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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 quarter ended March 31, 1999
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 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 7, 1999: 7,622,524
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COAST DENTAL SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
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UNAUDITED
DECEMBER 31, MARCH 31,
1998 1999
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ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................ $13,581,798 $ 6,077,295
Available-for-sale investments....................................... 13,785,320 17,743,486
Management fee receivable from Coast P.A............................. 5,235,035 6,132,615
Note receivable from Coast P.A., non-interest bearing................ 529,218 529,218
Supplies, inventory and small tools.................................. 2,481,552 2,660,109
Prepaid expenses and other assets.................................... 1,096,871 1,197,433
Deferred tax asset................................................... 560,871 560,871
----------- -----------
Total current assets............................................... 37,270,665 34,901,027
Property and equipment, net............................................ 16,297,559 18,281,257
Non-compete agreement, net of amortization of $332,235
and $377,916, respectively........................................... 818,440 785,702
Dental services agreement, net of amortization of $619,233
and $775,512, respectively........................................... 15,870,936 16,403,339
Other assets........................................................... 1,244,175 1,257,989
----------- -----------
Total assets....................................................... $71,501,775 $71,629,314
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 2,320,536 $ 2,418,894
Other accrued expenses............................................... 1,172,100 1,704,719
Treasury stock payable............................................... -- 1,077,698
Current maturities of debt and capital lease obligations............ 1,284,060 1,361,275
----------- -----------
Total current liabilities.......................................... 4,776,696 6,562,586
Long-term debt and capital lease obligations, excluding current maturities 1,635,703 1,614,431
----------- -----------
Total liabilities.................................................. 6,412,399 8,177,017
Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares authorized,
none issued........................................................ -- --
Common stock, $.001 par value; 50,000,000 shares authorized,
7,621,758 and 7,622,524 shares issued and 7,618,184 and 7,199,950
shares outstanding, respectively................................... 7,622 7,623
Additional paid-in capital........................................... 59,997,034 60,152,256
Retained earnings.................................................... 6,603,397 7,721,327
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66,608,053 67,881,206
Less: Stock option receivable from Coast P.A....................... 1,429,928 1,579,022
Treasury stock, 3,574 and 442,574 shares, respectively........ 88,749 2,849,887
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Total stockholders' equity......................................... 65,089,376 63,452,297
----------- -----------
Total liabilities and stockholders' equity......................... $71,501,775 $71,629,314
=========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
2
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COAST DENTAL SERVICES, INC.
STATEMENTS OF INCOME
UNAUDITED
<TABLE>
<CAPTION>
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QUARTER ENDED MARCH 31,
1998 1999
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<S> <C> <C>
Net revenue............................................................ $7,288,379 $10,912,548
Dental Center expenses:
Staff salaries....................................................... 2,172,508 3,501,144
Dental supplies and lab fees......................................... 1,043,514 1,680,544
Advertising.......................................................... 456,071 767,552
Rent................................................................. 757,670 1,439,637
Depreciation......................................................... 243,202 479,696
Other................................................................ 189,650 324,262
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Total Dental Center expenses....................................... 4,862,615 8,192,835
---------- -----------
Gross profit....................................................... 2,425,764 2,719,713
General and administrative expenses.................................... 641,335 1,005,579
Development costs...................................................... 567,878 --
Depreciation and amortization.......................................... 227,425 287,278
---------- -----------
Operating profit................................................... 989,126 1,426,856
Interest (expense) income, net......................................... 533,640 265,925
---------- -----------
Income before income taxes............................................. 1,522,766 1,692,781
Income tax expense..................................................... 549,963 574,851
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Income before cumulative effect of a change in accounting principle.... 972,803 1,117,930
Cumulative effect of a change in accounting principle, net of income
tax of $382,403...................................................... 633,813 --
---------- -----------
Net income............................................................. $ 338,990 $ 1,117,930
========== ===========
Basic earnings per share:
Income before cumulative effect of a change in accounting principle.... $ .13 $ .15
Cumulative effect of a change in accounting principle.................. .08 $ --
---------- -----------
Net income............................................................. $ .05 $ .15
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Diluted earnings per share:
Income before cumulative effect of a change in accounting principle.... $ .13 $ .15
Cumulative effect of a change in accounting principle.................. .08 $ --
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Net income............................................................. $ .05 $ .15
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Weighted average number of shares outstanding:
Basic................................................................ 7,608,055 7,538,686
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Diluted.............................................................. 7,736,228 7,538,717
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</TABLE>
See Notes to Condensed Financial Statements.
3
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COAST DENTAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
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QUARTER ENDED MARCH 31,
1998 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $ 338,990 $ 1,117,930
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation....................................................... 264,928 565,014
Amortization....................................................... 105,501 201,960
Deferred income tax benefit........................................ (590,156) --
Changes in operating assets and liabilities:
Increase in management fee receivable from Coast P.A............... (319,936) (897,580)
Increase in supplies, inventory and small tools.................... (297,191) (178,557)
Increase in prepaid expenses and other assets...................... (577,768) (100,562)
Increase in accounts payable and other accrued expenses............ 2,753,901 630,977
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................... 1,678,269 1,339,182
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................. (2,533,484) (2,488,712)
Acquired assets, including intangible assets......................... (563,738) (761,625)
Purchase of available-for-sale investments........................... -- (3,958,166)
Increase in other assets............................................. (539,053) (13,814)
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES.......................... (3,636,275) (7,222,317)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options.............................. 52,138 6,129
Purchase of treasury stock........................................... (29,741) (1,683,440)
Proceeds from long-term debt......................................... 25,000 240,000
Payments on long-term debt........................................... (235,516) (164,357)
Payments on capital leases........................................... (20,375) (19,700)
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NET CASH USED IN FINANCING ACTIVITIES.......................... (208,494) (1,621,368)
----------- ------------
DECREASE IN CASH AND CASH EQUIVALENTS.................................. (2,166,500) (7,504,503)
Cash and cash equivalents at beginning of period..................... 46,343,591 13,581,798
----------- ------------
Cash and cash equivalents at end of period........................... $44,177,091 $ 6,077,295
=========== ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid for interest............................................... $ 28,766 $ 44,193
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Cash paid for income taxes........................................... $ 80,000 $ 127,000
=========== ============
Non-cash stock option receivable to Coast P.A........................ $ -- $ 149,094
=========== ============
</TABLE>
See Notes to Condensed Financial Statements.
4
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COAST DENTAL SERVICES, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying Condensed Financial Statements of Coast Dental
Services, Inc. (the "Company") are unaudited and should be read in conjunction
with the audited Financial Statements and notes thereto for the year ended
December 31, 1998.
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 Income for the three months ended March 31, 1998 have
been reclassified to conform to the March 31, 1999 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 Company's annual Financial Statements and notes thereto.
NOTE 2 - EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128, ("Statement 128")
Earnings per Share 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
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 current enacted tax rates and laws.
NOTE 4 - SIGNIFICANT EVENTS
Effective February 1, 1999, the Company and the Coast P.A. amended the
Services and Support Agreements to change the management fee to approximately
73.0% of the Coast P.A.'s gross revenue, net of refunds and discounts and
eliminated the $50,000 payment made to the Coast P.A. in connection with each
internally developed Dental Center.
On January 28, 1999, the Company entered into a purchase agreement with
a dental practice whereby the Company acquired all of the tangible assets of the
dental practice. The purchase price for this acquired Dental Center was
approximately $.4 million consisting of $.2 million in cash and $.2 million in
promissory notes.
On February 10, 1999, the Company announced that its Board of Directors
authorized the repurchase of up to 500,000 shares of its outstanding common
stock. The Company will repurchase for cash these shares in the open market or
in privately negotiated transactions, from time to time, subject to market
conditions. The repurchase program will continue for twelve months, unless
sooner terminated by the Board of Directors.
5
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No shares will be repurchased from the Company's officers or directors. The
Company intends to hold the repurchased shares in treasury for general corporate
purposes.
On February 19, 1999, the Company entered into a purchase agreement
with a dental practice whereby the Company acquired all of the tangible assets
of the dental practice. The purchase price for this acquired Dental Center was
approximately $.3 million consisting of $.2 million in cash and $.1 million in
promissory notes.
On March 25, 1999, the Company announced that its Board of Directors
authorized the increase of the previously announced share repurchase program
from 500,000 to 1,500,000 shares. As of March 31, 1999, the Company had
repurchased 422,574 shares for approximately $2.8 million.
During the quarter ended March 31, 1999, the Company opened seven
internally developed Dental Centers, three in Florida, three in Georgia and one
in Tennessee, at an estimated cost of approximately $175,000 each. This cost
includes the cost of equipment, leasehold improvements and working capital.
NOTE 5 - SUBSEQUENT EVENTS
On April 1, 1999, the Company acquired the operations of Mid-Coast
Dental Services, Inc. ("MCDS") for $780,000 cash, $145,000 in notes and the
assumption of certain liabilities. MCDS operations include nine Dental Centers
opened at various times throughout the last nine months. Prior to closing, MCDS
had subleased the Dental Center facilities from the Company. The Company has
approximately $1.6 million invested in the tangible assets of these nine Dental
Centers in connection with its development agreement with MCDS. These de novo
Dental Centers, while early stage, had a combined gross revenue run rate of
approximately $2.1 million as of March 31, 1999. In connection with this
acquisition, the Company acquired the long-term management agreement between
MCDS and Adam Diasti D.D.S. & Associates, Inc., the terms of which are
substantially similar to the Services and Support Agreements with the Coast P.A.
Adam Diasti, the President of the Company, is the sole shareholder of Adam
Diasti D.D.S. & Associates, the professional corporation that employs MCDS's
doctors and hygienists.
6
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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. As of March 31,
1999, the Company had 113 Dental Centers consisting of 53 internally developed
and 60 acquired Dental Centers. The Company derives its revenue through fees
earned from the Company's managed professional associations (collectively the
"Coast P.A.") for providing management services and support at the Dental
Centers, located in Florida, Georgia, Tennessee and Virginia. As of March 31,
1999, 116 Coast Dentists were employed by the Coast P.A., serving over 725,000
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 Agreements with the 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. have ranged
from 65.0% to 76.0% of the Dental Centers' gross revenue, net of refunds and
discounts since October 1, 1996. As a result of an adjustment in services and
support fees approved by the Audit Committee, beginning in February 1999 the
services and support fees are expected to average between 71.0% and 73.0% over
the next several years. 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
based upon negotiations between the Audit Committee and the Coast P.A. The
Company pays, out of the services and support fee, all of the operating and
non-operating expenses incurred by the Coast P.A. at the Dental Centers, except
for the salaries and benefits of the Coast Dentists and dental hygienists. For
the period June 1, 1997 through January 31, 1999, the Company paid the Coast
P.A. the sum of $50,000 in connection with each internally developed Dental
Center it committed to open, in consideration for the Coast P.A.'s agreement to
expand the Services and Support Agreements to include the new internally
developed Dental Centers.
The Company opened one internally developed Dental Center in 1996,
nine in 1997, 25 in 1998 and seven in the quarter ended March 31, 1999 in
Florida, Georgia and Tennessee. The average cost to the Company of an
internally developed Dental Center is approximately $175,000, which includes
the cost of equipment, leasehold improvements and working capital. 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 in 1999. Management
believes that the strategy of focusing on internally developed Dental Centers
is an effective use of its working capital and provides for low cost expansion.
On April 1, 1999, the Company acquired the operations of Mid-Coast
Dental Services, Inc. ("MCDS"). MCDS operations include nine Dental Centers
opened at various times throughout the last nine months. The Dental Centers
were internally developed by MCDS and are now being integrated into the Coast
Operating Model.
7
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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 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,
-------------------------
1998 1999
-------------------------
<S> <C> <C>
Net revenue............................................................ 100.0% 100.0%
Dental Center expenses:
Staff salaries....................................................... 29.8 32.1
Dental supplies and lab fees......................................... 14.3 15.4
Advertising.......................................................... 6.3 7.0
Rent................................................................. 10.4 13.2
Depreciation......................................................... 3.3 4.4
Other................................................................ 2.6 3.0
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Total Dental Center expenses....................................... 66.7 75.1
----- -----
Gross profit....................................................... 33.3 24.9
General and administrative............................................. 8.8 9.2
Development costs...................................................... 7.8 --
Depreciation and amortization.......................................... 3.1 2.6
----- -----
Operating profit................................................... 13.6 13.1
Interest income........................................................ 7.3 2.4
----- -----
Income before income tax expense....................................... 20.9 15.5
Income tax expense..................................................... 7.5 5.3
----- -----
Income before cumulative effect of a change in accounting principle.... 13.4 10.2
Cumulative effect of a change in accounting principle.................. 8.7 --
----- -----
Net income............................................................. 4.7 10.2
===== =====
</TABLE>
QUARTER ENDED MARCH 31, 1999 COMPARED TO QUARTER ENDED MARCH 31, 1998
Net Revenue. Net revenue increased 49.7% from $7.3 million for the
quarter ended March 31, 1998 to $10.9 million for the quarter ended March 31,
1999. This increase was primarily due to the increase in net revenue
attributable to the 57 comparable Dental Centers (Dental Centers that were open
throughout the periods being compared), the 22 acquired Dental Centers in 1998
(including the two consolidated acquired Dental Centers) and the 25 internally
developed Dental Centers in 1998. Increases in net revenue are primarily driven
by increases in patient visits. Patient visits increased 47.5% from 85,061 for
the quarter ended March 31, 1998 to 125,490 for the quarter ended March 31,
1999. As of February 1, 1999, the Company amended its services and support fees
to 73.0%. Therefore, the Dental Center expenses listed below represent a higher
percentage of net revenue.
Staff Salaries. Staff salaries increased 61.2% from $2.2 million for
the quarter ended March 31, 1998 to $3.5 million for the quarter ended March 31,
1999. This increase in staff salaries was primarily caused by an increase in
Dental Center regional management and Dental Center staffing due to the addition
of the 22 acquired and 25 internally developed Dental Centers during 1998. While
an internally developed Dental Center can operate with a relatively limited
dental staff in the early stages of its development, the services of a dentist,
dental hygienist, dental assistant and front desk manager are still necessary.
As a result, staff salaries as a percentage of net revenue will typically be
higher in the first six months of operation until patient visits are increased.
In addition, for acquired Dental Centers, staff salaries as a percentage of net
revenue will typically be higher in the first three to six months following an
acquisition as the Company implements the Coast Operating Model to increase
productivity and efficiency. Staff salaries include the compensation paid to
administrative staff at each Dental Center, including dental assistants, office
managers, sterilization technicians and front desk managers.
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Dental Supplies and Lab Fees. Dental supplies and lab fees increased
61.1% from $1.0 million for the quarter ended March 31, 1998 to $1.7 million for
the quarter ended March 31, 1999. This increase was caused by the increase in
patient visits and dental services provided at the 113 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 an acquisition as the Company implements
the Coast Operating Model to increase productivity and efficiency.
Advertising. Advertising expense increased 68.3% from $.5 million for
the quarter ended March 31, 1998 to $.8 million for the quarter ended March 31,
1999. This increase was caused primarily by implementation of a more aggressive
advertising program, including television, in markets where internally developed
Dental Centers were open.
Rent. Rent expense increased 90.0% from $.8 million for the quarter
ended March 31, 1998 to $1.4 million for the quarter ended March 31, 1999. This
increase was caused primarily by the addition of the 22 acquired and 25
internally developed Dental Centers during 1998. The 25 internally developed
Dental Centers are typically larger than the ones previously built and
aggressive development along with new market penetration have increased rent
expense. The acquired Dental Centers also typically have a higher rent expense.
Depreciation. Depreciation expense at the Dental Centers increased
97.2% from $.2 million for the quarter ended March 31, 1998 to $.5 million for
the quarter ended March 31, 1999. The increase was primarily associated with the
increase in fixed assets from the 22 acquired and 25 internally developed Dental
Centers during 1998.
Other Expenses. Other expenses increased 71.0% from $.2 million for the
quarter ended March 31, 1998 to $.3 million for the quarter ended March 31,
1999. This increase was caused primarily by increases in insurance costs, credit
card discounts and other costs associated with the 22 acquired and 25 internally
developed Dental Centers.
General and Administrative Expenses. General and administrative
expenses increased 56.8% from $.6 million for the quarter ended March 31, 1998
to $1.0 million for the quarter ended March 31, 1999. This increase was caused
primarily by the increasing corporate administrative staff, professional fees,
rent and insurance costs due to the growth of the Company. General and
administrative expenses primarily consist of expenses incurred at the corporate
office.
Development Costs. Development costs decreased $.6 million for the
quarter ended March 31, 1999 in comparison to the prior year. This decrease was
caused primarily by the fee paid to the Coast P.A. in accordance with the
Services and Support Agreement for each of the 14 internally developed Dental
Centers which the Coast P.A. agreed to develop during 1998. The Company decided
to early adopt AICPA Statement of Position No. 98-5, Reporting on the Costs of
Start-Up Activities ("SOP 98-5") effective January 1, 1998. SOP 98-5 requires
all costs associated with the development of internally developed Dental Centers
be expensed as incurred. Effective February 1, 1999, the Company and the Coast
P.A. have emended the Services and Support Agreements to cancel the $50,000
payment to the Coast P.A., in connection with each internally developed Dental
Center.
Depreciation and amortization. Depreciation and amortization expenses
increased 26.3% from $.2 million for the quarter ended March 31, 1998 to $.3
million for the quarter ended March 31, 1999. This increase was caused primary
by the expansion of the corporate headquarters and the amortization of service
and support agreements and other.
Interest income, net. Interest income, net decreased 50.1% from $.5
million for the quarter ended March 31, 1998 to $.3 million for the quarter
ended March 31, 1999. This decrease was caused primarily by a decrease of the
Company's invested cash balances.
Income Taxes. Income taxes increased 4.5% from $.5 million for the
quarter ended March 31, 1998 to $.6 million for the quarter ended March 31,
1999. This increase was primarily attributable to the increase in income from
tax-free investments.
9
<PAGE> 10
Cumulative effect of a change in accounting principle. Development costs
paid to Coast P.A. beginning in June 1997 related to the expansion of dental
offices into new and existing markets were accounted for as deferred development
costs. In 1998, the Company adopted SOP 98-5, changed its accounting to charge
such costs to expense as incurred, and recorded the cumulative effect on
retained earnings as of January 1, 1998 of approximately $1.0 million ($.6
million net of tax).
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).
The Company has a revolving credit facility with NationsBank (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 May 7,
1999, the Company had available the entire $15.0 million for borrowing.
The Company has approximately $13.8 million in available-for-sale
investments which are invested in tax-free municipal bonds with interest rates
ranging between 3.85% to 4.9%. Since the investments have ratings ranging from
A1 to AAA, the Company believes that these investments have a low market risk
and can easily be converted to cash, if needed.
During the quarter ended March 31, 1999, the Company entered into a
purchase agreement with two dental practices whereby the Company acquired all of
the tangible assets of the dental practice. The purchase price for these
acquired Dental Centers was approximately $.7 million, consisting of $.4 million
in cash and $.3 million in promissory notes.
The Company added seven internally developed Dental Centers during the
quarter ended March 31, 1999 in Florida, Georgia and Tennessee at an average
cost of approximately $175,000, which includes the cost of equipment, leasehold
improvements and working capital.
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 principally through existing cash and
expected cash flow from operations.
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 00 as 1900 instead of 2000. This could cause many computer
systems, computer applications and non-information systems 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. In
1997, the Company created a Year 2000 committee tasked with evaluating the year
2000 issue and taking the appropriate actions. The year 2000 committee has
developed and is currently implementing a comprehensive plan (the "Plan") to
make its information technology and non-information technology systems and
applications ("IT Assets") year 2000 ready. The Plan covers the following
phases: (i) inventory of all IT Assets, (ii) assessment of repair or replacement
requirements, (iii) testing of IT Assets to determine correct manipulation of
dates and date-related data, (iv) verification that phases (i) through (iii)
were properly completed for all IT Assets, (v) verification of significant third
party year 2000 readiness and (vi) creation of contingency plans, if necessary,
in the event of year 2000 failures.
10
<PAGE> 11
The first five phases of the Plan have been completed for the majority
of IT Assets that have been internally developed and a significant portion of
the first five phases have been completed for IT Assets that were developed by
third parties. The completion of the first five phases for third party developed
IT Assets is expected by September 30, 1999.
The Company is currently surveying third parties who provide both
critical IT Assets and non-information technology related goods and services
(e.g. utility companies, supply transportation companies and insurance
companies) to (1) evaluate their year 2000 compliance plans and state of
readiness and (2) determine whether a year 2000 related event will impede the
ability of such third parties to continue to provide such goods and services as
the year 2000 approaches.
The Company has not yet completed phase (vi) of the Plan, but this
phase will be continuously monitored as the Company acquires more information
about the preparations of its third party vendors. Some risks related to the
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.
As of March 31, 1999, the costs associated with the year 2000 issue
have been immaterial and the Company estimates that the future costs will not
have a material impact on the Company's financial condition or results of
operations. However, there can be no guarantee that the actual costs will not
differ materially from the costs estimated to be incurred by the Company. The
Company intends to fund the costs of implementing the Plan from its operations.
Until the Plan can be completed, the Company cannot fully estimate the
risks of its year 2000 issue. To date, the Company has not identified any IT
Assets that present a material risk of not being year 2000 ready or for which a
suitable alternative cannot be implemented. However, as the Plan proceeds into
its final phases, it is possible that the Company may identify IT Assets that do
present a risk of a year 2000 related disruption. It is also possible that such
a disruption could have a material adverse effect on the financial condition and
results of operations. Also, there can be no assurances that third parties will
be year 2000 compliant or that such third parties systems will not fail due to
noncompliance and result in a disruption of service to the Company which could
in turn have a material adverse effect on the Company's operations.
On February 10, 1999, the Company announced that its Board of Directors
authorized the repurchase of up to 500,000 shares of its outstanding common
stock. On March 25, 1999, the Company announced that its Board of Directors
authorized the increase of the previously announced share repurchase program
from 500,000 to 1,500,000 shares. The Company has been and will repurchase for
cash these shares in the open market or in privately negotiated transactions,
from time to time, subject to market conditions. The repurchase program will
continue through February 9, 2000 unless sooner terminated by the Board of
Directors. No shares will be repurchased from the Company's officers or
directors. The Company intends to hold the repurchased shares in treasury for
general corporate purposes. As of March 31, 1999, the Company had repurchased
422,574 shares for approximately $2.8 million.
Based upon the Company's anticipated capital needs for operations of
its business, general corporate purposes, the addition of Dental Centers,
repayment of certain debts and share repurchases, 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 2000. Thereafter, it is anticipated by the Company that future
acquisitions and expansion will be funded primarily with cash on hand, cash flow
from operations and borrowings under the revolving line of credit. In the event
the Company expands at a more rapid rate, the Company could 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
See Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation, Section C.
11
<PAGE> 12
Liquidity for further information
SPECIAL NOTICE REGARDING FORWARD LOOKING STATEMENTS
This Form 10-Q, the quarterly report, 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 terms "Coast Dental Services,"
"company," "we," "our" and "us" refer to Coast Dental Services, Inc. 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 focus on the addition of
internally developed and certain select acquired Dental
Centers in accordance with the Company's growth strategy and
the impact on short term revenue and operating margins;
(ii) our liquidity and capital resources;
(iii) our financing opportunities and plans;
(iv) our future performance and operating results; and
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 to successfully add and integrate
internally developed Dental Centers;
(ii) any material inability to successfully identify, consummate
and integrate acquisitions at reasonable and anticipated
costs;
(iii) any adverse effect or limitations caused by any governmental
regulations or actions;
(iv) any adverse effect on continued positive cash flow or our
ability to obtain acceptable financing in connection with our
growth plans;
(v) any increased competition in business and in acquisitions;
(vi) inability to successfully conduct our business in new markets;
(vii) any adverse impacts on our revenue or operating margins due to
the expected increase of internally developed 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 our
professional association customers and their continued ability
to grow in conjunction with our growth;
(ix) any inability to meet or exceed analysts expectations in any
future period;
(x) any material decrease in the services and support fees
negotiated between the audit committee and the Coast P.A.;
12
<PAGE> 13
(xi) unanticipated costs and expenses resulting from our expansion
which impact margins;
(xii) any slow down in the number of patients or the services
performed by Dentists which impacts revenue;
(xiii) any material decrease in the number of Dentists available to
service patients, would affect productivity and impact overall
revenue; and
(xiv) any higher than anticipated seasonality resulting in a lower
number of patient visits in the Florida market in the summer
months.
We undertake no obligation to publicly update or revise the forward looking
statements made in this Form 10-Q or annual report to reflect events or
circumstances after the date of this Form 10-Q and annual report or to reflect
the occurrence of unanticipated events.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Unregistered Securities during the First Quarter
During the quarter ended March 31, 1999, the Company issued
non-negotiable promissory notes in the aggregate sum of $.4 million to three
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.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K.
None.
13
<PAGE> 14
COAST DENTAL SERVICES, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company 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, 1999.
COAST DENTAL SERVICES, INC.
By: /s/ TEREK DIASTI
------------------------------------------------
TEREK DIASTI
Chief Executive Officer, 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)
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
<S> <C>
11.1 Computation of Per Share Earnings.
27 Financial Data Schedule for the quarter March 31, 1999 (for SEC use
only)
</TABLE>
15
<PAGE> 1
COAST DENTAL SERVICES, INC.
EXHIBIT 11.1
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1998 1999
---------------------------
<S> <C> <C>
Income before cumulative effect of a change in accounting principle.... $ 972,803 $1,117,930
Cumulative effect of a change in accounting principle.................. 633,813 --
---------- ----------
Net income............................................................. $ 338,990 $1,117,930
========== ==========
SHARES:
Basic weighted average number of shares outstanding.................... 7,608,055 7,538,686
Additional shares issuable under stock options for diluted earnings
per share............................................................ 128,173 31
---------- ----------
Diluted weighted average number of shares outstanding.................. 7,736,228 7,538,717
========== ==========
BASIC EARNINGS PER SHARE:
Income before cumulative effect of a change in accounting principle.... $ .13 $ .15
Cumulative effect of a change in accounting principle.................. .08 $ --
---------- ----------
Net income............................................................. $ .05 $ .15
========== ==========
DILUTED EARNINGS PER SHARE:
Income before cumulative effect of a change in accounting principle.... $ .13 $ .15
Cumulative effect of a change in accounting principle.................. .08 $ --
---------- ----------
Net income............................................................. $ .05 $ .15
========== ==========
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COAST DENTAL SERVICES FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,077,295
<SECURITIES> 17,743,486
<RECEIVABLES> 6,132,615
<ALLOWANCES> 0
<INVENTORY> 2,660,109
<CURRENT-ASSETS> 35,321,290
<PP&E> 18,342,469
<DEPRECIATION> 1,153,428
<TOTAL-ASSETS> 72,049,577
<CURRENT-LIABILITIES> 5,946,913
<BONDS> 2,975,706
0
0
<COMMON> 7,623
<OTHER-SE> 63,444,674
<TOTAL-LIABILITY-AND-EQUITY> 63,452,297
<SALES> 10,912,548
<TOTAL-REVENUES> 10,912,548
<CGS> 0
<TOTAL-COSTS> 8,192,835
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,540
<INCOME-PRETAX> 1,692,781
<INCOME-TAX> 574,851
<INCOME-CONTINUING> 1,117,930
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,117,930
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
