<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 quarterly period ended September 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
November 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, SEPTEMBER 30,
1997 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $46,343,591 $33,314,394
Management fee receivable............................................ 2,418,689 4,611,823
Supplies, inventory, and small tools................................. 799,869 1,998,546
Prepaid expenses and other assets.................................... 268,253 931,811
----------- -----------
Total current assets............................................... 49,830,402 40,856,574
Property and equipment, net............................................ 6,047,993 14,325,688
Non-compete agreement, net of amortization of $208,763
and $301,367, respectively........................................... 949,393 851,179
Dental services agreement, net of amortization of $228,140
and $665,541, respectively........................................... 7,744,098 17,799,602
Note receivable from the Coast P.A..................................... -- 529,218
Other assets........................................................... 246,989 872,491
----------- -----------
Total assets....................................................... $64,818,875 $75,234,752
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 1,053,310 $ 1,828,902
Other accrued expenses................................................ 699,778 1,739,624
Current maturities of debt........................................... 454,330 4,086,346
----------- -----------
Total current liabilities.......................................... 2,207,418 7,654,872
Long-term debt, excluding current maturities........................... 1,040,623 2,106,770
Deferred tax liability................................................. 176,742 176,742
----------- -----------
Total liabilities.................................................. 3,424,783 9,938,384
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 6,951,391
----------- -----------
61,396,492 65,385,117
Less: treasury stock.............................................. 2,400 88,749
----------- -----------
Total stockholders' equity......................................... 61,394,092 65,296,368
----------- -----------
Total liabilities and stockholders' equity......................... $64,818,875 $75,234,752
=========== ===========
</TABLE>
See Condensed Notes to Financial Statements.
2
<PAGE> 3
COAST DENTAL SERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1997 1998 1997 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue.................................. $5,624,239 $9,201,631 $13,560,677 $24,562,118
Dental Center expenses:
Staff salaries............................. 1,746,135 3,115,560 4,159,867 7,943,669
Dental supplies and lab fees............... 797,475 1,295,646 1,957,421 3,507,588
Advertising................................ 326,738 539,874 833,452 1,483,937
Rent....................................... 624,100 1,126,039 1,389,972 2,845,743
Depreciation............................... 151,909 272,951 347,350 784,754
Other...................................... 124,494 219,617 292,658 615,797
---------- ---------- ----------- -----------
Total Dental Center expenses............. 3,770,851 6,569,687 8,980,720 17,181,488
---------- ---------- ----------- -----------
Gross profit............................. 1,853,388 2,631,944 4,579,957 7,380,630
General and administrative expenses.......... 528,056 797,486 1,279,193 2,330,580
Depreciation and amortization................ 105,210 253,982 248,601 603,961
---------- ---------- ----------- -----------
Operating profit ........................ 1,220,122 1,580,476 3,052,163 4,446,089
Interest income, net......................... 116,535 349,106 230,916 1,338,025
---------- ---------- ----------- -----------
Income before income taxes................... 1,336,657 1,929,582 3,283,079 5,784,114
Income tax expense........................... 521,296 578,478 1,138,380 1,898,676
---------- ---------- ----------- -----------
Net income................................... $ 815,361 $1,351,104 $ 2,144,699 $ 3,885,438
========== ========== =========== ===========
Pro forma income tax expense................. -- -- 142,021 --
---------- ---------- ----------- -----------
Pro forma net income......................... $ 815,361 $1,351,104 $ 2,002,678 $ 3,885,438
========== ========== =========== ===========
Basic earnings per share..................... $ .14 $ .18 $ .40 $ .51
========== ========== =========== ===========
Pro forma basic earnings per share........... $ .14 $ .18 $ .37 $ .51
========== ========== =========== ===========
Diluted earnings per share................... $ .14 $ .18 $ .39 $ .50
========== ========== =========== ===========
Pro forma diluted earnings per share......... $ .14 $ .18 $ .37 $ .50
========== ========== =========== ===========
Weighted average number of shares outstanding:
Basic........................................ 5,794,142 7,621,758 5,371,753 7,617,963
========== ========== =========== ===========
Diluted...................................... 5,948,389 7,672,458 5,470,080 7,712,796
========== ========== =========== ===========
</TABLE>
See Condensed Notes to Financial Statements.
3
<PAGE> 4
COAST DENTAL SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1997 1998
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................... $ 2,144,699 $ 3,885,438
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation ..................................................... 379,050 858,710
Amortization ..................................................... 216,901 530,005
Forgiveness of notes receivable from stockholders ................ 177,898 --
Deferred income tax expense ...................................... 196,440 --
Changes in operating assets and liabilities:
Increase in management fee receivable .......................... (1,151,142) (2,193,134)
(Increase) decrease in notes receivable from Coast P.A ......... 224,041 (529,218)
Increase in supplies, inventory and small tools ................ (143,135) (1,198,677)
Increase in prepaid expenses and other assets .................. (272,928) (663,558)
Increase in accounts payable and accrued expenses .............. 862,899 1,815,438
Increase in accrued offering expenses .......................... 576,886 --
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................... 3,211,609 2,505,004
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................... (2,373,413) (8,196,405)
Acquired assets, including intangible assets ....................... (5,062,460) (11,427,295)
Increase in other assets ........................................... (115,504) (625,502)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ........................ (7,551,377) (20,249,202)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial offering ..................................... 16,368,000 --
Proceeds from secondary offering ................................... 42,655,000 --
Payment of capitalized costs ....................................... (1,814,878) --
Proceeds from exercise of stock options ............................ 11,320 103,187
Proceeds from issuance of common stock upon acquisition ............ 100,000 --
Proceeds from notes payable ........................................ 602,750 5,240,500
Payments on notes payable .......................................... (4,126,413) (481,874)
Payments on capital leases ......................................... (103,556) (60,463)
Purchase of treasury stock ......................................... -- (86,349)
Distribution to stockholders ....................................... (642,636) --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................... 53,049,587 4,715,001
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................... 48,709,819 (13,029,197)
Cash and cash equivalents at beginning of period ..................... 540,790 46,343,591
------------ ------------
Cash and cash equivalents at end of period ........................... $ 49,250,609 $ 33,314,394
============ ============
Supplemental schedule of cash flow information:
Cash paid for interest ............................................. $ 132,428 $ 78,290
============ ============
Cash paid for income taxes ......................................... $ 1,040,000 $ 1,799,500
============ ============
</TABLE>
See Condensed Notes to Financial Statements.
4
<PAGE> 5
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 nine months ended September 30, 1997
have been reclassified to conform to the September 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 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 39.0%) 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 P.A. ("Coast P.A." refers collectively to
the Coast Florida P.A., the Coast Dental Services of Florida P.A., the Coast
Dental Services of Georgia P.C. and the Coast Dental Services of Tennessee
P.A.) entered into purchase agreements with dental practices located in the
following markets whereby the Company acquired all of the tangible assets of
the dental practices and the Coast 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>
08/01/98 Jacksonville, FL $ 810,000 $ 50,000 $ 760,000
09/01/98 Tallahassee, FL* 4,360,000 250,000 4,110,000
</TABLE>
*Four locations in the Tallahassee, Florida acquisition.
During the quarter ended September 30, 1998, the Company added three
internally developed Dental Centers, two in Florida and one in Georgia, at an
estimated cost of approximately $225,000 each.
NOTE 5. SUBSEQUENT EVENTS
The Company and the Coast P.A. entered into purchase agreements with a
practice located in the following market whereby the Company acquired all of
the tangible assets of the dental practice and the Coast 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>
10/26/98 Melborne, FL* $340,000 $ 50,000 $290,000
</TABLE>
*Two locations in the Melborne, Florida acquisition.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
A. OVERVIEW
Coast Dental Services, Inc. ("the Company") opened its first Dental
Center in May 1992 and since then has opened 41 internally developed Dental
Centers and added 57 acquired Dental Centers located in Florida, Georgia and
Tennessee. During the quarter, the Company consolidated two previously acquired
Dental Centers into one location. 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 Dental Services of Florida P.A., the Coast Dental
Services of Georgia P.C. and the Coast Dental Services of Tennessee P.A.) for
providing management services and support at the Dental Centers pursuant to
long-term services and support agreements (collectively "Services and Support
Agreements"). As of September 30, 1998, 102 licensed Dentists (the "Affiliated
Dentists") were employed by the Coast P.A. servicing over 600,000 patients. The
Company expects to expand the Coast Dental Network ("Coast Dental Network"
refers collectively to the Dental Centers and Affiliated Dentists) 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. are based upon
a gross percentage of revenue which varies between markets.
The Company opened 12 internally developed Dental Centers prior to
1997, nine in 1997 and 21 during the first nine months of 1998 in Florida and
Georgia. The average cost to the Company of adding an internally developed
Dental Center has been approximately $225,000. The Company and the Coast P.A.
added 17 acquired Dental Centers in 1996, 20 in 1997, 20 during the first nine
months of 1998 located in Florida and the Nashville, Tennessee market. The
purchase price for these Dental Centers consisted of $12.4 million in cash,
$6.4 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 $13.0 million and $10.4 million for 1997
and the nine months ended September 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 September 30, Nine Months Ended September 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 .................. 31.0 33.8 30.7 32.3
Dental supplies and lab fees .... 14.2 14.1 14.4 14.3
Advertising ..................... 5.8 5.9 6.1 6.0
Rent ............................ 11.1 12.2 10.3 11.6
Depreciation .................... 2.7 3.0 2.6 3.2
Other ........................... 2.2 2.4 2.2 2.5
----- ----- ----- -----
Total Dental Center expenses .. 67.0 71.4 66.3 69.9
----- ----- ----- -----
Gross profit .................. 33.0 28.6 33.7 30.1
General and administrative ........ 9.4 8.7 9.4 9.5
Depreciation and amortization ..... 1.9 2.7 1.8 2.5
----- ----- ----- -----
Operating profit .............. 21.7 17.2 22.5 18.1
Interest income, net .............. 2.1 3.8 1.7 5.4
----- ----- ----- -----
Income before income taxes ........ 23.8 21.0 24.2 23.5
Income tax expense ................ 9.3 6.3 8.4 7.7
----- ----- ----- -----
Net income ........................ 14.5 14.7 15.8 15.8
===== ===== ===== =====
Pro forma income tax expense ...... -- -- 1.0 --
----- ----- ----- -----
Pro forma net income .............. 14.5% 14.7% 14.8% 15.8%
===== ===== ===== =====
</TABLE>
Net Revenue. For the quarter and nine months ended September 30, 1997
and 1998, net revenue increased $3,577,392 from $5,624,239 to $9,201,631 and
$11,001,441 from $13,560,677 to $24,562,118, respectively. This increase was
primarily due to the increase in net revenue attributable to the 42 comparable
Dental Centers (Dental Centers that were open throughout the periods being
compared), the 26 acquired Dental Centers (including the two consolidated
acquired Dental Centers) and the 30 internally developed Dental Centers.
Additionally, increases in net revenue are primarily driven by increases in
patient visits. For the quarter and nine months ended September 30, 1997 and
1998, patient visits for the Dental Centers increased 99.5% from 59,437 to
118,576 and 100.8% from 154,171 to 309,596, respectively.
Staff Salaries. For the quarter and nine months ended September 30,
1997 and 1998, staff salaries increased $1,369,425 from $1,746,135 to
$3,115,560 and $3,783,802 from $4,159,867 to $7,943,669, 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 nine months ended
September 30, 1997 and 1998, dental supplies and lab fees increased $498,171
from $797,475 to $1,295,646 and $1,550,167 from $1,957,421 to $3,507,588,
respectively. This increase was caused primarily by the increase in patient
visits and dental services
8
<PAGE> 9
provided at the 42 comparable Dental Centers, the 26 acquired Dental Centers
and the 30 internally developed 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 nine months ended September 30, 1997
and 1998, advertising increased $213,136 from $326,738 to $539,874 and $650,485
from $833,452 to $1,483,937, 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 nine months ended September 30, 1997 and
1998, rent increased $501,939 from $624,100 to $1,126,039 and $1,455,771 from
$1,389,972 to $2,845,743, respectively. This increase was caused primarily by
the addition of the internally developed and acquired Dental Centers
principally in Atlanta, Georgia, which generally has higher rent per office.
The acquired Dental Centers also typically have a higher rent expense.
Depreciation. For the quarter and nine months ended September 30, 1997
and 1998, depreciation increased $121,042 from $151,909 to $272,951 and
$437,404 from $347,350 to $784,754, 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 nine months ended September 30,
1997 and 1998, other expenses increased $95,123 from $124,494 to $219,617 and
$323,139 from $292,658 to $615,797, 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 nine months
ended September 30, 1997 and 1998, general and administrative expenses
increased $269,430 from $528,056 to $797,486 and $1,051,387 from $1,279,193 to
$2,330,580, 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 nine months ended
September 30, 1997 and 1998, depreciation and amortization increased $148,772
from $105,210 to $253,982 and $355,360 from $248,601 to $603,961, 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 nine months ended September
30, 1997 and 1998, interest income, net increased $232,571 from $116,535 to
$349,106 and $1,107,109 from $230,916 to $1,338,025, 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.
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 Nations Bank
(formerly, Barnett Bank of Florida) which provides an aggregate of $15.0
million for general working capital needs and expansion of Dental Centers. As
of September 30, 1998, the Company had available the entire $15.0 million for
borrowing.
9
<PAGE> 10
During the quarter ended September 30, 1998, the Company added three
internally developed Dental Centers in Florida and Georgia at an average cost
of approximately $225,000. The Company and the Coast P.A. added five acquired
Dental Centers located in Florida. The purchase price for these acquired Dental
Centers consisted of $3.6 million in cash and $1.6 million in promissory notes.
Had these acquisitions occurred at the beginning of 1997, the additional net
revenue earned by the Company would have been $5.0 million and $1.0 million for
1997 and the nine months ended September 30, 1997, respectively.
On October 26, 1998, the Company and the Coast P.A. added two acquired
Dental Centers located in Florida. The purchase price for these acquired Dental
Centers consisted of $275,000 in cash and $65,000 in promissory notes. Had
these acquisitions occurred at the beginning of 1997, the additional net
revenue earned by the Company would have been $481,000 and $360,750 for 1997
and the nine months ended September 30, 1998, respectively.
The cost of an acquired Dental Center is typically based in part 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, 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 and applications being Year 2000 compliant by June
30, 1999.
The Company has also prepared and is in the implementation phase of a
risk management plan to verify Year 2000 readiness of any third party that could
cause a material impact on the Company. The Company has received some
preliminary information concerning the status of third parties, and anticipates
initiating more extensive inquiries with significant suppliers, insurance
companies, utility companies and other third parties. However, there can be no
assurances that computer systems of third parties will be Year 2000 compliant or
that such third party systems will not fail due to noncompliance and result in
the disruption of service to or by the Company which could in turn have a
material adverse effect on the Company's operations.
If the Company's or third party's computer systems or applications
fail with respect to the Year 2000 issue there could be a material adverse
effect on the Company's operations. Additionally, there can be no assurance
that the systems of other companies on which the Company's systems rely will be
timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems, would not have a
material adverse effect of the business operations or financial performance of
the Company. In particular, if third party providers, due to the Year 2000
issue, fail to provide the Company with supplies, reliable means of
transporting supplies, sufficient electrical power and other utilities to
sustain patient services or processing of patient claims, then any such failure
could have a material adverse effect on the business operation and financial
performance of the Company.
The Company has not yet seen any need for contingency plans for the
Year 2000 issue, but this need will be continuously monitored as the Company
acquires more information about the preparations of its third party vendors.
Some risks related to Year 2000 issue are beyond the control of the Company and
its third parties. For example, the Company does not believe that it can
develop a contingency plan which will protect the Company from a possible
ripple effect throughout the entire economy that could be caused by problems of
others with the Year 2000 issue.
The Company estimates that the costs associated with the Year 2000
issue will be immaterial with respect to the Company's financial condition.
However, there can be no guarantee that the actual costs won't differ
materially from these estimates.
10
<PAGE> 11
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. Therefore, 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 growth strategy; (ii)
the Company's liquidity and capital resources; (iii) the Company's financing
opportunities and plans; (iv) the Company's future performance and operating
results and (v) the Company's and third party's Year 2000 readiness. 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 increases 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) any negative impact on the continued
relationship with and success of the Company's managed professional
associations, the Coast P.A.s ability to grow and add qualified dentists to
staff Dental Centers in conjunction with the Company's growth and Coast P.A.'s
ability to successfully recruit, hire, incentivize and maintain relationships
with their dentists; (ix) any inability of the Company or companies in it's
sector to meet or exceed analysts expectations in any future period; (x) any
decrease in overall average comparable Dental Center revenue of the Company;
(xi) any loss of material managed care contracts; (xii) any inability of the
Company to become Year 2000 compliant or the inability of third parties
effecting the Company to become Year 2000 compliant and (xiii) 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 September 30, 1998, the Company issued
non-negotiable promissory notes in the aggregate sum of $1,550,000 to two
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 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.
As of June 30, 1998, the Company has used all proceeds from its initial public
offering on February 11, 1997.
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 November 10, 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
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- -------------- -------------------
11.1 Computation of Per Share Earnings
27 Financial Data Schedule for the quarter ended
September 30, 1998 (for SEC use only)
14
<PAGE> 1
EXHIBIT 11.1
COAST DENTAL SERVICES, INC.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
1997 1998 1997 1998
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net income.............................. $ 815,361 $1,351,104 $2,144,699 $3,885,438
========== ========== ========== ==========
Pro forma net income.................... $ 815,361 $1,351,104 $2,002,678 $3,885,438
========== ========== ========== ==========
Shares:
Basic weighted average number of
shares outstanding.................... 5,794,142 7,621,758 5,371,753 7,617,963
Additional shares issuable under
stock options for diluted earnings
per share............................. 154,247 50,700 98,327 94,833
---------- ---------- ---------- ----------
Diluted weighted average number
of shares outstanding................. 5,948,389 7,672,458 5,470,080 7,712,796
========== ========== ========== ==========
Basic earnings per share................ $ .14 $ .18 $ .40 $ .51
========== ========== ========== ==========
Pro forma basic earnings per share...... $ .14 $ .18 $ .37 $ .51
========== ========== ========== ==========
Diluted earnings per share.............. $ .14 $ .18 $ .39 $ .50
========== ========== ========== ==========
Pro forma diluted earnings per share.... $ .14 $ .18 $ .37 $ .50
========== ========== ========== ==========
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COAST DENTAL SERVICES, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 33,314,394
<SECURITIES> 0
<RECEIVABLES> 4,611,823
<ALLOWANCES> 0
<INVENTORY> 1,998,546
<CURRENT-ASSETS> 40,856,574
<PP&E> 16,359,264
<DEPRECIATION> 2,033,576
<TOTAL-ASSETS> 75,234,752
<CURRENT-LIABILITIES> 7,654,872
<BONDS> 2,106,770
0
0
<COMMON> 7,622
<OTHER-SE> 65,288,746
<TOTAL-LIABILITY-AND-EQUITY> 75,234,752
<SALES> 24,562,118
<TOTAL-REVENUES> 24,562,118
<CGS> 0
<TOTAL-COSTS> 17,181,488
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,683
<INCOME-PRETAX> 5,784,114
<INCOME-TAX> 1,898,676
<INCOME-CONTINUING> 3,885,438
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,885,438
<EPS-PRIMARY> .51
<EPS-DILUTED> .50
</TABLE>
