<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 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 August 6, 1999:
6,587,624.
===============================================================================
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
COAST DENTAL SERVICES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED
DECEMBER 31, JUNE 30,
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,581,798 $ 6,992,980
Available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . . 13,785,320 9,728,544
Management fee receivable from Coast P.A. . . . . . . . . . . . . . . . . . . . . 5,235,035 7,514,489
Supplies, inventory and small tools. . . . . . . . . . . . . . . . . . . . . . . . 2,481,552 2,965,508
Prepaid expenses and other assets. . . . . . . . . . . . . . . . . . . . . . . . . 1,096,871 632,608
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 560,871 560,871
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,741,447 28,395,000
Note receivable from Coast P.A., non-interest bearing. . . . . . . . . . . . . . . . 529,218 529,218
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,297,559 19,819,872
Non-compete agreement, net of amortization of $332,235
and $397,711, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . 818,440 752,964
Dental services agreement, net of amortization of $619,233
and $974,613, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,870,936 18,331,765
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,244,175 1,916,060
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $71,501,775 $69,744,879
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,320,536 $ 3,584,142
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,172,100 1,649,449
Current maturities of debt and capital lease obligations . . . . . . . . . . . . . 1,284,060 952,074
----------- -----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,776,696 6,185,665
Long-term debt and capital lease obligations, excluding current maturities . . . . . 1,635,703 1,480,083
----------- -----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,412,399 7,665,748
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 6,850,750
shares outstanding, respectively . . . . . . . . . . . . . . . . . . . . . . . . 7,618 6,851
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,908,289 55,584,312
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,603,397 8,231,669
----------- -----------
66,519,304 63,822,832
Less: Stock option receivable from Coast P.A., non-interest bearing. . . . . . . 1,429,928 1,743,701
----------- -----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . 65,089,376 62,079,131
----------- -----------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . $71,501,775 $69,744,879
=========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
2
<PAGE> 3
COAST DENTAL SERVICES, INC.
CONDENSED STATEMENTS OF INCOME - UNAUDITED
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1999 1998 1999
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenue....................................... $8,072,108 $11,166,127 $15,360,487 $22,078,675
Dental Center expenses:
Staff salaries.................................. 2,655,601 3,979,766 4,828,109 7,480,910
Dental supplies and lab fees.................... 1,168,428 1,755,451 2,211,942 3,435,995
Advertising..................................... 487,992 814,936 944,063 1,582,488
Rent............................................ 962,034 1,678,788 1,719,704 3,118,425
Depreciation.................................... 268,601 594,295 511,803 1,073,991
Other........................................... 206,530 328,413 396,180 652,675
---------- ----------- ----------- -----------
Total Dental Center expenses.................. 5,749,186 9,151,649 10,611,801 17,344,484
---------- ----------- ----------- -----------
Gross profit.................................. 2,322,922 2,014,478 4,748,686 4,734,191
General and administrative expenses............... 807,683 1,133,102 1,449,018 2,138,681
Development costs................................. 367,879 -- 935,757 --
Depreciation and amortization..................... 171,743 279,897 399,168 567,175
---------- ----------- ----------- -----------
Operating profit.............................. 975,617 601,479 1,964,743 2,028,335
Interest (expense) income, net.................... 455,279 140,184 988,919 406,109
---------- ----------- ----------- -----------
Income before income taxes........................ 1,430,896 741,663 2,953,662 2,434,444
Income tax expense................................ 431,239 231,321 981,202 806,172
---------- ----------- ----------- -----------
Income before cumulative effect of a change in
accounting principle............................ 999,657 510,342 1,972,460 1,628,272
Cumulative effect of a change in accounting
principle, net of income tax of $382,403........ -- -- 633,813 --
---------- ----------- ----------- -----------
Net income........................................ $ 999,657 $ 510,342 $ 1,338,647 $ 1,628,272
========== =========== =========== ===========
BASIC EARNINGS PER SHARE:
Income before cumulative effect of a change in
accounting principle............................ $ .13 $ .07 $ .26 $ .22
Cumulative effect of a change in accounting
principle....................................... -- -- .08 --
---------- ----------- ----------- -----------
Net income........................................ $ .13 $ .07 $ .18 $ .22
========== =========== =========== ===========
DILUTED EARNINGS PER SHARE:
Income before cumulative effect of a change in
accounting principle............................ $ .13 $ .07 $ .26 $ .22
Cumulative effect of a change in accounting
principle....................................... -- -- .08 --
---------- ----------- ----------- -----------
Net income........................................ $ .13 $ .07 $ .18 $ .22
========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic........................................... 7,621,084 7,103,794 7,616,034 7,319,653
========== =========== =========== ===========
Diluted......................................... 7,713,029 7,103,847 7,717,675 7,319,829
========== =========== =========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
3
<PAGE> 4
COAST DENTAL SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................... $ 1,338,647 $ 1,628,272
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation...................................................... 561,322 1,220,310
Amortization...................................................... 249,450 420,856
Deferred income tax (benefit) expense............................. (721,398) --
Changes in operating assets and liabilities:
Increase in management fee receivable from Coast P.A.............. (938,572) (2,279,454)
Increase in supplies, inventory and small tools................... (860,041) (483,956)
Increase in prepaid expenses and other assets..................... (425,958) 464,263
Increase in accounts payable and other accrued expenses........... 1,379,813 1,740,955
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 583,263 2,711,246
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................ (5,217,953) (4,682,623)
Acquired assets, including intangible assets........................ (3,629,739) (2,876,209)
Sale of available-for-sale investments.............................. -- 4,056,776
Increase in notes receivable from Coast P.A......................... (210,218) --
Increase in other assets............................................ (500,635) (671,885)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES......................... (9,558,545) (4,173,941)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options............................. 103,187 6,128
Purchase of treasury stock.......................................... (86,349) (4,644,645)
Proceeds from long-term debt........................................ 678,230 374,332
Payments on long-term debt.......................................... (405,208) (822,100)
Payments on capital leases.......................................... (41,585) (39,838)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES........... 248,275 (5,126,123)
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS................................. (8,727,007) (6,588,818)
Cash and cash equivalents at beginning of period.................... 46,343,591 13,581,798
------------ ------------
Cash and cash equivalents at end of period.......................... $ 37,616,584 $ 6,992,980
============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid for interest.............................................. $ 48,123 $ 101,972
============ ============
Cash paid for income taxes.......................................... $ 952,500 $ 324,000
============ ============
Non-cash stock option receivable to Coast P.A....................... $ 641,862 $ 149,094
============ ============
</TABLE>
See Notes to Condensed Financial Statements.
4
<PAGE> 5
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 quarter and six months ended June 30,
1998 have been reclassified to conform to the quarter and six months ended June
30, 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
During the quarter ended June 30, 1999, the Company opened three
internally developed Dental Centers, one in Florida, one in Georgia and one in
Virginia, at an estimated cost of approximately $175,000 each. This cost
includes the cost of equipment, leasehold improvements and working capital.
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. The acquisition has been accounted for as a
purchase. The total cost has been allocated to the dental service agreement.
MCDS operations included eight Dental Centers opened at various times
throughout the last year. 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 eight 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 prior to the acquisition date. In connection with this acquisition, the
Company acquired the long-term management agreement between MCDS and
5
<PAGE> 6
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.
NOTE 5 - SUBSEQUENT EVENTS
During July 1999, the Company opened one internally developed Dental
Center in Florida at an estimated cost of approximately $175,000. This cost
includes the cost of equipment, leasehold improvements and working capital.
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. As of June 30,
1999, the Company had 122 Dental Centers consisting of 57 internally developed
and 65 acquired Dental Centers (including the eight denovo's acquired from
MCDS). 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 June 30, 1999, the Coast P.A employed
128 Coast Dentists. The Company expects to expand the Coast Dental Network into
new and existing markets principally through the addition of internally
developed and also through select 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, 26 in 1998 and ten in the six months ended June 30, 1999 in
Florida, Georgia, Tennessee and Virginia. 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 continue to increase.
Management believes in spite of a start up period which can result in lowering
margins that the strategy of focusing on internally developed Dental Centers is
an effective long term use of its working capital providing for low cost
expansion.
On April 1, 1999, the Company acquired the operations of Mid-Coast
Dental Services, Inc. ("MCDS"). MCDS operations include eight Dental Centers
opened at various times throughout the last nine months. These Dental Centers
were internally developed by MCDS and are now being integrated into the rest of
the Coast Dental network.
The Company began to implement its rollout plan for the conversion of
its' Dental Center software during the six months ended June 30, 1999.
Approximately 70% of the Dental Centers had been trained and 50% converted as
of June 30, 1999 and the Company expects to have substantially completed the
rollout early in the 4th quarter of 1999. The estimated incremental direct
cost, including hardware, software and implementation costs of the software
conversion in 1999 is approximately $750,000. The conversion is also slightly
impacting revenues at Dental Centers as training occurs.
Additionally, as part of the Company's long term plan, the Company is
continuing to enhance its field management structure. The Company expects to
continue to add regional operations vice presidents to oversee up to 40 Dental
Centers in a region. While management believes that this level of management
will enhance the profitability of the Company, there could be some pressure on
the margins in the short term until the benefits of additional management are
realized.
7
<PAGE> 8
The Company began to implement its announced share repurchase program
in February, 1999. As of August 6, 1999, the Company had repurchased
approximately 1,035,000 shares for approximately $5.9 million, thus reducing
cash and interest income during the quarter with a corresponding reduction of
the weighted average shares outstanding during the period. Management believes
that the share repurchase will have a positive impact on earnings per share in
subsequent quarters.
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 and six months indicated. The performance of the Company during these
quarters and six months are not indicative of future financial results or
conditions.
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1999 1998 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenue ......................................... 100.0% 100.0% 100.0% 100.0%
Dental Center expenses:
Staff salaries .................................... 32.9 35.6 31.4 33.9
Dental supplies and lab fees ...................... 14.5 15.7 14.4 15.6
Advertising ....................................... 6.0 7.3 6.1 7.2
Rent .............................................. 11.9 15.0 11.2 14.1
Depreciation ...................................... 3.3 5.4 3.4 4.8
Other ............................................. 2.6 3.0 2.6 3.0
----- ----- ----- -----
Total Dental Center expenses .................... 71.2 82.0 69.1 78.6
----- ----- ----- -----
Gross profit .................................... 28.8 18.0 30.9 21.4
General and administrative .......................... 10.0 10.1 9.4 9.7
Development costs ................................... 4.6 -- 6.1 --
Depreciation and amortization ....................... 2.1 2.5 2.6 2.5
----- ----- ----- -----
Operating profit ................................ 12.1 5.4 12.8 9.2
Interest income ..................................... 5.6 1.3 6.4 1.8
----- ----- ----- -----
Income before income tax expense .................... 17.7 6.7 19.2 11.0
Income tax expense .................................. 5.3 2.1 6.4 3.6
----- ----- ----- -----
Income before cumulative effect of a change in
accounting principle .............................. 12.4 4.6 12.8 7.4
Cumulative effect of a change in accounting principle -- -- 4.1 --
----- ----- ----- -----
Net income .......................................... 12.4 4.6 8.7 7.4
===== ===== ===== =====
</TABLE>
QUARTER AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO QUARTER AND SIX MONTHS
ENDED JUNE 30, 1998
Net Revenue. Net revenue increased 38.3% and 43.7% for the quarter and
six months ended June 30, 1999, from $8.1 million to $11.2 million and from
$15.4 million to $22.1 million, respectively. This increase was primarily due
to the increase in net revenue attributable to the increase in Dental Centers
from 90 at June 30, 1998 to 122 at June 30, 1999. The increases in net revenue
are also primarily driven by increases in patient visits. Patient visits
increased 39.7% from 105,959 for the quarter ended June 30, 1998 to 148,054 for
the quarter ended June 30, 1999 and 43.2% from 191,020 for the six months ended
June 30, 1998 to 273,544 for the six months ended June 30, 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 49.9% and 54.9% for the
quarter and six months ended June 30, 1999, from $2.7 million to $4.0 million
and from $4.8 million to $7.5 million, respectively. This increase in staff
salaries was primarily caused by the continued increase in Dental Center
regional management and an increase in Dental Center staffing due to the
addition of approximately 25 internally developed Dental Centers added over the
last twelve months. Additionally, a portion of the increase is attributable to
the substantial amounts of incremental overtime in the Dental Centers as the
Company continues the rollout of its new Dental Center software.
8
<PAGE> 9
Dental Supplies and Lab Fees. Dental supplies and lab fees increased
50.2% and 55.3% for the quarter and six months ended June 30, 1999, from $1.2
million to $1.8 million and from $2.2 million to $3.4 million, respectively.
This increase was primarily caused by the substantial increase in the number of
new affiliated dentists in the Dental Centers from 80 in the quarter ended June
30, 1998 to 128 in the quarter ended June 30, 1999. These dentists typically
take a few quarters to become familiar with the cost savings typically
available to Coast Dentists.
Advertising. Advertising expense increased 67.0% and 67.6% for the
quarter and six months ended June 30, 1999, from $.5 million to $.8 million and
from $.9 million to $1.6 million, respectively. This increase was caused
primarily by implementation of television ads to the advertising mix utilized
by the Company.
Rent. Rent expense increased 74.5% and 81.3% for the quarter and six
months ended June 30, 1999, from $1.0 million to $1.7 million and from $1.7
million to $3.1 million, respectively. This increase was caused primarily by
the increasing square footage of the new Dental Centers, the aggressive
development schedule with 25 new internally developed Dental Centers added over
the last twelve months and the Company's growth into new markets.
Depreciation. Depreciation expense at the Dental Centers increased
121.3% and 109.8% for the quarter and six months ended June 30, 1999, from $.3
million to $.6 million and from $.5 million to $1.1 million, respectively. The
increase was directly attributable to the addition of 32 Dental Centers (25 of
which are new internally developed Dental Centers) during the last twelve
months without the corresponding revenue associated with the new Dental
Centers.
Other Expenses. Other expenses increased 59.0% and 64.7% for the
quarter and six months ended June 30, 1999, from $.2 million to $.3 million and
from $.4 million to $.7 million, respectively. This increase was caused
primarily by increases in insurance costs, credit card discounts and other
costs associated with the addition of the 32 Dental Centers during the last
twelve months.
General and Administrative Expenses. General and administrative
expenses increased 40.3% and 47.6% for the quarter and six months ended June
30, 1999, from $.8 million to $1.1 million and from $1.4 million to $2.1
million, respectively. Primarily the increasing corporate administrative staff
and technology due to the growth of the Company caused this increase. General
and administrative expenses primarily consist of expenses incurred at the
corporate office.
Development Costs. Development costs decreased $.4 million and $.9
million for the quarter and six months ended June 30, 1999 in comparison to the
prior year. Primarily the fee paid to the Coast P.A. in accordance with the
Services caused this decrease 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 amended 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 63.0% and 42.1 % for the quarter and six months ended June 30, 1999,
from $.2 million to $.3 million and from $.4 million to $.6 million,
respectively. The addition of assets at the corporate headquarters and the
amortization of additional acquired dental service agreements and other
intangible assets caused this increase.
Interest income, net. Interest income, net decreased 69.2% and 58.9%
for the quarter and six months ended June 30, 1999, from $.5 million to $.1
million and from $1.0 million to $.4 million, respectively. This decrease was
caused primarily by a decrease of the Company's invested cash balances which
was primarily utilized for the Company's expansion of its Dental Centers and to
repurchase stock pursuant to its stock repurchase initiative.
9
<PAGE> 10
Income Taxes. Income taxes decreased 46.4% and 17.8% for the quarter
and six months ended June 30, 1999, from $.4 million to $.2 million and from
$1.0 million to $.8 million, respectively. This decrease is a direct result of
the lower earnings experienced during the periods. The effective tax rate
increased slightly during the quarter as compared to the same quarter in 1998
due to the lower tax free interest income in 1999.
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).
During the quarter, the Company's $15.0 million revolving credit
facility with NationsBank expired. The Company has a commitment for a revolving
credit facility with NationsBank for an aggregate of up to $20.0 million for
the purpose of acquisitions or the construction of new dental offices, capital
expenditures and short-term working capital. The Company anticipates that the
entire $20.0 million will be available for borrowing once the facility is
finalized.
The Company has approximately $9.7 million in available-for-sale
investments, which are invested, in tax-free municipal bonds with interest
rates ranging between 3.5% to 4.0%. 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 June 30, 1999, the Company entered into a
purchase agreement with MCDS whereby the Company acquired all of the tangible
assets of the dental practices. The purchase price for these acquired Dental
Centers was approximately $.9 million, consisting of $.8 million in cash and
$.1 million in promissory notes and certain assumed liabilities. The Company
had built these Dental Centers, which currently have a net asset value of $1.3
million, and leased them to MCDS.
The Company added three internally developed Dental Centers during the
quarter ended June 30, 1999 in Florida, Georgia and Virginia 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.
The Company began to implement its rollout plan for the conversion of
its' Dental Center software during the six months ended June 30, 1999. The
estimated incremental direct cost, including hardware, software and
implementation costs, of the software conversion in 1999 is approximately
$750,000. The Dental Center software being installed is year 2000 compliant.
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.
10
<PAGE> 11
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, to the extent deemed necessary.
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 June 30, 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.
The Company cannot fully estimate the risks of its year 2000 issue,
however, 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. 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
continue to repurchase, for cash, its 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 retire the repurchased
shares. As of August 6, 1999, the Company had repurchased 1,034,900 shares for
approximately $5.9 million.
The Company anticipates that for the balance of 1999, it will need to
spend approximately $2.5 million on capital expenditures including, new
internally developed Dental Centers, refurbishment and relocation of existing
Dental Centers and other capital equipment needs in both the Corporate office
and the Dental Centers.
11
<PAGE> 12
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, its anticipated 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 for the foreseeable future. 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. 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;
12
<PAGE> 13
(v) any increased competition in business and in acquisitions;
(vi) inability to successfully conduct our business in newer
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.;
(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;
(xiv) any higher than anticipated seasonality resulting in a lower
number of patient visits in the Florida market in the summer
months;
(xv) continued and increased negative effects on our business from
the conversion of our Dental Center software and any inability
to successfully complete the conversion and implementation of
our Dental Center software could negatively affect or results;
and
(xvi) the inability to add regional operations vice presidents and
the inability of such positions to positively impact operating
results.
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 June 30, 1999, the Company issued a
non-negotiable promissory note in the aggregate sum of $.1 million to one
seller 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 note issued in this transaction is a "security" as
defined by Section 2(1) of the Securities Act. However, in the event the
promissory note is deemed to be a security this transaction would be exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) because it did not involve any public offering.
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 21, 1999. Each share of
13
<PAGE> 14
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 7,345,979 shares of common stock voted on the matters
described below.
(1) The stockholders elected, pursuant to the following vote, Joseph
Smith to the Company to hold office until his term expires and
until his successor has been duly elected and qualified. Mr.
Smith received 7,322,121 votes and 23,858 votes abstained.
(2) The stockholders approved the amendment of the Company's Stock
Option Plan to provide for additional shares. The amendment
received 4,351,812 votes, 553,337 votes against, 10,350 votes
abstained and 2,430,480 votes not cast on this non-routine
proposal.
(3) The stockholders approved the amendment of the Company's
Affiliated Professionals Stock Plan to provide for additional
shares. The amendment received 4,323,462 votes, 574,487 votes
against, 17,550 votes abstained and 2,430,480 votes not cast on
this non-routine proposal.
(4) The stockholders approved the proposal to ratify the appointment
of Deloitte and Touche LLP as the Company's independent auditors
for the fiscal year 1999. Deloitte and Touche LLP received
7,329,372 votes, 12,747 votes against and 3,860 votes abstained.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K.
None.
14
<PAGE> 15
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 August 13, 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)
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<S> <C>
4.5 Loan commitment letter dated August 4, 1999 by and among Coast Dental
Services, Inc. and NationsBank, N.A.
10.2 Loan commitment letter dated August 4, 1999 by and among Coast Dental
Services, Inc. and NationsBank, N.A. incorporated by reference to
exhibit 4.5
11.1 Computation of Per Share Earnings.
27 Financial Data Schedule for the quarter ended June 30, 1999 (for SEC
use only)
</TABLE>
16
<PAGE> 1
EXHIBIT 4.5
August 4, 1999
Mr. Joseph Smith
Chief Financial Officer
Coast Dental Services, Inc.
2502 Rocky Point Drive, Suite 1000
Tampa, FL 33607
Dear Joe:
Thank you for the opportunity to make the following commitment to you.
NationsBank, N.A. (the "Bank") is pleased to have approved for Coast Dental
Services, Inc. (the "Borrower") a credit facility consisting of a Revolving
Line of Credit in an amount not to exceed $20,000,000 (the "Loan"). This
commitment is to be used by you for the purpose of acquisitions or the
construction of new dental offices, capital expenditures, and short-term
working capital.
This commitment is subject to the execution and delivery to the Bank of legal
documents yet to be prepared, including, without limitation, a loan agreement,
promissory note, guaranties, collateral and security documents. All such
documents must be satisfactory in form and substance to the Bank and its
counsel. The making and funding of any loans under this commitment is expressly
subject to the terms and conditions set forth in the attached Terms and
Conditions.
TERMS AND CONDITIONS
BORROWER: Coast Dental Services, Inc.
PURPOSE: Acquisitions of or construction of new dental centers, capital
expenditures, and short-term working capital
AMOUNT OF LOAN: $20,000,000
MATURITY: Three years from closing
<PAGE> 2
INTEREST RATE: The interest rate shall be equal to the 30-day LIBOR plus the
applicable interest rate margin. The applicable interest rate margin with
respect to the LIBOR Rate option shall be based on the Borrower's consolidated
ratio of Funded Debt to EBITDA as follows:
<TABLE>
<CAPTION>
LIBOR UNUSED
FUNDED DEBT TO EBITDA MARGIN% FEE%
- --------------------- ------- ----
<S> <C> <C>
<1.00:1.00 1.25 .15
from 1.00:1.00 to 1.50:1.00 1.50 .15
from 1.50:1.00 to 2.25:1.00 1.75 .15
</TABLE>
STANDBY LETTERS OF CREDIT: There shall be a sub-limit for the issuance of
Standby Letters of Credit in an amount not to exceed $2,000,000. The Borrower
shall pay to the Bank an issuance fee on the aggregate amount of the letter of
credit available to be drawn at a rate equal to the applicable LIBOR margin.
Such Standby letters of credit shall have duration of not more than twelve (12)
months.
COMMITMENT FEE: Borrower agrees to pay a commitment fee of $10,000 payable at
closing.
REPAYMENT TERMS: Principal will be due upon maturity three years from closing,
with interest payable monthly.
LOAN DOCUMENTS: The Loan shall be made under and governed by definitive Loan
documents to be executed and delivered by the Borrower to the Bank and
containing the terms set forth in this commitment and such other terms,
conditions, representations, warranties and covenants as are usual and
customary in lending transactions such as the Loan, which documents may include
a promissory note, loan agreement, security agreement, guaranties, pledge
agreement, and such other documents executed and/or delivered by Borrower, any
guarantor or third party in connection with the Loan (collectively, the "Loan
Documents").
COLLATERAL: The Bank shall take a blanket lien on all assets of the Borrower
and Guarantors, including accounts receivable, chattel paper, inventory,
equipment, general intangibles and all replacements and substitutions thereof
and proceeds thereof. In addition, the Bank will take a first priority security
interest in the stock of all Guarantors.
GUARANTORS: This Loan shall be unconditionally and fully guaranteed by any
existing or future subsidiaries of the Borrower whose obligations to the Bank
shall be
2
<PAGE> 3
joint and several with Borrower and all other guarantors, if any, and shall be
on such other written terms as are acceptable to the Bank.
SURVIVAL: This commitment letter shall constitute one of the Loan Documents and
shall survive the closing of the Loan, the execution and delivery of all Loan
Documents, and the making of any advances or disbursements thereunder. In the
event of a conflict between a provision contained in this commitment letter and
a provision of any other Loan Document, the terms of the other Loan Document
shall control.
CONDITIONS TO FIRST ADVANCE: Prior to the making by the Bank of the first
advance to the Borrower, the following conditions precedent shall have been
satisfied.
The Bank shall have received, duly executed, all Loan Documents and any other
documents and instruments necessary or advisable in connection with the Loan,
all of which shall be in form and substance satisfactory to the Bank and its
counsel.
All financing statements, notices and other documents and instruments deemed by
the Bank and its counsel to be necessary or advisable in connection with the
collateral described herein shall have been recorded or filed in all necessary
places, and sent to or received by all necessary persons, as the case may be.
With respect to the personal property or other collateral described herein
referred to above, the Bank shall have received (i) casualty insurance policies
on tangible personal property naming the Bank as a loss payee thereunder, and
(ii) evidence satisfactory to the Bank as to the validity, enforceability and
priority of the Bank's security interest therein subject only to prior liens
referred to in this commitment and such other exceptions as may be acceptable
to the Bank in its sole discretion.
The Bank shall have received the written opinion of Borrower's counsel as to
the validity and enforceability of the Loan Documents and such other matters as
the Bank may reasonably require.
The Bank shall have received such other financial or other information as it
may reasonably require, including, without limitation, satisfactory review of
all Service and Support Agreements to which the Borrower is party.
3
<PAGE> 4
ADVANCE PROCEDURE: Advances on this Loan will be made by telephonic or written
communication from a person reasonably believed by the Bank to be an authorized
representative of the Borrower. Unless otherwise agreed by the Bank, all
advances will be made to a demand deposit account maintained at the Bank in the
name of the Borrower.
FINANCIAL COVENANTS: So long as the Borrower is indebted to the Bank, the
following financial covenants shall be applicable:
1. Borrower shall not permit its ratio of Total Liabilities to Tangible Net
Worth to exceed a maximum of 1.00 to 1.00 at any time.
2. Borrower shall not permit its ratio of Funded Debt to EBITDA to exceed a
maximum of 2.25 to 1.00 at any time. EBITDA shall be defined as net income plus
interest expense plus tax expense plus depreciation expense plus amortization
expense and shall be measured on a rolling four quarter basis. EBITDA shall
exclude any non-recurring or extraordinary cash or non-cash income.
3. Borrower shall maintain a Fixed Charge Coverage Ratio of not less than 2.50
to 1.00 at all times. This ratio shall be defined as EBITDA less cash taxes
less capital expenditures less dividends paid less the cost of share
repurchases plus cash and cash equivalents on hand at the end of the applicable
fiscal quarter end all divided by interest expense plus current maturities of
long term debt plus current maturities of capital leases. Cash and cash
equivalents on hand at the end of each fiscal quarter end shall be incorporated
into the Fixed Charge Coverage Ratio so long as the Borrowers cash balance is
in excess of $2,000,000. At such time as the cash and cash equivalents on hand
is less than $2,000,000 for two consecutive fiscal quarters, this shall no
longer be incorporated into the Fixed Charge Coverage Ratio calculation.
Capital Expenditures shall not include any cash outflow used for the purchase
of acquiring dental practices or any operational or capital expenditures
associated with funding the start-up of new dental offices. In addition,
current maturities of long term debt shall exclude any seller notes associated
with the acquisition of a dental practice so long as the Borrower has cash and
cash equivalents on hand at the applicable quarter end of at least $2,000,000
in excess of the amount of such seller note.
The above defined covenants shall be considered tentative until such time as
they are further agreed upon by both the Borrower and the Bank. The Borrowers
acceptance of this commitment letter shall not imply final acceptance of the
above financial
4
<PAGE> 5
covenants. However, the Borrowers acceptance of this commitment
letter shall imply acceptance of all other terms and conditions specified
herein.
REPORTING REQUIREMENTS: So long as the Borrower is indebted to the Bank, the
Borrower shall submit to the Bank the following:
1. Quarterly, within forty-five (45) days of the end of each quarter,
internally prepared consolidated financial statements of the Borrower,
including a balance sheet and income statement, the form of which may be equal
to the format required by the SEC.
2. Annually, within one-hundred twenty (120) days following the end of the
Borrower's fiscal year, a consolidated balance sheet and income statement
prepared in accordance with generally accepted accounting principles on an
audited basis by an independent certified public accountant acceptable to the
Bank, including statements of financial condition, income, cash flows and
changes in shareholders' equity.
All financial statements provided to the Bank shall be accompanied by a
Certificate of Compliance signed by a responsible officer of the Company, which
includes the Borrower's computation of all restrictive covenants defined
hereunder accompany the financial statements.
REPRESENTATIONS AND WARRANTIES: Customary, including confirmation of
corporation status and authority; execution, delivery and performance of Loan
Documents do not violate law or existing agreements; no litigation except as
disclosed to Bank; ownership of property; payment of taxes; no material adverse
change in financial condition or operations since March 31, 1999; principal
place of business; compliance with environmental laws and continuation of
representations and warranties.
PERMITTED ACQUISITIONS: The Borrower will be permitted to incur cash outlays
for the acquisition of existing dental practices or the development of new
dental offices of up to $8,000,000 in any given fiscal quarter and up to
$5,000,000 in any single transaction without prior Bank approval. In the event
of expenditures in excess of such amounts, the Borrower shall be required to
obtain approval from the Bank in writing in advance and such approval by the
Bank shall not be unreasonably withheld.
AFFIRMATIVE COVENANTS: Customary, including delivery of financial statements;
reports and other information requested by Bank; maintenance of insurance;
continuation of business and maintenance of existence; compliance with
5
<PAGE> 6
laws; payment of taxes; maintenance of property and notice of environmental
claims; notice of actual or potential contingent liabilities.
NEGATIVE COVENANTS: Customary, including: limitations on incurring additional
debt with the exception of a total aggregate amount for purchase money
obligations of up to $500,000, transfer of assets or control, and liens with
the exception of assets pledged with the permitted purchase money.
Additionally, the Borrower will not be permitted to amend, modify, or terminate
any existing Services and Support Agreement and any new Services and Support
Agreement shall be in substantially the same form as all existing agreements.
CLOSING COSTS AND EXPENSES: The Borrower shall pay all costs and expenses
incurred by the Bank in connection with the Bank's review, due diligence and
closing of the Loan, including attorneys' fees incurred by the Bank in
connection with the negotiation and preparation of the Loan Documents, whether
or not the Loan actually closes.
MATERIAL ADVERSE CHANGE: This commitment may be terminated, in the sole
discretion of the Bank, upon the occurrence of a material adverse change in the
financial condition of the Borrower or any other person liable to the Bank for
the repayment of this Loan.
NON-ASSIGNABLE: This commitment and the right of Borrower to receive loans
hereunder may not be assigned by Borrower.
RELIANCE: This commitment constitutes an offer by the Bank to the Borrower to
make a Loan on the terms and conditions set forth herein and should not be
relied upon by any third party for any purpose.
AMENDMENT AND WAIVER: No alteration, modification, amendment or waiver of any
terms and conditions of this commitment, or of any of the documents required by
or delivered to the Bank under this commitment, shall be effective or
enforceable against the Bank unless set forth in a writing signed by the Bank.
GOVERNING LAW: This commitment and the Loan shall be governed by and construed
in accordance with the laws of the State of Florida (without regard to choice
of law principles).
INTEGRATION: The terms set forth above represent the entire understanding
between the Borrower and the Bank with respect to the subject matter of this
6
<PAGE> 7
commitment, and this commitment supersedes any prior and contemporaneous
agreements, commitments, discussions and understandings, oral or written, with
respect to the subject matter of this commitment.
YEAR 2000 COMPLIANCE: This commitment is subject to, among the other conditions
contained herein, the Bank's satisfaction that (a) the Borrower and its
subsidiaries are taking all necessary and appropriate steps to ascertain the
extent of, and to quantify and successfully address, business and financial
risks facing the Borrower and its subsidiaries as a result of failure to become
Year 2000 compliant (that is, that computer applications, imbedded microchips
and other systems will be able to perform date-sensitive functions prior to and
after December 31, 1999) including risks resulting from the failure of key
vendors and suppliers of the Borrower and its subsidiaries to become Year 2000
compliant, and (b) the Borrower's and its subsidiaries' material computer
applications and those of its key vendors and suppliers will, on a timely
basis, adequately address the Year 2000 problem in all material respects.
ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO
INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS
INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR
DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL
BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION
ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND
PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE AND
ANY SUCCESSOR THEREOF (J.A.M.S.), AND THE "SPECIAL RULES" SET FORTH BELOW. IN
THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON
ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY
PARTY TO THIS AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED
PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS
AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION.
A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF
THE BORROWER'S DOMICILE AT TIME OF THE EXECUTION OF THIS INSTRUMENT, AGREEMENT
OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF
J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION,
THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS
WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE
ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE
COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS.
B. RESERVATION OF RIGHTS. NOTHING IN THIS INSTRUMENT, AGREEMENT OR
DOCUMENT SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE
APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY
7
<PAGE> 8
WAIVERS CONTAINED IN THIS AGREEMENT; OR (II) BE A WAIVER BY THE BANK OF THE
PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT
STATE LAW; OR (III) LIMIT THE RIGHT OF THE BANK HERETO (A) TO EXERCISE SELF
HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST
ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT
PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE
RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE BANK MAY
EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH
PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY
ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS INSTRUMENT, AGREEMENT OR
DOCUMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR
MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES
SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN
ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM
OCCASIONING RESORT TO SUCH REMEDIES.
EXPIRATION: This commitment is to be closed within sixty (60) days of the
acceptance date. Should this commitment not be accepted by the expiration date,
and not closed within sixty (60) days of the acceptance date, then the Bank
shall have no further obligation to extend credit hereunder.
If you find the terms and conditions of this commitment to be acceptable to
you, please execute the enclosed copy of this letter and return it to the
undersigned. If not accepted, this commitment shall expire on August 31, 1999.
We appreciate the opportunity to provide you with the financial services of
NationsBank, N.A.
Sincerely,
/s/ Sadahri Berry
- -----------------------------------
Sadahri Berry
Vice President
The terms and conditions set forth above are accepted this 5th day of
August, 1999.
By: /s/ Joseph Smith
- -----------------------------------
Title: Chief Financial Officer
8
<PAGE> 1
EXHIBIT 11.1
COAST DENTAL SERVICES, INC.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1999 1998 1999
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Income before cumulative effect of a
change in accounting principle................ $ 999,657 $ 510,342 $ 1,972,460 $1,628,272
Cumulative effect of a change in accounting
principle..................................... -- -- 633,813 --
---------- ---------- ------------- ----------
Net income...................................... $ 999,657 $ 510,342 $ 1,338,647 $1,628,272
========== ========== ============= ==========
SHARES:
Basic weighted average number of shares
outstanding................................... 7,621,084 7,103,794 7,616,034 7,319,653
Additional shares issuable under stock
options for diluted earnings per share........ 91,945 53 101,641 176
---------- ---------- ------------- ----------
Diluted weighted average number of
shares outstanding............................ 7,713,029 7,103,847 7,717,675 7,319,829
BASIC EARNINGS PER SHARE:
Income before cumulative effect of a
change in accounting principle................ $ .13 $ .07 $ .26 $ .22
Cumulative effect of a change in accounting
principle..................................... -- -- .08 --
---------- ---------- ------------- ----------
Net income...................................... $ .13 $ .07 $ .18 $ .22
========== ========== ============= ==========
DILUTED EARNINGS PER SHARE:
Income before cumulative effect of a
change in accounting principle................ $ .13 $ .07 $ .26 $ .22
Cumulative effect of a change in accounting
principle..................................... -- -- .08 --
---------- ---------- ------------- ----------
Net income...................................... $ .13 $ .07 $ .18 $ .22
========== ========== ============= ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,992,980
<SECURITIES> 9,728,544
<RECEIVABLES> 7,514,489
<ALLOWANCES> 0
<INVENTORY> 2,965,508
<CURRENT-ASSETS> 28,395,000
<PP&E> 23,624,534
<DEPRECIATION> (3,804,662)
<TOTAL-ASSETS> 69,744,879
<CURRENT-LIABILITIES> 6,185,665
<BONDS> 2,432,157
0
0
<COMMON> 6,851
<OTHER-SE> 62,072,280
<TOTAL-LIABILITY-AND-EQUITY> 69,744,879
<SALES> 22,078,675
<TOTAL-REVENUES> 22,078,675
<CGS> 0
<TOTAL-COSTS> 17,344,484
<OTHER-EXPENSES> 2,705,856
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,226
<INCOME-PRETAX> 2,434,444
<INCOME-TAX> 806,172
<INCOME-CONTINUING> 1,628,272
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,628,272
<EPS-BASIC> .22
<EPS-DILUTED> .22
</TABLE>
