental Center expenses:
Staff salaries............................... 31.3 32.9 30.4 31.4
Dental supplies and lab fees................. 13.4 14.5 14.6 14.4
Advertising.................................. 6.0 6.0 6.4 6.1
Rent......................................... 10.2 11.9 9.7 11.2
Depreciation................................. 2.3 3.3 2.5 3.3
Other........................................ 2.6 2.6 2.0 2.6
------ ------- --------- ------
Total Dental Center expenses............... 65.8 71.2 65.6 69.0
------ ------- --------- ------
Gross profit............................... 34.2 28.8 34.4 31.0
General and administrative..................... 9.5 10.0 9.5 10.0
Depreciation and amortization.................. 2.0 2.4 1.8 2.3
------ ------- --------- ------
Operating profit........................... 22.7 16.4 23.1 18.7
Interest income, net........................... 2.5 5.7 1.4 6.4
------ ------- --------- ------
Income before income taxes..................... 25.2 22.1 24.5 25.1
Income tax expense............................. 9.8 7.0 7.8 8.6
------ ------- --------- ------
Net income..................................... 15.4 15.1 16.7 16.5
====== ======= ========= ======
Pro forma income tax expense................... -- -- 1.7 --
------ ------- --------- ------
Pro forma net income........................... 15.4% 15.1% 15.0% 16.5%
====== ======= ========= ======
</TABLE>
Net Revenue. For the quarter and six months ended June 30, 1997 and
1998, net revenue increased $3,657,762 from $4,414,346 to $8,072,108 and
$7,424,050 from $7,936,437 to $15,360,487, respectively. This increase was
primarily due to the increase in net revenue attributable to the 29 comparable
Dental Centers (Dental Centers that were open throughout the periods being
compared), the 35 acquired Dental Centers and the 27 internally developed
Dental Centers. Additionally, increases in net revenue are primarily driven by
increases in patient visits. For the quarter and six months ended June 30, 1997
and 1998, patient visits for the Dental Centers increased 98.7% from 53,310 to
105,959 and 101.6% from 94,734 to 191,020, respectively.
Staff Salaries. For the quarter and six months ended June 30, 1997 and
1998, staff salaries increased $1,272,905 from $1,382,696 to $2,655,601 and
$2,414,377 from $2,413,732 to $4,828,109, respectively. This increase was
primarily caused by an increase in Dental Center regional management and Dental
Center staffing due to the addition of internally developed and acquired Dental
Centers. 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. Staff salaries include
the compensation paid to administrative staff at each Dental Center, including
the dental assistants, office managers, sterilization technicians and front
desk managers.
Dental Supplies and Lab Fees. For the quarter and six months ended
June 30, 1997 and 1998, dental supplies and lab fees increased $578,702 from
$589,726 to $1,168,428 and $1,051,995 from $1,159,947 to $2,211,942,
respectively. This increase was caused primarily by the increase in patient
visits and dental services provided at the 29 comparable Dental Centers, the 35
acquired Dental Centers and the 27 internally developed
8
<PAGE> 9
Dental Centers. Dental supplies and lab fees as a percent 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.
Advertising. For the quarter and six months ended June 30, 1997 and
1998, advertising increased $221,476 from $266,516 to $487,992 and $437,349
from $506,714 to $944,063, respectively. This increase was caused primarily by
implementation of a more aggressive advertising program in markets where
internally developed Dental Centers were opened.
Rent. For the quarter and six months ended June 30, 1997 and 1998,
rent increased $509,824 from $452,210 to $962,034 and $953,832 from $765,872 to
$1,719,704, respectively. This increase was caused primarily by the addition of
the internally developed and acquired Dental Centers. The acquired Dental
Centers also typically have a higher rent expense.
Depreciation. For the quarter and six months ended June 30, 1997 and
1998, depreciation increased $165,997 from $102,604 to $268,601 and $316,362
from $195,441 to $511,803, respectively. This increase was primarily caused by
the increase in fixed assets from the acquired and internally developed Dental
Centers.
Other Expenses. For the quarter and six months ended June 30, 1997 and
1998, other expenses increased $94,905 from $111,625 to $206,530 and $228,017
from $168,163 to $396,180, respectively. This increase was caused primarily by
the increase in insurance costs, credit card discounts and other costs
associated with acquired and internally developed Dental Centers.
General and Administrative Expenses. For the quarter and six months
ended June 30, 1997 and 1998, general and administrative expenses increased
$388,780 from $418,903 to $807,683 and $781,985 from $751,136 to $1,533,094,
respectively. This increase was caused primarily by corporate administrative
salaries, rent and insurance costs due to the growth of the Company.
Depreciation and Amortization. For the quarter and six months ended
June 30, 1997 and 1998, depreciation and amortization increased $103,811 from
$87,042 to $190,853 and $206,588 from $143,391 to $349,979, respectively. The
increase is primarily associated with the expansion of the corporate
headquarters and the amortization of service agreements and other intangibles
acquired.
Interest Income, net. For the quarter and six months ended June 30,
1997 and 1998, interest income, net increased $346,646 from $108,633 to
$455,279 and $874,538 from $114,381 to $988,919, respectively. The increase in
interest income and decrease in interest expense was caused primarily by an
increase of the Company's invested cash balances and the reduction of interest
paid due to the repayment of notes payable issued as part of the consideration
for certain acquisitions.
Income Taxes. For the quarter and six months ended June 30, 1997 and
1998, income tax expense increased $128,935 from $433,546 to $562,481 and
$703,114 from $617,084 to $1,320,198, respectively. The increase was
attributable to the change in corporate 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 the 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 sales
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).
The Company has a revolving credit facility with Barnett Bank of
Florida which provides an aggregate of $15.0 million for general working
capital needs and expansion of Dental Centers. As of June 30, 1998, the
9
<PAGE> 10
Company had available the entire $15.0 million for borrowing.
During the quarter ended June 30, 1998, the Company and the Coast
Florida P.A. added seven acquired Dental Centers located in Florida. The
purchase price for these acquired Dental Centers consisted of $1.7 million in
cash and $.7 million in promissory notes. Had these acquisitions occurred at the
beginning of 1997, the additional net revenue earned by the Company would have
been $3.1 million and $1.2 million for 1997 and the six months ended June 30,
1998, respectively.
During the quarter ended June 30, 1998, the Company added nine
internally developed Dental Centers 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 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 may be affected by the Year 2000 issue. The Company has
implemented a plan of action which it believes will result in the Company's
computer systems being Year 2000 compliant by June 30, 1999. The cost associated
with this plan is not expected to be material in respect to the Company's
financial condition.
The Company has also prepared and is in the process of implementing a
risk management plan to verify Year 2000 readiness of any third party that could
cause a material impact on the Company. However, there can be no assurances that
computers systems of third parties will not have a material adverse effect on
the Company's operations.
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 such time future
acquisitions and expansion will be funded primarily with cash on hand, cash flow
from operations and, if necessary, borrowings under the revolving line of
credit. Thereafter, or in the event the Company expands at a more rapid rate,
the Company would seek to 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 continued 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
10
<PAGE> 11
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 and to obtain profitability in
a similar manner to historical performance; (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, grow and add qualified dentists to staff Dental Centers in
conjunction with the Company's growth and a Coast P.A.'s ability to successfully
recruit, hire and maintain relationships with the dentists they employ; (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.
11
<PAGE> 12
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Unregistered Securities during the Second Quarter
During the quarter ended June 30, 1998, the Company issued
non-negotiable promissory notes in the aggregate sum of $655,500 to six sellers
as part of the purchase price in connection with the Company's purchase of the
allowable assets of certain dental practices. 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.
(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.
As of June 30, 1998, the Company has used all proceeds from its initial public
offering on February 11, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of Coast Dental Services, Inc. was
held on May 8, 1998. Each share of Common Stock entitled its holder to one vote
on the matters considered by stockholders at the annual meeting. Stockholders
present in person, or by proxy, representing 7,130,757 shares of common stock
voted on the matters described below.
(1) The stockholders elected, pursuant to the following vote, Dr.
Adam Diasti to the Company to hold office until his term expires
and until his successor has been duly elected and qualified. Dr.
Diasti received 7,111,319 votes and 19,438 shares abstained.
(2) The stockholders approved the proposal to ratify the appointment
of Deloitte and Touche LLP as the Company's independent auditors
for the fiscal year 1998. Deloitte and Touche LLP received
7,113,707 votes, 4,350 votes against and 12,700 votes abstained.
ITEM 5. OTHER INFORMATION
Notice of Shareholder Proposal Deadline Date Under New Proxy Rule 14a-4 for the
1999 Annual Meeting
The Company hereby notifies all shareholders that March 3, 1999 (the
"Deadline") is the date after which notice of a shareholder sponsored proposal
for consideration at the Company's 1999 meeting of shareholders (other than in
respect of a nominee for election to the Board of Directors) submitted outside
the processes of Rule 14a-8 under the Securities Exchange Act of 1934, as
amended, will be considered untimely under the new proxy Rule 14a-4(c)(1)
issued by the Securities and Exchange Commission. A proposal submitted outside
the processes of Rule 14a-8 is any shareholder proposal submitted for
presentation at the next annual meeting of shareholders but not submitted for
inclusion in the Company's proxy statement. Under Rule 14a-4(c)(1), if a
proponent fails to notify the Company by the Deadline, then the management
proxies will be permitted to use their discretionary voting authority if such
proposal is raised at the annual meeting, without any discussion of the matter
in the proxy statement. With respect to shareholder proposals for consideration
for inclusion in the Company's proxy statement for the 1999 annual meeting of
shareholders, such shareholder proposals are still required to be submitted to
the Company no later than December 18, 1998 as previously stated in the
Company's April 17, 1998 proxy statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
See Exhibit Index.
(B) REPORTS ON FORM 8-K.
None.
12
<PAGE> 13
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 August 14, 1998.
COAST DENTAL SERVICES, INC.
By: /s/ DR. TEREK DIASTI, DVM
------------------------------------------------------
DR. TEREK DIASTI, DVM
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
By: /s/ JOSEPH R. SMITH
------------------------------------------------------
JOSEPH R. SMITH
Chief Financial Officer, Secretary, Treasurer and
Director (Principal Accounting Officer)
13
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- -------------- -------------------
<S> <C>
11.1 Computation of Per Share Earnings
27 Financial Data Schedule for the quarter ended June 30, 1998 (for SEC use only)
</TABLE>
14
<PAGE> 1
COAST DENTAL SERVICES, INC.
EXHIBIT 11.1
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ---------------------------
1997 1998 1997 1998
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net income.............................. $ 678,111 $1,217,184 $1,329,338 $2,534,334
========== ========== ========== ==========
Pro forma net income.................... $ 678,111 $1,217,184 $1,187,317 $2,534,334
========== ========== ========== ==========
Shares:
Basic weighted average number of
shares outstanding.................... 5,731,420 7,621,084 5,210,797 7,616,034
Additional shares issuable under
stock options for diluted earnings
per share............................. 70,625 91,945 63,547 101,641
---------- ---------- ---------- ----------
Diluted weighted average number
of shares outstanding................. 5,802,045 7,713,029 5,274,344 7,717,675
========== ========== ========== ==========
Basic earnings per share................ $ .12 $ .16 $ .26 $ .33
========== ========== ========== ==========
Pro forma basic earnings per share...... $ .12 $ .16 $ .23 $ .33
========== ========== ========== ==========
Diluted earnings per share.............. $ .12 $ .16 $ .25 $ .33
========== ========== ========== ==========
Pro forma diluted earnings per share.... $ .12 $ .16 $ .23 $ .33
========== ========== ========== ==========
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 37,616,584
<SECURITIES> 0
<RECEIVABLES> 3,357,261
<ALLOWANCES> 0
<INVENTORY> 1,659,910
<CURRENT-ASSETS> 43,327,966
<PP&E> 13,213,108
<DEPRECIATION> 1,734,361
<TOTAL-ASSETS> 68,981,297
<CURRENT-LIABILITIES> 3,528,606
<BONDS> 1,330,685
0
0
<COMMON> 7,622
<OTHER-SE> 63,937,642
<TOTAL-LIABILITY-AND-EQUITY> 63,945,264
<SALES> 15,360,487
<TOTAL-REVENUES> 15,360,487
<CGS> 0
<TOTAL-COSTS> 10,611,801
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,056
<INCOME-PRETAX> 3,854,532
<INCOME-TAX> 1,320,198
<INCOME-CONTINUING> 2,534,334
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,534,334
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
