COAST DENTAL SERVICES INC - 10-K Annual Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________
FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1996
Commission file number 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.)

6200 Courtney Campbell Causeway
Tampa, Florida 33607
(Address of principal executive offices) (Zip code)

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

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.001 per share
---------------------------------------
(Title of Class)

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 [ ] No [X]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates
of the Registrant on March 14, 1997, was $32,707,500 based upon the closing
price of such shares on such date on the Nasdaq Stock Market's National Market.
As of March 14, 1997, there were 5,700,000 shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement to be used in
connection with the Registrant's 1997 Annual Meeting of Shareholders, which
will be filed with the Commission on or before April 30, 1997, are incorporated
by reference in Part III, Items 10-13 of this Form 10-K. Except with respect
to information specifically incorporated by reference in this Form 10-K, the
Proxy Statement is not deemed to be filed as a part hereof.
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COAST DENTAL SERVICES, INC.

1996 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PAGE

ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . 7

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . 8

ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . 10

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND DISCLOSURE . . . . . . . . . . . . . . . 33

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . 33

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . 34

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INTRODUCTION

Unless the context otherwise requires, references in this document
to "Coast Dental" or the "Company" refer to Coast Dental Services, Inc. and its
predecessor; "Dental Centers" refers to dental offices with a dental practice
managed or to be managed by the Company pursuant to a services and support
agreement; the "Coast Florida P.A." refers to the Florida professional
association which employs the dentists providing dental services at the Dental
Centers in Florida pursuant to a services and support agreement with the
Company (the "Services and Support Agreement"); "Coast P.A." refers to any
professional dental association outside the State of Florida, with which the
Company may enter into a services and support agreement; "internally developed
Dental Centers" refers to Dental Centers which are initially opened, developed
and managed by the company pursuant to a services and support agreement with
the Coast Florida P.A. or Coast P.A.; "acquired Dental Centers" refers to
Dental Centers resulting from the acquisition of an existing dental facility by
the company, combined with the acquisition by the Coast Florida P.A. or Coast
P.A. of the existing dental practice located at that facility; "Coast Dentists"
refers to the licensed dentists employed by the Coast Florida P.A. or Coast
P.A. who provide dental services at the Dental Centers; and "Coast Dental
Network" refers collectively to the Dental Centers and the Coast Dentists.

PART I

ITEM 1. BUSINESS.

GENERAL.

Coast Dental Services, Inc. provides management services to 29
Dental Centers located in central Florida. Of the 29 Dental Centers, 12 were
internally developed and 17 were acquired by the Company. As of December 31,
1996, 41 Coast Dentists were employed by the Coast Florida P.A., serving over
237,500 patients. The Company expects to add a combined total of at least 25
internally developed and acquired Dental Centers in 1997.

The United States dental industry is highly fragmented, consisting
of more than 110,000 dental practices with approximately 88% of these practices
operated by dentists working alone or with one other dentist. According to the
Health Care Financing Administration, expenditures for all dental services in
the United States were an estimated $45.2 billion in 1995 and are expected to
grow at a rate of 6.6% per year through 2000. Based upon a 1990 Survey by the
American Dental Association ("ADA"), general dentistry was estimated to
represent approximately 83% of all dental services performed in the United
States. The Company believes several factors are driving the overall industry
growth. First, as the "baby boom" generation ages, the demand for many higher
priced dental maintenance products and procedures (such as crowns, bridges and
dentures) will increase relative to the demand for other more routine, lower
priced dental products and procedures (such as cleanings and fillings).
Second, increasing attention to dental health and, in particular, to personal
appearance has increased the demand for general dentistry services and cosmetic
dental products and procedures (such as bonding and whitening). Finally, a
greater percentage of the population is now covered by private or government
funded dental health insurance thereby facilitating increased dental office
visits and a greater utilization of general dentistry services.

The Company's goal is to develop a leadership position in the
management of general dentistry practices throughout Florida and the
southeastern United States. The Company earns fees paid by the Coast Florida
P.A. for providing management services and support to the Dental Centers. A
uniform operating model (the "Coast Operating Model"), utilized at the Dental
Centers is designed with the goals of increasing productivity and maintaining
the low cost delivery of quality general dentistry services. The key elements
of the Coast Operating Model are: (i) affiliating with general dental providers
that focus on the most common, high volume dental products and procedures which
lend themselves to cost-effective delivery; (ii) centralizing management and
administrative responsibilities, thus allowing Coast Dentists to concentrate on
delivering high quality dental care; (iii) facilitating the training of the
Dental Center staff, including Coast Dentists and hygienists, in techniques for
managing the delivery of high volume, quality dental services; and (iv)
assisting with the implementation of marketing programs designed to meet the
needs of each Dental Center. The Company believes that expansion of the Coast
Dental Network can help in maximizing economies of scale in management and
administration, materials procurement and marketing, and assist in facilitating
contracting with managed care companies.

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As the Coast Dental Network has grown, an increasing percentage of
the Coast Dentist's patient revenue has been derived from a growing managed
care patient base. The Company believes that managed care companies are
presently focused on increasing their revenue and gaining market share by
offering a full range of health insurance options, including dental insurance.
As a result, managed care companies are aggressively seeking to contract with
dental providers that offer extensive regional coverage, have the ability to
deliver dental services at managed care pricing levels, and possess the
necessary management information systems and contract administration expertise.
Accordingly, the Company believes that it is well positioned to gain an
increased state of the managed cared market as compared to sole practitioners
and small dental group practices that generally do not have the resources to
develop such capabilities or managed care relationships.

The Company expects to continue to expand into new contiguous
markets in the southeastern United States through the continued addition of
internally developed and acquired Dental Centers. Of the 29 Dental Centers
currently managed by the Company, 12 were internally developed and 17 were
acquired by the Company. When the Company acquires an existing dental office,
the Company acquires the assets to the extent permitted by law. Typically, the
Company acquires the dental office lease as well as all dental and office
equipment. The Coast Florida P.A. acquires the patient lists and related
assets, and typically enters into employment agreements with the acquired
practice's dentists and hygienists to staff the Dental Center. When the Company
internally develops Dental Centers, the Company provides the dental office
location and the necessary equipment and support staff while the Coast Florida
P.A. provides dentists and dental hygienists. The patient lists are the
property of the Coast Florida P.A.

The Company was originally incorporated in August 1992 as Sunshine
Health Services Inc., a Florida corporation. In August 1994 Sushine Health
Services, Inc. changed its name to Coast Dental, Inc. Effective March 31,
1996, Coast Dental, Inc. was merged into the Company, for the purpose of
reincorporating the Company in the state of Delaware and changing its corporate
name. The Company is located at 6200 Courtney Campbell Causeway, Tampa,
Florida, 33607, and its telephone number is 813-288-1999.

RECENT ACQUISITIONS

The Company opened two internally developed Dental Centers in both
1992 and 1993, four in 1994, three in 1995 and one in 1996. The Company has
added 17 acquired Dental Centers in 1996, including a single dental office in
January 1996, seven dental offices in April 1996 through the Volusia
Acquisition, three separate single dental offices in September 1996,
three dental offices in November 1996 through the Seminole Acquisition, and
three separate single dental offices in December 1996. The total purchase
prices for the Volusia Acquisition and the Seminole Acquisition were $1.8
million and $2.5 million, respectively, and the purchase prices for the other
acquisitions completed in 1996 aggregated approximately $1.0 million. See
Note 4 to Notes to Financial Statements of the Company. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION".

SERVICES AND OPERATIONS

The Company is primarily responsible for the management and
administrative functions of its Dental Centers. The Company provides
financial, accounting, billing, training, marketing assistance and collection
services for the Coast Florida P.A. and employs the Dental Center's management
and administrative personnel, but does not provide dental care. The Coast
Florida P.A. maintains full control over the dental practices of the Coast
Dentists, employs the Coast Dentists and their hygienists and sets standards of
care in order to promote the provision of quality dental care. The Coast
Florida P.A. is also responsible for compliance with state and local
regulations of the practice of dentistry and with license or certification
requirements. Each Coast Dentist is responsible for acquiring and maintaining
professional liability insurance.

Pursuant to the Services and Support Agreement with the Coast
Florida P.A. the Company is the exclusive business manager, to the extent
allowable by law, of the Dental Centers. As Dental Centers are acquired or
internally developed in Florida by the Company and the Coast Florida P.A., the
Dental Centers are expected to be governed by the existing Services and Support
Agreement, subject to possible future modification or amendment.

As compensation for its management services the current Services
and Support Agreement, the Coast Florida P.A. pays the Company a monthly
services and support fee equal to a percentage of the gross revenue of the
Dental Center. From the service and support fee paid to the Company by the
Coast Florida P.A., the Company pays all operating and

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nonoperating expenses incurred at the Dental Center except for the salaries and
benefits of the Coast Dentists and dental hygienists, federal and state income
taxes, bad debt, and any other expenses designated as an expense of the Coast
Florida P.A. in the Services and Support Agreement.

The Company currently obtains all of its revenue from the services
and support fee paid by the Coast Florida P.A. The loss of such customer would
have a material adverse effect on the Company's business and results of
operations. The Coast Florida P.A. is wholly owned and managed by Adam Diasti,
an executive officer and director of the Company. See "DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT." Future modifications, amendments or revisions to
the Services and Support Agreement are subject to approval in advance by the
Audit Committee of the Company's Board of Directors, a majority of which
consist of the independent outside directors of the Company, and by Barnett
Bank N.A. pursuant to the terms of the Company's current credit facility. Due
to legal restrictions in the State of Florida, the Services and Support
Agreement prohibits the Company from exercising any control, either direct or
indirect, over the Coast Dentists' professional decisions, patient records, and
decisions relating to pricing, advertising, office personnel and hours of
practice.

The Company plans to continue to use the current form of its
Services and Support Agreement to the extent possible and marketable, as it
enters into new states or into arrangements with other dental practices.
However, the terms of future agreements may differ according to market
conditions and the statutory or regulatory requirements of the particular state
in which the dental practice is located.

GOVERNMENTAL AND STATE REGULATIONS

The Company's operations and relationships are subject to a
variety of governmental and regulatory requirements relating to the conduct of
its business. The Company is also subject to laws and regulations which relate
to business corporations in general. The Company believes that it exercises
care in an effort to structure its practices and arrangements with dental
practices to comply with relevant federal and state law and believes that such
arrangements and practices comply in all material repsects with all applicable
statutes and regulations. The health care industry and dental practices are
highly regulated, and there can be no assurance that the regulatory environment
in which the Company operates will not change significantly and adversely in the
future. In general, regulation of health care providers providers and
companies is increasing.

The laws of many states prohibit corporations that are not owned
entirely by dentists from employing dentists (and in some states, dental
hygienists and dental assistants), having control over clinical
decision-making, or engaging in other activities that are deemed to constitute
the practice of dentistry. Florida law specifically prohibits non-professional
corporations from employing dentists and dental hygienists, exercising control
over patient records, and making decisions relating to clinical matters, office
personnel, hours of practice, pricing, credit, refunds, warranties and
advertising. The Company does not employ dentists or dental hygienists and
does not exercise control over any prohibited areas. While Dr. Adam Diasti,
the sole shareholder of the Coast Dental P.A., is also a shareholder, director
and officer of the Company, he acts independently when making decisions in
these areas on behalf of the Coast Florida P.A.

Some states, including Florida, also prohibit non-professional
corporations from owning, maintaining or operating an office for the practice
of dentistry. These laws have generally been construed to permit arrangements
under which the dentists are not employed by or otherwise controlled as to
clinical matters by the party supplying facilities and non-professional
services. Florida law specifically requires that dentists or their
professional corporations maintain complete care, custody and control of all
equipment and materials used in the practice of dentistry. The Services and
Support Agreement between the Company and Coast Florida P.A. provides that the
Company shall not exercise control over any matters that would violate the
requirements of Florida law.

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Many states also prohibit "fee-splitting" by dentists with any party
except other dentists in the same professional corporation or practice entity.
In most cases, these laws have been construed as applying to the practice of
paying a protion of a fee to another person for referring a patient or
otherwise generating business, and not to provide payment of reasonable
compensation for facilities and services (other than the generation of
referrals), even if the payment is based on a percentage of the practice's
revenues. The Florida fee-splitting law prohibits paying or receiving any
commission, bonus, kickback, or rebate, or engaging in any split-fee
arrangement in any form with a dentist for patient referrals to dentists or
other providers of health care goods and services.

Many states, including Florida, prohibit dentists from using
advertising which includes any name other than their own, or from advertising
in any manner that is likely to mislead a person to believe that a non-dentist
is engaged in the practice of dentistry. The Services and Support Agreement
provides that all advertising shall conform to these requirements. Florida law
also requires all advertising to identify the Florida dentist who assumes total
responsibility for the advertisement and may not include the name of a person
who is not either actually involved in the practice of dentistry at the
advertised location or an owner of the practice being advertised. All of the
advertisements include the name of Dr. Adam Diasti who owns the dental practice
through the Coast Florida P.A.

The laws referred to above have civil and criminal penalties and
have been subject to limited juducial and regulatory interpretation. They are
enforced by regulatory agencies that are vested with broad discretion in
interpreting their meaning. The Company's agreements and activities have not
been examined by federal or state authorities under these laws and regulations.
For these reasons, there can be no assurance that review of the Company's
business arrangements or the operation of the Dental Centers will not result in
determinations taht adversely affect the Company's operations or that the
long-term Service and Support Agreement or certain of its provisions will not
be held invalid and unenforceable.

In addition, these laws and their interpretation vary from state to
state. The laws and regulatioms of certain states into which the Company seeks
to expand may require the Company to change the form of relationships entered
into with dentists in a manner that restricts the Company's operations in
those states.

The Company believes that health care regulaions will continue to
change, and as a result, regularly monitors developments in health care law.
The Company expects to modify its agreements and operations from time to time,
if necessary, as the business and regulatory environment change. However,
there can be no assurance that any such changes will not adversely affect the
ability of the Company to operate under the Services and Support Agreement as
it currently does.

COMPETITION

The Company is aware of other companies which are actively engaged
in the consolidation of existing dental practices and providing management
services to dental practices, some of which may have substantially greater
financial resources and longer operating histories than the Company. The
Company assumes that additional companies with similar objectives may enter the
Company's markets and compete with the Company. The primary basis of
competition between dental PPMs are the extent of the dental care network,
management expertise and experience, sophistication of management information
systems, the elements of its operating system, the availability of managed care
business, opportunity for career enhancement of potential associated dentists,
liquidity, high visibility, pricing in acquisition and management agreements,
degrees of control required by the merger and the size of operations.

The business of providing dental services is highly competitive in
each of the markets in which the Dental Centers operate. The primary
bases of competition within the dental services industry are price of services,
marketing exposure, convenience of location and traffic flow of location, hours
of operation, reputation, managed care contracts, quality of care, and
appearance and usefulness of facility and equipment. Coast Dentists compete
with other dentists who maintain single offices or operate a single satellite
office, as well as with dentists who maintain group practices or operate in
multiple offices. Many of those dentists have more established practices in
their markets.

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SEASONALITY

The Company has traditionally experienced its highest volume of
patient visits during the first and last quarters of the year and its lowest
volume of patient visits in the summer. Individual Dental Centers typically
experience increased patient visits during the period from October through
March, when the population of Florida increases for the winter, and decreased
patient visits during the summer months. Seasonality for the period since
January 1, 1995 has been mitigated by the increase in monthly capitation
revenue from managed care contracts to the Coast Florida P.A.

SERVICE MARKS

The Company believes its service marks are important to the
Company. The Company applied for registration of the service marks "Coast
Dental" and the Company logo with the United States Patent and Trademarks
Office in 1996 which application is currently pending.

EMPLOYEES

At March 14, 1997 the Company had 190 full-time and part-time
employees, of which approximately 18 were employed at the Company's
headquarters and approximately 172 were employed at the Dental Centers. None
of the Company's employees are employed under a collective bargaining
agreement. The Company believes that its relationship with its employees is
good.

ITEM 2. PROPERTIES.

The Company presently leases an average of between 1,200 to 2,000
square feet of office space for each of the Dental Centers. The typical lease
for office space is for a term of approximately five years and generally
provides for renewal options for additional years. The average rental payments
for a leased Dental Center are approximately $1,600 per month. The Company
plans to continue to lease rather than purchase space for the Dental Centers to
preserve the Company's available capital.

ITEM 3. LEGAL PROCEEDINGS

There are no material pending legal proceedings other than routine
litigation arising in the ordinary course of business. The Company does not
believe that the results of such litigation, even if the outcome were
unfavorable to the Company, would have a material effect on its financial
position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On October 14, 1996, the shareholders took action by unanimous
written consent without a meeting to amend and restate the Company's
Certificate of Incorporation to effect a .8888889 for 1 reverse split of the
Company's Common Stock. There were 3,465,000 votes for; 0 votes against; 0
abstentions; and 0 broker non-votes.

On October 20, 1996 the shareholders took action by unanimous
written consent without a meeting to keep the numbers of shares of Common Stock
available under the Company's Stock Option Plan and Affiliated Professionals
Plan to 450,000 shares each. There were 3,465,000 votes for; 0 votes against;
0 abstentions; and 0 broker non-votes.

On December 27, 1996 the shareholders took action by unanimous
written consent without a meeting to amend the Company's Certificate of
Incorporation to effect a .875 for 1 reverse split of the Company's Common
Stock. There were 3,465,000 votes for; 0 votes against; 0 abstentions; and 0
broker non-votes.

On December 29, 1996, the shareholders took action by unanimous
written consent without a meeting to elect John H. Kang and Donald R. Millard
to the Board of Directors to be effective the date of the Company's initial
public offering. There were 3,465,000 votes for; 0 votes against; 0
abstentions; and 0 broker non-votes.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION

The Common Stock of the Company has been trading publicly under
the symbol CDEN on the Nasdaq National Market since the Company's initial
public offering on February 11, 1997. The following table sets forth the high
and low closing sale price of the Company's Common Stock as reported in the
Nasdaq National Market for the periods indicated:

HIGH LOW
---- ---

1997
- ----
February 11, 1997 $14 .00 $10.25
through March 14, 1997

HOLDERS

At March 1, 1997, there were 56 stockholders of record. The
number of record holders was determined from the records of the Company's
transfer agent and does not include beneficial owners of Common Stock whose
shares are held in the names of various securities brokers, dealers and
registered clearing agencies. The Company believes that there are
approximately 1,000 beneficial owners of Common Stock.

DIVIDENDS

The Company has never paid cash dividends on its Common Stock.
The Company presently intends to retain all cash for use in the operation and
expansion of the Company's business and does not anticipate paying any cash
dividends in the near future. In addition, the Company's existing bank credit
agreement restricts the declaration or payment of cash dividends on its Common
Stock.

SALES OF UNREGISTERED SECURITIES

In March 1996, the Company issued an aggregate of 3,360,000
shares of Common Stock in connection with its corporate reorganization. This
transaction was exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) because it did not involve any public offering.

In January and February 1996, the Company reached mutual
understandings to provide restricted shares of Common Stock and in April and
May 1996 issued 35,000 and 105,000 shares, respectively, as compensations to
certain employees, executive officers, and affiliated professionals, pursuant
to the Plans. These transactions were exempt from the registration
requirements of the Securities Act pursuant to Rule 701.

In October, November and December 1996, and in January 1997
the Company granted options to purchase approximately 196,000 shares of Common
Stock under the Plans to certain employees, executive officers and affiliated
professionals. These transactions are exempt from the registration
requirements of the Securities Act pursuant to Rule 701.

The Company has issued non-negotiable promissory notes to
sellers as part of the purchase price in connection with the Company's purchase
of the allowable assets of certain dental practices. On April 24, 1996 the
Company issued non-negotiable promissory notes totalling $1.2 million to
Richard J. Shawn, D.M.D. in connection with the Shawn Acquisition. On
September 27, 1996 and September 30, 1996, the Company issued non-negotiable
promissory notes totalling $341,250 to Juan A. Soler, D.D.S., Jerry L.
Reynolds, D.D.S. and Dan Steele, P.A. in connection with the acquisition of the
allowable assets of three dental practices. On October 31, 1996, the Company
issued non-negotiable promissory notes totalling $1.5 million to Seminole
Dental Center, Seminole Dental West, Seminole Dental South, Michael D.
Whitcher, D.D.S. and C. M. Garcia, D.M.D. in connection with the Seminole
Acquisition. The Company does not believe that the promissory notes issued in
these transactions are a "security" as defined by Section 2(1) of the
Securities Act. However, in the event the promissory notes are deemed to be a
security these transactions were exempt from the registration requirements of
the Securities Act pursuant to Section 4(2) because they did not involve any
public offering.

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ITEM 6. SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA
(in thousands, except per share data)

The following selected financial data with respect to the
Company's statements of operation's for the years ended December 31, 1993,
1994, 1995 and 1996 and the balance sheet data as of December 31, 1993, 1994,
1995 and 1996 are derived from the Financial Statements of the Company which
have been audited by Deloitte & Touche LLP, independent accountants. The
selected financial data presented below as of and for the year ended December
31, 1992 is unaudited and was prepared by management of the Company on the same
basis as the audited Financial Statements included elsewhere herein and, in the
opinion of management of the Company, include all adjustments necessary to
present fairly the information set forth therein. The following data should
be read in conjunction with the Financial Statements of the Company and the
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Business--Coast Dental Center
Locations" included elsewhere herein.

YEARS ENDED DECEMBER 31,
------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Net revenue $ 398 $1,194 $1,868 $3,325 $8,128
Dental Center expenses:
Staff salaries 63 291 446 863 2,325
Dental supplies and lab fees 35 166 385 557 1,203
Advertising 71 155 221 351 675
Rent 33 140 218 296 811
Other 52 100 163 286 438
----- ------ ------ ------ ------
Total Dental Center expenses 254 852 1,433 2,353 5,452
----- ------ ------ ------ ------
Gross profit 144 342 435 972 2,676
General and administrative expenses -- 296 580 682 950
Depreciation and amortization 11 10 5 15 139
----- ------ ------ ------ ------
Operating income (loss) 133 36 (150) 275 1,587
Interest expense--net 9 30 32 50 184
----- ------ ------ ------ ------
Income (loss) before income taxes 124 6 (182) 225 1,403
Pro forma income tax (expense) benefit(1) (50) (2) 73 (90) (547)
----- ------ ------ ------ ------
Pro forma net income (loss) $ 74 $ 4 $ (109) $ 135 $ 856
===== ====== ====== ====== ------
Pro forma net earnings per common share $ .04 $ .24
Weighted average shares outstanding (000s) 3,500 3,500
======= =====

SELECTED OPERATING DATA:
Number of Dental Centers(2) 2 4 8 11 29
Gross revenue per Dental Center(3) NA NA $535 $590 $635
Number of dental chairs(2) 11 22 38 48 148
Number of Coast Florida, P.A. Dentists(2) 2 4 8 10 35
Patient visits NA 11,881 19,346 42,005 100,949
Number of patient visits per dental chair(4) NA 735 736 918 1,263

DECEMBER 31,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----

(IN THOUSANDS)

BALANCE SHEET DATA:
Working capital (deficit) $(24) $(228) $(496) $ (168) $ (816)
Total assets 376 583 914 1,198 7,969
Long-term debt, including current maturities 172 210 385 608 4,649
Stockholders' equity 126 132 (50) 175 1,464

_______________________________
(1) Pro forma adjusted to reflect a 39% income tax rate as if the Company
was taxed as a C Corporation during the periods presented.
(2) Presented as of the end of the period.
(3) Includes only Dental Centers open for at least one year as of the
beginning of the period, so that two Dental Centers are included for
1994, four Dental Centers are included for 1995 and eight Dental
Centers are included for the year ended December 31, 1996.
(4) Includes only Dental Centers that were open for the entire period.

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10

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

OVERVIEW

The Company opened its first Dental Center in May 1992 and to
date has opened 12 internally developed Dental Centers and added 17 acquired
Dental Centers. The Company derives its revenue through fees earned from the
Coast Florida P.A. for providing management services and support at the Dental
Centers. The Company currently manages a network of 29 Dental Centers in
central Florida, staffed by 41 Coast Dentists and serving over 237,500
patients. Subsequent to fiscal year end December 31, 1996, the Company
completed its initial public offering of common stock on February 11, 1997
("Initial Public Offering"). The net proceeds to the Company from the sale of
2,200,000 shares of Common Stock offered by the Company were $15.1 million
(after deducting underwriting discounts and commissions and offering expenses).
The Company currently expects to use approximately $10.0 million of the net
proceeds therefrom to expand the Coast Dental Network in new and existing
markets through the addition of internally developed and acquired Dental
Centers.

Pursuant to the Services and Support Agreement with the Coast
Florida 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. Under the current Services and Support Agreement, the Coast
Florida P.A. pays a fee to the Company equal to approximately 76.0% of the
Dental Centers' gross revenue. Prior to October 1996, the services and support
fee paid to the Company averaged 78.5% of gross revenue from which the Company
pays the operating expenses incurred by the Coast Florida P.A. excluding
certain costs incurred by the Coast Florida P.A. The cost incurred by the Coast
Florida P.A. include primarily dentists and hygienist salaries, as described in
Note 1 of the Company's Notes to Financial Statements.

The Company opened two internally developed Dental Centers in
both 1992 and 1993, four in 1994, three in 1995 and one in 1996. The average
cost to the Company of an internally developed Dental Center has been
approximately $125,000, which includes the cost of equipment, leasehold
improvements and working capital associated with initial operations. At
internally developed Dental Centers, profitability to the Company has been
attained in an average of three to four months from opening.

The Company completed its first acquisition of one Dental
Center in January 1996 for a purchase price of $40,000 and added seven acquired
Dental Centers on April 1996 through the Volusia Acquisition for a purchase
price of $1.8 million. The gross revenue for the eight dental practices
located in these acquired Dental Centers was approximately $3.5 million for the
year ended December 31, 1995. In September 1996, the Company added a total of
three separately acquired Dental Centers located in Tampa, Wesley Chapel and
Orlando, Florida. The combined purchase price for these three acquired Dental
Centers was $620,000. For the year ended December 31, 1995 these three
acquired dental practices had combined gross revenue of $1.1 million. In
November 1996, the Company added a total of three acquired Dental Centers
located in Casselberry, Apopka and Waters Edge, Florida through the Seminole
Acquisition. The combined purchase price for these three acquired Dental
Centers was $2.5 million. For the year ended December 31, 1995 these three
acquired dental practices had combined gross revenue of $3.4 million. In
December 1996, the Company added a total of three separately acquired Dental
Centers located in Gainesville, Kissimmee and Orlando, Florida. The combined
purchase price for these three acquired Dental Centers was $375,000. For the
year ended December 31, 1995 these three acquired dental practices had combined
gross revenue of $600,000. The Company's results of operation may vary in the
future as a result of the timing, size and impact of anticipated future
acquisitions.

The Coast Florida P.A. currently derives its revenue from a
combination of sources, including fees paid by private pay patients, indemnity
insurance reimbursements and capitation payments from managed care companies.
Medicaid reimbursements currently account for approximately two percent of
the revenue of the Coast Florida P.A. The Coast Florida P.A. currently
maintains 11 capitated managed care contracts.

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The following table outlines the payor mix for the Coast
Florida P.A. revenue for the periods presented:

December 31,
----------------------------
1994 1995 1996
---- ---- ----

Self-pay . . . . . . . . . . . . . . . 100.0% 65.0% 55.0%
HMOs . . . . . . . . . . . . . . . . . -- 22.0 26.0
Private insurers, including HMOs . . . -- 12.0 17.0
Medicare and Medicaid . . . . . . . . . -- 1.0 2.0
----- ----- -----
Total . . . . . . . . . . . . . . 100% 100% 100%
===== ===== =====

RESULTS OF OPERATIONS

The following table sets forth, as a percentage of net revenue
(consisting of management fees derived pursuant to the Services and Support
Agreement) certain items in the Company's statements of operations for the
periods indicated:

YEARS ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
---- ---- ----

Net Revenue . . . . . . . . . . . . . . . . . . 100.0 % 100.0 % 100.0 %
----- ----- -----
Dental Center Expenses:
Staff Salaries . . . . . . . . . . . . . . . 23.9 26.0 28.6
Dental Supplies and Lab Fees . . . . . . . . 20.6 16.7 14.8
Advertising . . . . . . . . . . . . . . . . . 11.8 10.6 8.3
Rent . . . . . . . . . . . . . . . . . . . . 11.7 8.9 10.0
Other . . . . . . . . . . . . . . . . . . . . 8.7 8.6 5.4
----- ----- -----
Total Dental Center Expenses . 76.7 70.8 67.1
----- ----- -----
Gross Profit . . . . . . . . . . . . . . . . . 23.3 29.2 32.9
----- ----- -----
General and Administrative Expense . . . . . . 31.0 20.5 11.7
Depreciation and amortization . . . . . . . . . 0.3 0.5 1.7
----- ----- -----
Operating Income (loss) . . . . . . . . . . . . (8.0) 8.2 19.5
Interest Expense . . . . . . . . . . . . . . . 1.7 1.5 2.3
----- ----- -----
Income (loss) Before Income Taxes . . . . . . . (9.7) 6.7 17.2
Pro-Forma Provision for Income Taxes . . . . . 3.9 (2.7) (6.7)
----- ----- -----
Net Income (loss) . . . . . . . . . . . . . . . (5.8) % 4.0 % 10.5 %
===== ===== =====

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

Net Revenue. Net revenue increased 144.5% from $3.3 million
for the year ended December 31, 1995 to $8.1 million for the year ended
December 31, 1996. This increase was caused primarily by a 38.7% increase in
net revenue attributable to the eight comparable Dental Centers (Dental Centers
that were open throughout the periods being compared), which accounted for
$1,090,000 of the net revenue increase; the three internally developed Dental
Centers opened in 1995, which accounted for $964,000 of the increase; and the
17 acquired Dental Centers added in 1996, which accounted for $2.7 million of
the increase. Capitation payments received from 11 managed care contracts
during the year ended December 31, 1996 accounted for $975,000 of this
increase. Increases in net revenue are primarily driven by increases in
patient visits.

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12

Patient visits increased 140.3% from 42,005 for the year ended December 31,
1995 to 100,949 for the year ended December 31, 1996. This increase was caused
primarily by an increase of 13,457 patient visits at the eight comparable
Dental Centers, an increase of 13,291 patient visits at the three internally
developed Dental Centers and 32,085 patient visits at the 17 acquired Dental
Centers.

Staff Salaries. Staff salaries increased 169.3% from $863,000
for the year ended December 31, 1995 to $2.3 million for the year ended
December 31, 1996. This increase in staff salaries was caused primarily by an
increase in salaries of $287,000 for the eight comparable Dental Centers,
$271,000 increase for the three internally developed Dental Centers and
$898,000 for the 17 acquired Dental Centers. Staff salaries include the
compensation paid to the administrative staff at each Dental Center, including
the dental assistants, office managers, sterilization technicians and front
desk managers. As a percentage of net revenue, staff salaries increased from
26.0% for the year ended December 31, 1995 to 28.6% for the year ended December
31, 1996. The increase was caused primarily by the increase in staffing due to
the addition of internally developed and acquired Dental Centers which was
somewhat offset by staff levels at the eight comparable Dental Centers
remaining relatively constant, while net revenue increased. While an
internally developed Dental Center can operate with a relatively limited dental
staff in the early stages of its development, the services of a dentist, dental
hygienist, dental assistant and front desk manager are still necessary. As a
result, staff salaries as a percentage of net revenue will typically be higher
in the first six months of operation until patient visits are increased. In
addition, for acquired Dental Centers, staff salaries as a percentage of net
revenue will typically be higher in the first three to six months following
acquisition as the Company implements the Coast Operating Model to increase
productivity and efficiency.

Dental Supplies and Lab Fees. Dental supplies and lab fees
increased 116.1% from $557,000 for the year ended December 31, 1995 to $1.2
million for the year ended December 31, 1996. This increase was caused
primarily by the increase in patient visits and dental services provided at the
eight comparable Dental Centers and the three internally developed and the 17
acquired Dental Centers. As a percentage of net revenue, dental supplies and
lab fees decreased from 16.7% for the year ended December 31, 1995 to 14.8% for
the year ended December 31, 1996. This decrease was caused primarily by the
Company changing suppliers in October 1995 and negotiating a more favorable
supply agreement. In addition, as the Coast Dental Network expands into new
markets, changing demographics have caused crowns and dentures as a percentage
of total product mix to decrease. Crowns and dentures result in lab fees not
incurred with other dental products and procedures.

Advertising. Advertising expense increased 92.5% from
$351,000 for the year ended December 31, 1995 to $675,000 for the year ended
December 31, 1996. This increase was caused primarily by implementation of a
more aggressive advertising program for the 17 acquired Dental Centers. As a
percentage of net revenue, advertising expense decreased from 10.6% for the
year ended December 31, 1995 to 8.3% for the year ended December 31, 1996.
This decrease was caused primarily by an increase in market penetration by
comparable Dental Centers while advertising expenses remained relatively
constant for those Centers.

Rent. Rent expense increased 174.1% from $296,000 for the
year ended December 31, 1995 to $811,000 for the year ended December 31, 1996.
This increase was caused primarily by the addition of the three internally
developed Dental Centers and the 17 acquired Dental Centers. As a percentage
of net revenue, rent expense increased from 8.9% for the year ended December
31, 1995 to 10.0% for the year ended December 31, 1996. This increase was
caused primarily by higher rent expense associated with the 17 acquired Dental
Centers.

Other Expenses. Other expenses increased 52.7% from $287,000
for the year ended December 31, 1995 to $438,000 for the year ended December
31, 1996. This increase was caused primarily by increases in insurance costs,
credit card discounts and other costs, which accounted for $85,000 of the
increase, and depreciation expense, associated with the addition of the
eighteen Dental Centers, which accounted for $66,000 the increase. As a
percentage of net revenue, other expenses decreased from 8.6% for the year
ended December 31, 1995 to 5.4% for the year ended December 31, 1996. This
decrease was caused primarily by increased economies of scale associated with
the increasing number of patient visits.

General and Administrative Expenses. General and
administrative expenses increased 39.3% from $682,000 for the year ended
December 31, 1995 to $950,000 for the year ended December 31, 1996. This
increase was caused primarily by corporate administrative salaries increasing,
which accounted for $333,000 of the increase, and a decrease in other general
and administrative expenses of $65,000. As a percentage of net revenue,
general and administrative expenses decreased from 20.5% for the year ended
December 31, 1995 to 11.7% for the year ended December 31, 1996. This decrease

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13

was caused primarily by economies of scale realized through the centralization
of Dental Center management. General and administrative expenses primarily
consist of expenses incurred at the corporate office.

Depreciation and Amortization. Depreciation and amortization
expense increased 821.5% from $15,000 for the year ended December 31, 1995 to
$139,000 for the year ended December 31, 1996. As a percentage of net revenue,
depreciation and amortization expense increased from 0.5% for the year ended
December 31, 1995 to 1.7% for the year ended December 31, 1996. This increase
was caused primarily by the recognition of amortization expense in 1996 related
to a covenant not to compete agreement pursuant to the Volusia Acquisition,
which accounted for $83,000 of the increase, and depreciation expense incurred
at the corporate office which accounted for $27,000 of the increase.

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994

Net Revenue. Net revenue increased 78.0% from $1.9 million
for 1994 to $3.3 million for 1995. This increase was caused primarily by a
14.2% increase in net revenue attributable to the four comparable Dental
Centers, all of which were internally developed and accounted for $224,000 of
the net revenue increase, the four internally developed Dental Centers that
were opened during 1994, which accounted for $431,000 of the increase, and the
three internally developed Dental Centers opened in 1995, which accounted for
$802,000 of the increase. Capitation payments received from 11 managed care
contracts during 1995 accounted for approximately $20,000 of the increase.
Patient visits increased 117.1% from 19,346 in 1994 to 42,005 in 1995. This
increase was caused primarily by an increase of 6,509 patient visits at the
four comparable Dental Centers, an increase of 6,228 patient visits at the four
internally developed Dental Centers opened in 1994 and an increase of 9,922
patient visits at the three internally developed Dental Centers opened in 1995.

Staff Salaries. Staff salaries increased 93.8% from $445,000
in 1994 to $863,000 in 1995. This increase was caused primarily by the
increase in staff related to the addition of the four internally developed
Dental Centers in 1994 and the three internally developed Dental Centers in
1995. As a percentage of net revenue, staff salaries increased from 23.8% in
1994 to 26.0% in 1995. This increase was caused primarily by the opening of
internally developed Dental Centers in 1994 and 1995. Staff salaries at the
comparable Dental Centers remained relatively constant.

Dental Supplies and Lab Fees. Dental supplies and lab fees
increased 44.5% from $385,000 in 1994 to $557,000 in 1995. This increase was
primarily caused by the increase in patient visits and dental services provided
at the four comparable Dental Centers, the four internally developed Dental
Centers opened in 1994 and the three internally developed Dental Centers opened
in 1995. As a percentage of net revenue, dental supplies and lab fees
decreased from 20.6% in 1994 to 16.7% in 1995. This decrease was caused
primarily by the Company changing suppliers in October 1995 and negotiating a
more favorable supply agreement. In addition, as the Coast Dental Network
expands into new markets, changing demographics have caused crowns and dentures
as a percentage of the total product mix to decrease.

Advertising. Advertising expense increased 58.6% from
$221,000 in 1994 to $351,000 in 1995. This increase was caused primarily by
the increased advertising for the four internally developed Dental Centers
opened in 1994 and the three internally developed Dental Centers opened in
1995. As a percentage of net revenue, advertising expense decreased from 11.7%
in 1994 to 10.6% in 1995. This decrease was caused primarily by increased
economies of scale in advertising achieved through greater market penetration.

Rent. Rent expense increased 35.8% from $218,000 in 1994 to
$296,000 in 1995. This increase was caused primarily by the addition of the
four internally developed Dental Centers opened in 1994 and the three
internally developed Dental Centers opened in 1995. Rent expense at the four
comparable Dental Centers remained relatively constant. As a percentage of net
revenue, rent expense decreased from 11.7% in 1994 to 8.9% in 1995. This
decrease was caused primarily by the increase in net revenue at comparable
Dental Centers and the seven internally developed Dental Centers more than
offsetting the increase in rent expense.

Other Expenses. Other expenses increased 76.1% from $163,000
in 1994 to $287,000 in 1995. This increase was caused primarily by increases
in insurance costs, credit card discounts and expenses related to the three
internally developed Dental Centers opened during 1995, which accounted for
$92,000 of the increase, and depreciation expense, which accounted for $32,000
of the increase. As a percentage of net revenue, other expenses remained
relatively constant, decreasing from 8.7% in 1994 to 8.6% in 1995.

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14

General and Administrative Expenses. General and
administrative expenses increased 17.5% from $580,000 in 1994 to $682,000 in
1995. This increase was caused primarily by corporate administrative salaries
increasing $131,000 while other general and administrative expenses decreased
$29,000. Additions to corporate staff were made in 1994 in anticipation of the
Company's expansion in 1995. As a percentage of net revenue, general and
administrative expenses decreased from 31.0% in 1994 to 20.5% in 1995. This
decrease was caused primarily by economies of scale realized through the
centralization of Dental Center management.

Depreciation and Amortization. Depreciation and amortization
increased 200.0% from $5,000 in 1994 to $15,000 in 1995. This increase was
caused primarily by equipment purchases for the corporate office in 1995.

SEASONALITY

The Company has traditionally experienced its highest volume
of patient visits during the first and last quarters of the year and its lowest
volume of patient visits in the summer. Individual Dental Centers typically
experience increased patient visits during the period from October through
March, when the population of Florida increases for the winter, and decreased
patient visits during the summer months. Seasonality for the period since
January 1, 1995 has been mitigated by the increase in monthly capitation
revenue from managed care contracts to the Coast Florida P.A. which represented
9.4% of total revenue to the Coast Florida P.A. for the year ended December 31,
1996.

LIQUIDITY AND CAPITAL RESOURCES

Prior to the Company's Initial Public Offering, the Company
financed its operations through a combination of commercial borrowings and cash
generated from operations. Net cash provided by operations for the years ended
December 31, 1994, 1995 and 1996 was $135,000, $231,000, and $2.08 million,
respectively. Net cash provided by operations for 1995 and 1996 consisted
primarily of net income and increases in accounts payable, offset by an
increase in 1995 in the management fee receivable. For the year ended December
31, 1996, net cash provided by operations consisted primarily of net income and
increases in accounts payable and accrued expenses offset by an increase in
management fees and other receivables.

Cash used in investing activities for the years ended December
31, 1994 and 1995 of $200,000 and $157,000, respectively, was almost
exclusively related to the purchase of equipment and leasehold improvements
related to the nine internally developed Dental Centers opened during those
periods. For the year ended December 31, 1996, cash used in investing
activities of $5.63 million related primarily to the acquisition of tangible
and intangible assets of the 17 acquired Dental Centers, one in January 1996,
seven in April 1996, three in September 1996, three in November 1996 and three
in December 1996.

Cash provided by financing activities for the year ended
December 31, 1994, 1995 and 1996 was $147,000, $46,000 and $3.85 million,
respectively. The increase was primarily due to higher levels of bank
borrowings to support the Company's addition of both internally developed and
acquired Dental Centers.

On August 15, 1996, the Company entered into a revolving line
of credit with Barnett Bank of Florida (the "Barnett Credit Agreement"), which
provided an aggregate of $1.5 million for general working capital needs and
expansion of the number of Dental Centers. The revolving line of credit
included interest at the rate of 1.5% per annum above Barnett Bank of Florida's
prime rate and was payable on demand. Interest only was payable monthly.
During February, 1997, the Company repaid all amounts owed on the Barnett
credit line with proceeds from its Initial Public Offering.

On March 7, 1997, the Company entered into a new agreement
with Barnett whereby the line of credit agreement was increased to $5 million
and the term was extended to April, 1998. In addition, the interest rate was
adjusted to the Barnett prime rate or LIBOR plus, at the Company's option.
Amounts borrowed pursuant to the Barnett Credit Agreement are collateralized by
a first security interest in most of the Company's assets, including its
receivables and equipment. The Barnett Credit Agreement contains negative and
affirmative covenants and agreements restricting the Company's disposition of
assets, capital expenditures, acquisitions, operations and payment of dividends
as well as requiring the maintenance of certain financial ratios. As of March
15, 1997, the Company had available approximately $5,000,000 for borrowing
under the Barnett Credit Agreement.

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15
On December 11, 1995, the Company entered into a revolving
line of credit with the Bank of St. Petersburg (the "St. Petersburg Credit
Agreement"), which provides an aggregate of $100,000 for general working
capital needs and the addition of internally developed and acquired Dental
Centers. The revolving line of credit bears interest at 2.0% per annum above
the Bank of St. Petersburg's prime rate and amounts borrowed are secured by a
first security interest in the Company's assets generally not secured by the
Barnett Credit Agreement, including certain receivables and equipment, and are
to be repaid in equal installments of $2,174 per month, plus interest. During
February, 1997, the Company repaid the amounts outstanding on the St.
Petersburg Credit Agreement with the net proceeds from its Initial Public
Offering.

During 1996, the Company added 17 acquired Dental Centers at a
cost of approximately $4.3 million, consisting of approximately $1.1 million in
cash and approximately $3.2 million of promissory notes issued by the Company.
In certain acquisitions the Company provided security in the assets purchased
pursuant to seller financing. The interest rates on the notes range from 8% to
9% per annum and the maturity dates for the notes range from the date of the
Offering to October 2003. The Company expects to repay $2.9 million of such
notes from the net proceeds received from its Initial Public Offering.

The Company has previously loaned capital to the Coast Florida
P.A. in connection with acquisitions of existing dental practices. The total
outstanding balance of such loans as of December 31, 1996 was $224,000. The
loans bear interest at 8% and have a maturity date of June 30, 1998. In March,
1997, the outstanding balance of such loans was repaid by the P.A. to the
Company.

Based upon the Company's anticipated capital needs for
operations of its business, general corporate purposes, the addition of at
least 25 Dental Centers and repayment of certain debts, management believes
that the combination of the funds expected to be available under the Company's
revolving line of credit, cash flow from operations and the net proceeds
received from its Initial Public Offering should be sufficient to meet the
Company's funding requirements to conduct its operations and for further
implementation of its growth strategy for at least the remainder of 1997.
Thereafter, it is anticipated by the Company that future acquisitions and
expansion will be funded primarily with cash flow from operations, borrowings
under the Barnett Credit Agreement, other credit sources, and where desirable,
funding from the sale of debt or equity securities.

INFLATION

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

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

Certain statements contained in this Form 10-K under
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" such as statements concerning the Company's addition of
internally developed and acquired Dental Centers and the implementation of the
Coast Operating Model at acquired Dental Centers, future intentions and
prospects arising from same, and other statements contained herein regarding
matters that are not historical facts are "forward looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 and because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward looking statements. Those statements appear in a
number of places in this Form 10-K 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) potential acquisitions or internal
development of Dental Centers and the successful integration of such
acquisitions and internally developed Dental Centers into the Coast Dental
Network; (ii) the Company's financing plans; (iii) the Company's future
financial condition or results of operation and trends related thereto;
(iv) the status and trends of governmental regulations; and (v) the Company's
growth strategy and operating strategy including the implementation of the
Coast Operating Model at acquired Dental Centers and increases in revenue and
cost efficiencies expected therefrom. 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 form those projected in the forward looking statements as a result
of various factors including, but not limited to an future (i) inability to
locate or acquire suitable additional acquisitions or internal development
locations; (ii) shortage of dentists available or willing to be hired by the
Coast P.A.; (iii) inability of the Company to obtain acceptable financing to
continue its growth strategy; (iv) disagreement between the Company and Coast
Florida P.A.; (v) decision by the Coast Florida P.A. to not follow the Coast
Operating Model; (vi) inability of the Coast Florida P.A. to perform under the
Services and Support Agreement; (vii) adverse governmental regulations
affecting the Company or the Coast Florida P.A.; (viii) inability of the
Company to successfully integrate future Initially Developed and Acquired
Dental Centers into the Company's business; (ix) inability of the Company to
handle its existing business during future aggressive growth; and (x) changes
in competitive factors or increased competition in its current and future
territories regarding acquisitions and for practice management services to
dentists.

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16

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

(A) FINANCIAL STATEMENTS

(1) FINANCIAL STATEMENTS. The Company's Financial Statements included
in Item 8 hereof, as required, including the reports of the Independent
Auditors are as follows:

a. Independent Auditors' Report;
b. Balance Sheets - December 31, 1995 and 1996;
c. Statements of Operations - Years Ended December 31, 1994,
1995 and 1996;
d. Statements of Stockholders' Equity (Deficiency) - Years Ended
December 31, 1994, 1995 and 1996;
e. Statements of Cash Flows - Years Ended December 31, 1994,
1995 and 1996; and
f. Notes to Financial Statements.

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17

INDEPENDENT AUDITORS' REPORT

Coast Dental Services, Inc.

We have audited the accompanying balance sheets of Coast Dental
Services, Inc. (the Company) as of December 31, 1995 and 1996, and the related
statements of operations, stockholders' equity (deficiency) and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit incudes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Coast Dental
Services, Inc. as of December 31, 1995 and 1996 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.

Deloitte & Touche LLP
Tampa, Florida

March 11, 1997

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18
COAST DENTAL SERVICES, INC.
BALANCE SHEETS

DECEMBER 31,
-------------------------------------
1995 1996
---------------- ---------------

ASSETS
Current assets:
Cash and cash equivalents (including restricted cash of
$21,114 at December 31, 1996) . . . . . . . . . . . . . $ 241,403 $ 540,790
Management fee receivable from P.A. . . . . . . . . . . . 130,113 818,370
Notes receivable from Manrique and advances to P.A. . . . -- 354,568
Supplies . . . . . . . . . . . . . . . . . . . . . . . . 41,250 106,500
Prepaid expenses and other assets . . . . . . . . . . . . 2,786 26,560
---------------- ----------------
Total current assets . . . . . . . . . . . . . . . 415,552 1,846,788
Property and equipment, net . . . . . . . . . . . . . . . . 602,070 1,802,285
Notes receivable from stockholders . . . . . . . . . . . . 125,579 177,898
Non-compete agreement - net of amortization of $82,778 . . -- 1,028,622
Dental service agreement -- net of amortization of $18,363 -- 2,117,742
Capitalized offering costs . . . . . . . . . . . . . . . . -- 938,481
Other assets . . . . . . . . . . . . . . . . . . . . . . . 54,351 57,410
---------------- ----------------
Total . . . . . . . . . . . . . . . . . . . . . . . $ 1,197,552 $ 7,969,226
================ ================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 352,166 $ 664,050
Accrued offering costs . . . . . . . . . . . . . . . . . -- 787,981
Accrued payroll . . . . . . . . . . . . . . . . . . . . . 57,568 185,229
Other accrued expenses . . . . . . . . . . . . . . . . . 5,079 218,518
Current maturities of long-term debt . . . . . . . . . . 99,161 731,127
Current portion of capital lease obligations . . . . . . 69,578 75,874
---------------- ----------------
Total current liabilities . . . . . . . . . . . . . 583,552 2,662,779
Long-term debt, excluding current maturities . . . . . . . 254,812 3,714,446
Capital lease obligations, excluding current portion . . . 184,529 127,850
---------------- ----------------
Total liabilities . . . . . . . . . . . . . . . . . 1,022,893 6,505,075
---------------- ----------------
Stockholders' equity:

Preferred stock, $.001 par value; 2,000,000 shares
authorized, none issued . . . . . . . . . . . . . . . . -- --

Common stock, $.001 par value; 50,000,000 shares
authorized, 3,360,000 and 3,500,000, shares
issued and outstanding, respectively . . . . . . . . . 336 3,500
Additional paid-in capital . . . . . . . . . . . . . . . 664 25,174
Retained earnings . . . . . . . . . . . . . . . . . . . 173,659 1,435,477
---------------- ----------------
Total stockholders' equity . . . . . . . . . . . . 174,659 1,464,151
---------------- ----------------
Total . . . . . . . . . . . . . . . . . . . . . . . $ 1,197,552 $ 7,969,226
================ ================

SEE NOTES TO FINANCIAL STATEMENTS.

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19
COAST DENTAL SERVICES, INC.
STATEMENTS OF OPERATIONS

DECEMBER 31,
-----------------------------------------------------------
1994 1995 1996
---------------- ---------------- -----------------

Net revenue . . . . . . . . . . . . . . . . . . . . $ 1,867,765 $ 3,324,668 $ 8,128,148
Dental Center expenses: . . . . . . . . . . . . . .

Staff salaries . . . . . . . . . . . . . . . . . 445,385 863,142 2,324,496
Dental supplies and lab fees . . . . . . . . . . 385,311 556,574 1,202,986
Advertising . . . . . . . . . . . . . . . . . . . 221,071 350,659 674,918
Rent . . . . . . . . . . . . . . . . . . . . . . 218,017 295,982 811,210
Depreciation . . . . . . . . . . . . . . . . . . 106,179 138,213 203,753
Other . . . . . . . . . . . . . . . . . . . . . . 56,575 148,506 234,130
---------------- ---------------- -----------------
Total Dental Center expenses . . . . . . . . . . . 1,432,538 2,353,076 5,451,493
---------------- ---------------- -----------------
Gross profit . . . . . . . . . . . . . . . . . . 435,227 971,592 2,676,655
General and administrative expenses . . . . . . . . 580,298 681,815 950,006
Depreciation and amortization . . . . . . . . . . . 5,043 15,127 139,395
---------------- ---------------- -----------------
Operating (loss) income . . . . . . . . . . . . . (150,114) 274,650 1,587,254
Interest expense - net . . . . . . . . . . . . . . 31,677 50,339 184,290
---------------- ---------------- -----------------
(Loss) income before income taxes . . . . . . . . . (181,791) 224,311 1,402,964
Pro forma income tax benefit (expense) . . . . . . $ 72,716 $ (89,725) $ (547,156)
---------------- ---------------- -----------------
Pro forma net (loss) income . . . . . . . . . . . $ (109,075) $ 134,586 $ 855,808
================ ================ =================
Pro forma earnings per share . . . . . . . . . . . $ .04 $ .24
================ =================
Weighted average number of shares outstanding . . . 3,500,000 3,500,000
================ =================

SEE NOTES TO FINANCIAL STATEMENTS.

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20

COAST DENTAL SERVICES, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)

TOTAL
COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
------------------------------ PAID-IN EARNINGS EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIENCY)
------------- -------------

Balance at December 31, 1993 3,360,000 336 664 131,139 132,139
Net income -- -- -- (181,791) (181,791)
------------- ------------- ----------- ----------- ------------
Balance at December 31, 1994 3,360,000 336 664 (50,652) (49,652)
Net income -- -- -- 224,311 224,311
------------- ------------- ----------- ----------- ------------
Balance at December 31, 1995 3,360,000 336 664 173,659 174,659
Net income -- -- -- 1,402,964 1,402,964
Change in par value of stock -- 3,150 (3,150) -- --
Issuance of Common Stock 140,000 14 27,660 -- 27,674
Distribution to Stockholders -- -- -- (141,146) (141,146)
------------- ------------- ----------- ----------- ------------
Balance at December 31, 1996 $ 3,500,000 $ 3,500 $ 25,174 $ 1,435,477 $ 1,464,151
============= ============= =========== =========== ============

SEE NOTES TO FINANCIAL STATEMENTS.

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21

COAST DENTAL SERVICES, INC.

STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
-------------------------------------------------
1994 1995 1996
------------- ----------- -----------

Cash Flows From Operating Activities:
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . $ (181,791) $ 224,311 $1,402,964
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 111,222 153,341 238,504
Amortization of noncompete and dental
service agreements . . . . . . . . . . . . . . . . . . . . . . . - - 101,141
Compensation in the form of common stock . . . . . . . . . . . . . - - 27,674
Changes in operating assets and liabilities:
Increase in management fee receivable from P.A. . . . . . . . . (13,142) (130,113) (688,257)
Increase in notes receivables from Manrique and advances - - (354,568)
to P.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in prepaids and other assets . . . . . . . . (11,648) 8,862 (23,774)
Increase in supplies . . . . . . . . . . . . . . . . . . . . . . (15,000) (11,250) (65,250)
(Increase) in accounts payable and
accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 245,417 (14,189) 1,440,965
------------- ----------- ----------
Net cash provided by operating activities 135,058 230,962 2,079,399
------------- ----------- ----------
Cash Flows From Investing Activities:
Purchases of property and equipment . . . . . . . . . . . . . . . . (192,155) (119,770) (466,119)
Acquired assets, including intangible assets of $3,243,379 . . . . - - (5,158,586)
(Increase) in other assets . . . . . . . . . . . . . . . . . . . . (7,572) (37,008) (3,059)
------------- ----------- ----------
Net cash used in investing activities . . . . . . . . . . . . . (199,727) (156,778) (5,627,764)
------------- ----------- ----------
Cash Flows From Financing Activities:
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . 131,947 231,500 4,418,813
Principal payments on long-term debt . . . . . . . . . . . . . . . (68,648) (44,225) (327,213)
Proceeds from notes payable . . . . . . . . . . . . . . . . . . . . 150,000 - _
Payments on notes payable . . . . . . . . . . . . . . . . . . . . . (35,000) (150,000) _
Proceeds from capital leases . . . . . . . . . . . . . . . . . . . - 8,065 _
Principal payments on capital leases . . . . . . . . . . . . . . . (21,993) (24,036) (50,383)
(Increase) decrease in notes receivable stockholders . . . . . . . (9,051) 24,512 (52,319)
Distribution to shareholders . . . . . . . . . . . . . . . . . . . - - (141,146)
------------- ----------- ----------
Net cash provided by financing activities . . . . . . . . . . . 147,255 45,816 3,847,752
------------- ----------- ----------
Net increase in cash and cash equivalents . . . . . . . . . . . 82,586 120,000 299,387
Cash and cash equivalents at beginning of period . . . . . . . . . . 38,817 121,403 241,403
------------- ----------- ----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . $ 121,403 $ 241,403 $ 540,790
============= =========== ==========
Supplemental schedule of cash flow information:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . $ 36,307 $ 70,554 $ 108,460
============= =========== ==========

Noncash investing and financing activities: During 1994, 1995 and 1996, the
Company recorded approximately $134,000, $60,000, and $18,000, respectively, of
capital leases.

SEE NOTES TO FINANCIAL STATEMENTS.

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22

COAST DENTAL SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996

1. DESCRIPTION OF BUSINESS

Sunshine Health Services, Inc. was incorporated in August 1992, as a
Florida corporation and subsequently changed its name to Coast Dental, Inc.
Effective March 31, 1996, Coast Dental, Inc. was merged into Coast Dental
Services, Inc. (the "Company"), a Delaware corporation. The Company's sole
business is to provide practice management services to the Coast Florida, P.A.
(the "P.A."), an affiliated company. The Company has entered into a services
and support agreement with the P.A. whereby the Company will provide certain
management support services to the P.A. in return for a fee. The P.A. employs
the dentists and the professional hygienists and provides all of the dental
services to the patients. As of December 31, 1996, the Company operated 29
dental centers in Florida.

The Company provides administrative and technical support for
professional services rendered by the dental professionals under the service
agreement and receives a management fee from the P.A. The Company does not
employ dentists and hygienists and, accordingly, "Dental Center Staff Salaries"
presented on the face of the Statement of Operations do not include the
salaries of dentists and hygienists. Prior to October 1, 1996 the fee was
based on revenues earned by the P.A. reduced by certain costs incurred by the
P.A. and a negotiated return to the P.A., however, effective October 1, 1996
the fee is equal to seventy six (76%) percent of revenue of the P.A. The costs
incurred by the P.A. include primarily dentists and hygienists salaries and bad
debts.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation. The accompanying financial statements have
been prepared on the accrual basis of accounting. The Company does not own any
interests in or control the activities of the P.A. Accordingly, the financial
statements of the P.A. are not consolidated with those of the Company.

Cash Equivalents. The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.

Management Fee Receivable from P.A. Management fee receivable
represents the receivable from the P.A. for management services provided by the
Company (See Note 3.)

Supplies. Supplies are stated at the lower of FIFO cost or market.

Property and Equipment. Property and equipment are stated at cost.
Equipment held under capital leases is stated at the present value of minimum
lease payments at the inception of the related leases. Depreciation of
property and equipment is calculated using the straight-line method over the
estimated useful lives of the assets ranging from 5 to 7 years. Equipment held
under capital leases and leasehold improvements are amortized on a
straight-line basis over the shorter of the lease term or estimated useful life
of the assets.

When assets are retired or otherwise disposed of, the costs and
related accumulated depreciation are removed from the accounts. The difference
between the net book value of the assets and proceeds from disposition is
recognized as gain or loss. Routine maintenance and repairs are charged to
expenses as incurred, while costs of improvements and renewals are capitalized.

Non-Compete Agreement. Costs incurred in connection with the
non-compete agreements are being amortized over their estimated life of three
to nine years on a straight line basis. The estimated life of the non-compete
agreement acquired in connection with the Volusia Acquisition (see Note 4)
considers not only the contractual term of the non-compete agreement but also
the Company's estimated length of future employment of Dr. Richard J. Shawn.
While the employment agreement may be cancelled by either party at the end of a
one year term, the expected length of employment

22
23

of Dr. Shawn is based on his age and the maturity date of the notes payable
issued to him in connection with the Volusia Acquisition.

Dental Service Agreement. Costs of acquisitions in excess of the
estimated fair value of property and equipment and any noncompete agreements is
allocated to the dental service agreement because the Company has effectively
acquired the right to manage the practice and to earn 76% of patient revenues
for that service. The dental service agreement with the P.A. represents the
Company's exclusive right to operate the dental centers during the term of the
agreement. The assigned value of the dental service agreement is amortized
using the straight-line method over its estimated life of twenty five years.

Capitalized Offering Costs. The Company has capitalized all costs
related to the initial public offering. Upon completion of the offering, such
costs were netted against the proceeds.

Use of estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimated.

Dependence on the P.A. and the Coast Dentists. The Company receives
fees for services provided to the P.A. under a services and support agreement,
but does not employ dentists or hygienists or control the practices of the
Coast Dentists. The Company's revenue is dependent on revenue generated by the
Coast Dentists and, therefore, effective and continued performance of the Coast
Dentists during the term of the Services and Support Agreement is essential to
the Company's long term success. Under the current Services and Support
Agreement, the Company receives a monthly fee from the P.A. equal to 76.0% of
the Dental Centers' gross revenue. Prior to October 1, 1996, the services and
support fee paid by the P.A. to the Company averaged 78.5% of the Dental
Centers' gross revenue from which the Company pays the operating expenses
incurred by the P.A. excluding certain costs incurred by the P.A. As a result
of the change in the services and support fee, there can be no assurance that
the prior economic performance of the Company will be indicative of future
results. The Company pays all of the operating and nonoperating expenses
incurred by the P.A. at the Dental Centers, except for the salaries and
benefits of the Coast Dentists and hygienists, federal and state income taxes,
bad debt and other expense designated as an expense of the P.A. Any material
loss of revenue by the P.A. would have a material adverse effect on the Company.

Stock-Based Compensation. In October 1995 the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"), which is effective
for fiscal years beginning after December 15, 1995. Under SFAS No. 123, the
Company may elect to recognize stock-based compensation expense based on the
fair value of the awards or continue to account for stock-based compensation
under Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to
Employees and disclose in the financial statements the effects of SFAS No. 123
as if the recognition provisions were adopted. The Company has not adopted the
recognition provisions of SFAS No. 123.

Fair Value of Financial Instruments. The estimated fair value of
amounts reported in the financial statements has been determined by using
available market information and appropriate valuation methodologies. The
carrying value of all current assets and current liabilities approximates the
fair value because of their short-term nature. The fair value of long-term
debt approximates its carrying value.

Pro Forma Income Taxes. Upon completion of the public offering, the
Company terminated its status as an S Corporation and became subject to federal
income taxes. As such, the financial statements include a pro forma adjustment
for federal income taxes as if the Company had not been treated as an S
Corporation. The effective rate utilized of 39% approximates the combined
statutory federal and state income tax rate.

Pro Forma Net Income Per Common Share. The pro forma net income per
common share is based on the weighted average number of common shares
outstanding during each period adjusted for actual shares issued during the
period. The weighted average number of shares outstanding reflects all shares
issued within one year of the initial public offering as if the shares were
issued on January 1, 1995.

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24

3. NET REVENUE.

Revenue for all dental centers is recorded at established rates
reduced by amounts retained by the P.A. The Company has a 40 year evergreen
dental service agreement with the P.A. whereby the Company receives fees for
services provided to the P.A. Net revenue represents the aggregate fee charged
to the P.A. under the agreement during the year. Prior to October 1, 1996,
the fee was based on revenues earned by the P.A. reduced by certain costs
incurred by the P.A. and a negotiated return to the P.A. The costs incurred
by the P.A. include primarily dentists and hygienists salaries, see Note 1.
All arrangements for fees to date have been agreed between the principal and
sole owner of the P.A., Dr. Adam Diasti, (who is also a major shareholder and
the President of the Company) and the Chief Executive Officer of the Company,
Terek Diasti. The factors considered in setting those fees included the
Company's evaluation of the services it provides, the costs incurred by the
Company in connection with providing the services, and the Company's negotiated
return, balanced against the P.A's requirement for a retained amount which
ensured its financial viability, contemplated an anticipated long-term
relationship with the Company and reflected the future business opportunity
related thereto. The following table sets forth for the periods prior to
October 1, 1996 the amount of gross Dental Center revenue received by the P.A.,
the amounts retained by the P.A., and the management fee earned by the Company:

NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ ------------------
1994 1995 1996
------------------ ---------------- ------------------

Dental Center revenue . . . . . $ 2,286,265 $ 4,281,340 $ 7,009,516

P.A. Dentist's salaries and
benefits . . . . . . . . . . . . 246,878 623,028 1,180,680
P.A. Hygienist's salaries and
benefits . . . . . . . . . . . . 121,622 288,811 431,312
Amounts Retained by the P.A.(1). 50,000 44,833 55,709
------------------ ---------------- ---------------
Total . . . . . . . . . . . . . . $ 418,500 $ 956,672 $ 1,667,701
------------------ ---------------- ---------------
Fees earned by the Company . . . $ 1,867,765 $ 3,324,668 $ 5,341,815
================== ================ ===============

- -----------------
(1) The amounts set forth are net of bad debt expense for estimated
uncollectible accounts which amounted to $1,000, $58,890 and $56,346
for each of the two years ended December 31, 1994 and 1995 and for the
nine months ended September 30, 1996, respectively. The P.A. has
incurred in the past and currently incurs, all risks regarding bad
debts in connection with its arrangement with the Company.

Only the fees earned by the Company for its services to the P.A. and
the actual expenses of the Company are reflected in the financial statements of
the Company. Neither the P.A. nor any of the amounts retained by the P.A. are
reflected in the financial statements of the Company. For the period 1994
through September 30, 1996, the services and support fee paid by the P.A. to the
Company varied, but averaged 78.5% of P.A.'s gross revenue for the entire
period. The fee was based on revenues earned by the P.A. reduced by certain
costs incurred by the P.A. and an agreed upon payment to the P.A. In the event
the current fee of 76.0% had been charged by the Company instead of the
previous agreed fee for the years ended 1994 and 1995, the fees earned by
the Company would have been reduced by approximately $128,000 and $74,000,
respectively, and would have remained approximately the same for the nine
months ended September 30, 1996. Any future changes to the current Services
and Support Agreement and the related 76% fee must be approved in advance by
the independent outside directors of the Company's Audit Committee.

Effective October 1, 1996, under the current Services and Support
Agreement, the P.A. began paying a fee to the Company equal to 76% of the
Dental Centers' gross revenue, net of refunds and discounts. The costs
incurred by the P.A. include primarily dentists and hygienists salaries and bad
debt expense, as described in Note 1. The management fee earned since October
1, 1996 under the current Services and Support Agreement was $2,786,333.

4. ACQUISITIONS

The Company and the P.A. periodically have jointly entered into asset
purchase agreements with existing dental practices. In all cases, the P.A.
acquires the patient lists and any other professional assets and the Company
acquires certain tangible assets, principally the dental equipment and assumes
certain liabilities such as the lease agreement for the facility. The fair
value of the patient lists is determined based upon general market information
received from an

24
25

independent dental practice transition consultant regarding traditional dental
practice acquisitions. In addition to the purchase price allocations for
tangible assets, there are allocations for identifiable intangible assets and
unidentifiable intangible assets. The identifiable intangible asset
allocation relates to non-compete agreements which are partially allocated to
the Company and partially allocated to the P.A. The total value of the
non-compete agreements is based upon arms-length negotiations between the
sellers and the Company and P.A. as buyers. The value of such acquired
identifiable intangible asset is allocated between the P.A. and the Company.
The non-compete protection acquired by the Company typically relates to
agreements between the selling professional association and its dentist(s)
jointly, and the Company, whereby the selling professional association and its
dentist(s) agree not to engage in competition with the Company's practice
management business or utilize any other practice management group, in the
immediate vicinity of the acquired Dental Center; and also relates to the
Company's third party contractual rights refraining the selling professional
association and its dentist(s) from competing with the P.A. within a specified
area surrounding the acquired Dental Office. The amount allocated to the P.A.,
on the other hand, is limited to the value of the P.A.'s right to prohibit the
selling professional association and its dentist(s) from competing in the
dental business within the specified area surrounding the acquired Dental
Office. That portion of the amount of the purchase price attributable to such
non-compete agreements in acquisitions has historically been allocated on
average, 77% to the Company, and 23% to the P.A. In the future, the Company
policy is that the allocation for the purchase price attributable to the
non-compete agreements, unless unique circumstances dictate otherwise, will be
approximately 76% and 24% to the Company and P.A., respectively. The
historical allocation to the Company is larger because in an early acquisition
unique circumstances existed which justified a greater allocation of such total
value to the Company. In the future, after a determination of the value of the
tangible assets and identifiable intangible assets acquired, the total
remaining purchase price representing unidentifiable intangible assets will be
allocated on the basis of 76% to the Company and 24% to the P.A. (value of the
Service and Support Agreement attributable to the Dental Center).
Historically, the allocation of value for unidentifiable intangible assets
acquired amounted to approximately 80% and 20% to the Company and the P.A.,
respectively. Had the allocations set forth above been allocated pursuant to
the Company's current standard policy, there would not have been a significant
effect herein. All acquisitions are purchases of assets and the operating
results of the Company only include the effects of the operations of the
acquired assets from the date of acquisition.

On January 18, 1996, the Company entered into an asset purchase
agreement with Dr. Manrique, P.A. ("Manrique"), whereby the Company acquired
all of the tangible assets of the dental practice entity and entered into a
services and support agreement with Manrique to provide management services.
The total purchase price was $40,000. In connection with the purchase, the
Company loaned $60,000 to Manrique at 9% repayable in sixty equal installments.
Also, the P.A. has the option to acquire Manrique's patient lists for a price
ranging from $222,000 to $322,000 depending on an appraisal as to their value,
subject to adjustment based on future revenue from the acquired practice.

On April 1, 1996, the Company and the P.A. entered into a purchase
agreement with Richard J. Shawn, DMD, P.A. ("Volusia"), whereby the Company
acquired all of the tangible assets and assumed certain liabilities of Volusia
and the P.A. acquired the patient files of Volusia for a total purchase price
of $1,800,000. The Company's portion of the purchase was approximately
$1,500,000 ($300,000 paid in cash and the balance in seller financed notes) of
which $950,000 has been allocated to the contractually assigned value of the
not to compete agreement and the balance of $550,000 to property and equipment.
The P.A.'s portion of the purchase price, $300,000 (seller financed), relates
to the value of the professional assets principally the patient lists and
goodwill. The Company has entered into a services and support agreement with
the P.A. to provide management services and support to the Volusia practice.
Two of the Company's majority shareholders are guarantors of the $300,000 debt
of the P.A.

On September 27, 1996 the Company and the P.A. entered into a
purchase agreement with Juan A. Soler ("Soler") whereby the Company acquired
all of the tangible assets of Soler's dental practice and the P.A. acquired
the professional assets, principally patient lists of the practice for a
combined purchase price of $110,000. The Company's portion of the purchase is
approximately $85,000 of which $35,000 has been allocated to the tangible
assets acquired and $50,000 has been allocated to the dental service agreement.

On September 30, 1996 the Company and the P.A. entered into a
purchase agreement with Dan Steele, P.A. ("Steele") whereby the Company
acquired all of the tangible assets of Steele's dental practice and the P.A.
acquired the professional assets, principally patient lists of Steele for a
combined purchase price of $285,000. The Company's portion of the purchase is
approximately $251,000 of which $68,450 has been allocated to the tangible
assets acquired and $182,550 has been allocated to the dental service agreement
and a covenant not to compete.

25
26

On September 30, 1996 the Company and the P.A. entered into a
purchase agreement with Jerry L. Reynolds, P.A. ("Reynolds") whereby the
Company acquired all of the tangible assets of Reynolds' dental practice and
the P.A. acquired the professional assets, principally patient lists of
Reynolds for a combined purchase price of $225,000. The Company's portion of
the purchase is $190,000 of which $30,000 has been allocated to the tangible
assets acquired and $160,000 has been allocated to the dental service agreement
and a covenant not to compete.

On November 7, 1996 the Company and the P.A. entered into a purchase
agreement with Seminole Dental Center, Seminole Dental South, Seminole Dental
West and Seminole Dental Services, Inc. (collectively the "Seminole Dental
Center") whereby the Company acquired all of the tangible assets of the
Seminole Dental Centers dental practices and the P.A. acquired the
professional assets, principally patient lists and goodwill, of Seminole Dental
Center for a combined purchase price of $2,500,000. The Company's portion of
the purchase is $1,900,000 of which $250,000 has been allocated to the
estimated fair value of the tangible assets acquired and $1,650,000 has been
allocated to the dental service agreement and a covenant not to compete.

On December 14, 1996, the Company and the P.A. entered into a
Purchase Agreement with Gerber Dental, Inc. ("Gerber") whereby the Company
acquired all of the tangible assets of Gerber's dental practice and the P.A.
acquired the professional assets, principally patient lists, of Gerber for a
combined purchase price of $170,000. The Company's portion of the purchase
price is $135,000, of which $43,500 has been allocated to the tangible assets
acquired and $91,500 has been allocated to the dental service agreement and
covenant not to compete.

On December 31, 1996, the Company and the P.A. entered into a
purchase agreement with Patrick Wayne O'Brien, DMD, P.A. ("O'Brien"), whereby
the Company acquired all of the tangible assets of O'Brien's dental practice
and the P.A. acquired the professional assets, principally patient lists, of
O'Brien for a combined purchase price of $120,000. The Company's portion of
the purchase price is $95,000 of which $40,000 has been allocated to the
tangible assets acquired and $55,000 has been allocated to the dental service
agreement

On December 31, 1996, the Company and the P.A. entered into a
purchase agreement with William Glover, DMD, P.A. ("Glover"), whereby the
Company acquired all of the tangible assets of Glover's dental practice and the
P.A. acquired the professional assets, principally patient lists, of Glover
for a combined purchase price of $85,000. The Company's portion of the
purchase price is $70,000 of which $40,000 has been allocated to the tangible
assets acquired and $30,000 has been allocated to the dental service agreement.

The unaudited pro forma results of all current, continuing operations,
assuming the 1996 acquisitions completed on or prior to December 31, 1996 had
been consummated on January 1, 1995 are as follows:

YEARS ENDED DECEMBER 31,
1995 1996
----------------- -----------------

Net revenue . . . . . . . . . . . . . . . . . . $ 9,916,000 $ 11,933,000
Earnings before income taxes . . . . . . . . . 760,000 2,076,000
Net earnings . . . . . . . . . . . . . . . . . 456,000 1,267,000
Net earnings per share . . . . . . . . . . . .
.11 .31

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27

5. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

DECEMBER 31,
---------------------------------------------------
1995 1996
------------------ ---------------------

Furniture fixtures and equipment . . . . . $ 405,676 $ 1,711,005
Leasehold improvements . . . . . . . . . . 251,159 365,871
Capitalized leases - equipment . . . . . . 287,227 305,905
------------------ ---------------------
Total . . . . . . . . . . . . . . 944,062 2,382,781
Less accumulated depreciation and
amortization . . . . . . . . . . . . . . . (341,992) (580,496)
------------------ ---------------------
Total . . . . . . . . . . . . . . . . . . . $ 602,070 $ 1,802,285
================== =====================

Accumulated depreciation on capitalized leases of equipment amounted to
approximately $113,000 and $172,632 at December 31, 1995 and 1996, respectively.

6. LONG-TERM DEBT AND CAPITAL LEASES

Long-term debt consists of the following:

DECEMBER 31,
-----------------------------------------
1995 1996
------------------ -------------------

Note payable in increasing monthly installments of $560
to $672 at an interest rate of 13% payable monthly
through March 1998. Collateralized by dental equipment . $ 17,639 $ 10,393

Note payable in monthly installments of $314 at an
interest rate of 13% payable monthly through April 1997.
Collateralized by dental equipment . . . . . . . . . . . 5,880 2.108

Note payable in monthly installments of $186 at an
interest rate of 13% payable monthly through April 1997.
Collateralized by dental equipment . . . . . . . . . . . 3,618 1,245

Note payable in monthly installments of $242 at an
interest rate of 7.75% . . . . . . . . . . . . . . . . . 8,473 -

Note payable in monthly installments of $667 plus
interest equal to the bank's prime rate plus 2.5% . . . . 21,333 -

Note payable in monthly installments of $746 plus
interest at 10% payable monthly through November 1997 at
which time the remaining $16,622 becomes due.
Collateralized by bank accounts held with the lender and
by personal guarantees by two of the majority
stockholders of the Company. In addition, a
compensating balance equal to the amount due on the note
must be held with the lender. At December 31, 1996,
cash balance held with the lender totaled in
excess of the balance of the loan . . . . . . . . . . . . 28,841 22,428

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28

DECEMBER 31,
-----------------------------------------
1995 1996
------------------ -------------------

Note payable in monthly installments of $1,042 plus
interest equal to the prime rate plus 2% (Prime was
8.25% at December 31, 1996 payable monthly through
December 1998. Collateralized by bank accounts held
with the lender and by personal guarantees of the
majority stockholders of the Company. The Bank has a
right of offset of any accounts maintained in the Bank.
At December 31, 1996, the cash balances with the lender
totaled in excess of the balance of the loan . . . . . . 37,496 24,992

Note payable to a bank in monthly installments of $1,005
through November 1998, at an interest rate of 9.25% per
annum and is collateralized by computer equipment. The
Bank has the right of offset of any accounts maintained
in the Bank. At December 31, 1996 the Company had cash
on hand at the Bank in excess of the balance of the loan 30,693 21,114

Note payable to a bank in monthly installments of $2,560
with interest at the bank's prime rate plus 2%. (Prime
was 8.25% at December 31, 1996) The note is personally
guaranteed by two of the majority stockholders of the
Company. The note is collateralized by the assets of
the Company and the Bank has a right of offset of any
accounts maintained in the Bank. At December 31, 1996,
the Company had cash on hand at the Bank in excess of
the balance of the loan . . . . . . . . . . . . . . . . . 100,000 76,874

Note payable to a bank in monthly installments of
$10,000 plus interest at the Bank's prime rate plus 2%.
(Prime was 8.25% at December 31, 1996). The note is
personally guaranteed by two of the majority
stockholders of the Company. The note is collateralized
by the assets of the Company . . . . . . . . . . . . . 100,000 379,292

Note payable to Richard J. Shawn DMD in monthly
installments of $4,997 at an interest rate of 9%
beginning May 1997 payable monthly through April 1999.
Upon completion of a public offering, the remaining
balance will be paid together with accrued interest . . . - 100,000

Note payable to Richard J. Shawn DMD in monthly
installments of $9,994 at an interest rate of 9%
beginning May 1997 payable monthly through April 1999.
Upon completion of a public offering, the remaining
balance will be paid together with accrued interest . . . - 200,000

Note payable to Richard J. Shawn DMD in monthly
installments of $17,744 at an interest rate of 9%
beginning May 1997 payable monthly through April 2003.
Upon completion of a public offering, the remaining
balance will be paid together with accrued interest . . . - 900,000

Note payable to Jerry L. Reynolds D.D.S, P.A. in monthly
installments of $830.33 at an interest rate of 9%
beginning Oct. 15, 1996 payable monthly through Sept.
15, 2001 . . . . . . . . . . . . . . . . . . . . . . . . - 38,396

Note payable to Jerry L. Reynolds D.D.S, P.A. in monthly
installments of $1,556.80 at an interest rate of 9%
beginning Oct. 15, 1996 payable monthly through Sept.
15, 2001. Upon completion of a public offering, the
remaining balance will be paid together with any accrued
interest . . . . . . . . . . . . . . . . . . . . . . . . - 71,994

28
29

DECEMBER 31,
-----------------------------------------
1995 1996
------------------ -------------------

Note payable to Dan Steele, P.A. in monthly installments
of $3,970.03 at an interest rate of 9% beginning Oct.
15, 1996 payable monthly through Feb. 1, 1998 with a
balloon payment of $146,598.84 on March 15, 1998 . . . . - 183,586

Note payable to Juan A. Soler DMD, in monthly
installments of $726.54 at an interest rate of 9%
beginning Oct. 15, 1996 payable monthly through
September 15, 2001. Upon completion of a public
offering, the remaining balance will be paid together - 33,560
with any accrued interest. . . . . . . . . . . . . . . .

Revolving line of credit agreement for $1,500,000 at an
interest rate of Prime + 1.5% payable on demand. This
agreement contains covenants requiring maintenance of
certain financial ratios and restrictions on disposition
of assets, capital expenditures and payment of dividends - 795,000

Note payable to Seminole Dental Center in monthly
installments of $19,267, at an interest rate of 8%
beginning December, 1996 payable monthly through
November, 2001. Upon completion of a public offering,
the remaining balance up to $750,000 will be paid
together with any accrued interest. The remaining
balance shall be paid over the original term in equal
monthly installments
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 937,074

Note payable to Seminole Dental West in monthly
installments of $8,619, at an interest rate of 8%
beginning December, 1996 payable monthly through
November, 2001. Upon completion of a public offering,
the remaining balance will be paid together with any
accrued interest . . . . . . . . . . . . . . . . . . . . - 419,217

Note payable to Seminole Dental South in monthly
installments of $507, at an interest rate of 8%
beginning December, 1996 payable monthly though
November, 2001 Upon completion of a public offering,
the remaining balance will be paid together with any
accrued interest . . . . . . . . . . . . . . . . . . . . - 24,660

Note payable to Michael D. Witcher, D.D.S. in monthly
installments of $1,014, at an interest rate of 8%
beginning December, 1996 payable monthly through
November, 2001. Upon completion of a public offering,
the remaining balance will be paid together with any
accrued interest . . . . . . . . . . . . . . . . . . . . - 49,320

Note payable to C.M. Garcia, D.M.D. in monthly
installments of $1,014, at an interest rate of 8%
beginning December, 1996 payable monthly through
November, 2001. Upon completion of a public offering,
the remaining balance will be paid together with any
accrued interest . . . . . . . . . . . . . . . . . . . . - 49,320

Note payable to Gerber Dental, P.A. in monthly
installments of $1,217, at an interest rate of 8%
beginning January, 1997 payable monthly through
December, 2001. Upon completion of a public offering,
the remaining balance will be paid together with any
accrued interest . . . . . . . . . . . . . . . . . . . . - 60,000

29
30

DECEMBER 31,
-----------------------------------------
1995 1996
------------------ -------------------

Note payable to Patrick Wayne O'Brien, D.M.D., P.A. in
monthly installments of $912, at an interest rate of 8%
beginning February, 1997 payable through January, 2002.
Upon completion of a public offering, the remaining
balance will be paid together with any accrued interest . - 45,000
------------------ -------------------
Total long-term debt . . . . . . . . . . . . . . . . . . 353,973 4,445,573

Less current maturities . . . . . . . . . . . . . . . . . (99,161) (731,127)
------------------ -------------------
Long-term debt, excluding current maturities . . . . . . $ 254,812 $ 3,714,446
================== ===================

The three notes payable listed above to Dr. Shawn totaling $1,200,000 at
December 31, 1996 originated in connection with the purchase from Dr. Shawn
discussed in note 4. The notes are secured by the Company's interest in the
Dr. Shawn business and the goodwill associated therewith along with a
collateral assignment of leases for the related offices. Each of the notes is
also personally guaranteed by two of the majority shareholders of Coast.

Capital lease obligations consist of the following:

DECEMBER 31,
-----------------------------------------
1995 1996
------------------ -------------------

Capital lease obligations, at varying rates of imputed
interest from 15% to 21%, collateralized by lease
equipment, with an amortized cost of approximately $174,000
and $148,000 at December 31, 1995, and December 31, 1996,
respectively . . . . . . . . . . . . . . . . . . . . . . . $ 254,107 $ 203,724

Less current portion of capital lease
obligations . . . . . . . . . . . . . . . . . . . . . . . (69,578) (75,874)
------------------ -------------------
Capital lease obligations, net of current
portion . . . . . . . . . . . . . . . . . . . . . . . . . $ 184,529 $ 127,850
================== ===================

Scheduled maturities of long-term debt and payments on capital lease
obligations as of December 31, 1996 are as follows:

OBLIGATIONS
LONG-TERM UNDER
DEBT CAPITAL LEASES
----------------- --------------------

1997 . . . . . . . . . . . . . . . . . . . . . $ 731,127 $ 105,238
1998 . . . . . . . . . . . . . . . . . . . . . 1,742,935 84,558
1999 . . . . . . . . . . . . . . . . . . . . . 697,645 64,559
2000 . . . . . . . . . . . . . . . . . . . . . 550,062 9,349
2001 . . . . . . . . . . . . . . . . . . . . . 522,900 --

Thereafter . . . . . . . . . . . . . . . . . . 200,904 --
----------------- -----------------
$ 4,445,573 $ 263,704
=================
Less amounts representing interest . . . . . . 59,980
-----------------
$ 203,724
=================

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31

7. INCOME TAXES

Since October 1992, the Company has elected to be treated as an S
Corporation for federal income tax purposes, with profits and losses generally
reportable by the stockholders in their individual income tax returns. Upon
completion of the public offering, the Company terminated its status as an S
Corporation.

The pro forma income tax adjustment represents a provision for federal
and state income taxes at the statutory rate in effect for the periods
presented (at an effective rate of 39%) as if the Company had not been treated
as an S Corporation.

8. RELATED PARTY TRANSACTIONS

The Company periodically advances funds to/from the majority
stockholders and the P.A. The P.A. is wholly-owned by a majority shareholder
and director of the Company. See Notes 1 and 3 for a further description of
the relationship with the P.A. These advances are reflected on the balance
sheet as notes receivable from stockholders for $125,579 and $177,898 at
December 31, 1995 and 1996, respectively. The notes have a maturity of five
years and are being repaid in varying installments plus interest at 5% to 8%
per annum. Interest income relating to these amounts was insignificant for all
periods presented. Additionally, at December 31, 1996 the Company advanced
funds on a short-term basis to Manrique (see Note 4) and to the P.A. totalling
$354,568. These advances bear interest at 8%.

As of December 31, 1996, the P.A. has incurred $1,069,000 of
acquisition debt in connection with the acquisitions completed through such
date. Through December 31, 1996, the Company has advanced $224,000 to the P.A.
to assist the P.A. in making its required principle repayments on this
acquisition debt. The Company was not required to make these advances, is not
a guarantor or party to any of the P.A.'s debt, and has not pledged any assets
to secure the P.A.'s debt. Additionally, the balance of the management fee
receivable from the P.A. increased to approximately $733,000 at December 31,
1996. This increase is directly attributed to the increase in patient revenues
earned by the P.A. for which the Company is due its 76% management fee. These
advances and receivable are unsecured and represent a concentration of credit
risk and expose the Company to risk of loss for these amounts should the P.A.
be unable to pay its debts.

9. COMMITMENTS AND CONTINGENCIES

The Company primarily leases space for operation of its clinics under
several noncancelable operating leases expanded over the next seven years.
Rental expense for the years ended December 31, 1994, 1995 and 1996 was
$117,432, $195,664, and $489,827, respectively.

Future minimum lease payments under these agreements as of December
31, 1996 are:

1997 . . . . . . . . . . . . . . . . . . . . . $ 696,606
1998 . . . . . . . . . . . . . . . . . . . . . 556,137
1999 . . . . . . . . . . . . . . . . . . . . . 440,373
2000 . . . . . . . . . . . . . . . . . . . . . 255,666
2001 . . . . . . . . . . . . . . . . . . . . . 206,677
Thereafter . . . . . . . . . . . . . . . . . . 501,920
--------------
$ 2,657,379
==============

The Company has entered into employment agreements with four of its
officers, three of whom are the majority shareholders of the Company. The
terms of the agreements are from three to five years.

10. STOCKHOLDERS' EQUITY

Effective April 1, 1996, the Board of Directors adopted, and the
stockholders of the Company approved, two stock incentive plans: the Stock
Option Plan (the "Incentive Plan") and the Affiliated Professionals Stock Plan
(the "Professionals

31
32

Plan," and together with the Incentive Plan, the "Plans"). The purpose of the
Plans is to provide directors, officers, key employees, advisors and dental
professionals employed by the P.A.'s (subject to approval and reimbursement by
the P.A.) with additional incentives by increasing their proprietary interest
in the Company or tying a portion of their compensation to increases in the
price of the Company's common stock. The aggregate number of shares of common
stock subject to the Incentive Plan and the Professionals Plan is 450,000
shares and 450,000 shares, respectively. During 1996, the Company has granted
approximately 140,000 options under the Professionals Plan and approximately
46,000 options under the Incentive Plan with an exercise price equal to $8
per share, the price of stock in the initial public offering of the Company's
stock. The options vest over three years, some are exercisable as of January
1, 1997. The fair value of the options granted is not significant. The effect
on compensation expense and net income had compensation costs for the Company's
stock option plans been determined based on the fair value at the grant date
consistent with the provisions of SFAS No. 123, is not material. The Company
estimated the fair value of options utilizing an option pricing model assuming
a market price and exercise price of $8 per share, a risk free interest rate of
7.5%, a four year expected life, 0% expected volatility, and no dividends. The
fair value of the options, totalling $185,000, issued to the dental
professionals employed by the P.A. are charged to the P.A. and reimbursed to
the Company from the P.A.

In February, 1996 the Company reached a mutual understanding with an
officer that the officer would be entitled to 105,000 shares as compensation
and in January 1996 reached a mutual understanding with certain other employees
of the Company that they would be entitled to an aggregate of 35,000 shares as
compensation for which the Company recognized compensation expense of $27,674.
The fair market value of the Common Stock used to determine compensation
expense recorded was determined based on an independent valuation of the
Company's stock as of February 11, 1996. The above described shares were
formally issued in May and April, respectively.

On October 1, 1996 and December 29, 1996 the Company approved stock
splits resulting in an exchange of 1 share for approximately 3.86 shares of
Common Stock issued and outstanding. Simultaneously, the par value of the
common stock was changed from $.00001 to $.001. All share and per share
amounts have been retroactively adjusted for these splits. Additionally, the
Company increased the authorized number of common shares to 50,000,000.

11. SUBSEQUENT EVENTS

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 $15.1 million
(after deducting underwriting discounts and commissions and offering expenses).

As of March 11, 1997, the Company used a portion of the net proceeds
from its initial public offering for the repayment of: (i) $1.2 million for
notes payable to banks utilized as consideration for acquisitions by the
Company; (ii) $1.3 million for notes payable issued as part of the
consideration for the Seminole Acquisitions; (iii) $136,000 for notes payable
as part consideration for the addition of six acquired Dental Centers occurring
after June 30, 1996; and (iv) $228,000 for equipment lease and note obligations.

On March 10, 1997, the Company executed a revised line of credit
agreement with Barnett Bank. Under the terms of this agreement, the Company
may borrow up to $5 million subject to certain limitations. The agreement
contains certain financial covenants. No amounts are currently outstanding
under this Barnett bank line of credit.

The Company anticipates making a distribution to existing founding
shareholders of $477,000 which constitutes approximately 34% of the S
Corporation earnings. Additionally, the Company will forgive by way of
dividend, the notes receivable from shareholders of $177,898. The remaining
undistributed S Corporation retained earnings of $780,579 will be reclassified
as additional paid-in capital.

At completion of the offering, the Company converted from an S
Corporation to a C Corporation and became obligated to pay federal and state
income taxes.

32
33

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND DISCLOSURE

During May 1996 the Company's Board of Directors approved of
a change in accountants and the Company's former accountants were dismissed.
The independent accounting firm of Deloitte & Touche LLP was engaged by the
Company on June 18, 1996. The former accountant's report on the financial
statements for the years ended December 31, 1995 and 1994 did not contain an
adverse opinion, disclaimer opinion, and was not qualified or modified as to
uncertainty, audit scope, or accounting principles. In addition, there were no
disagreements between the Company and its former accountants on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure during the two most recent fiscal years ended December 31,
1995 and 1994 and any subsequent interim period preceding such dismissal. The
Company's financial statements as of December 31, 1995 and 1996 and for each of
the three years in the period ended December 31, 1996, included herein have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and are so included in reliance upon the report of such
firm given upon their authority as experts in auditing and accounting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item is incorporated herein
by reference to the information under the headings "MANAGEMENT - Directors and
Executive Officers" in the Company's definitive Proxy Statement to be used in
connection with the Company's 1996 Annual Meeting of Shareholders, which will
be filed with the Commission on or before April 30, 1997.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated herein
by reference to the information under the headings "MANAGEMENT - Compensation
of Executive Officers and Directors" in the Company's definitive Proxy
Statement to be used in connection with the Company's 1996 Annual Meeting of
Shareholders, which will be filed with the Commission on or before April 30,
1997.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated herein
by reference to the information under the headings "MANAGEMENT - Security
Ownership of Management and Others" in the Company's definitive Proxy Statement
to be used in connection with the Company's 1996 Annual Meeting of
Shareholders, which will be filed with the Commission on or before April 30,
1997.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated herein
by reference to the information under the headings "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" in the Company's definitive Proxy Statement to be used in
connection with the Company's 1996 Annual Meeting of Shareholders, which will
be filed with the Commission on or before April 30, 1997.

33
34

PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM
8-K

(a) 1. The following Financial Statements of the Registrant
are included in Part II, Item 8, Page:

Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Balance Sheets - December 31, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Statements of Operations - Years Ended December 31, 1994, 1995
and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Statements of Stockholders' Equity (Deficiency) - Years Ended December 31, 1994, 1995
and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Statements of Cash Flows - Years Ended December 31, 1994, 1995
and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

2. Financial Statement Schedules of the Registrant are
omitted because of the absence of the conditions under
which they are required or because the required
information is included in the financial statements and
their notes.

3. Exhibits:

EXHIBIT # EXHIBIT DESCRIPTION
- --------- -------------------

2.1** Asset Purchase Agreement dated April 1, by and among Adam Diasti, D.D.S., P.A., Coast Dental Services,
Inc., Richard J. Shawn D.M.D., P.A., East Coast Dental Management, Inc. and Richard J. Shawn, D.M.D

2.2** Asset Purchase Agreement dated October 31, 1996 by and among Coast Florida P.A., Coast Dental Services,
Inc., Seminole Dental Services, Inc., Seminole Dental Center, Seminole Dental West, Seminole Dental
South, Michael D. Witcher, D.D.S., P.A., Milo R. Novotny, D.D.S., P.A., and C.M. Garcia, D.M.D., P.A

3.1**** Restated Certificate of Incorporation of Coast Dental Services, Inc

3.2* Bylaws of Coast Dental Services, Inc

4.1* Specimen of Coast Dental Services, Inc. Common Stock Certificate

4.2* Business Loan Agreement dated August 15, 1996 between Coast Dental Services, Inc. and Barnett Bank,
N.A.

4.3 First Amendment to Business Loan Agreement dated March 7, 1997 between Coast Dental Services, Inc. and
Barnett Bank, N.A.

(The Company is not filing any instrument with respect to long-term debt that does not exceed 10
percent of the total assets of the Company and the Company agrees to furnish a copy of such instrument
to the Commission upon request.)

10.1** Employment Agreement between Coast Dental Services, Inc. and Terek Diasti.

10.2** Employment Agreement between Coast Dental Services, Inc. and Adam Diasti, D.D.S

10.3* Employment Agreement between Coast Dental Services, Inc. and Joseph R. Smith

10.4* Coast Dental Services, Inc. Stock Option Plan

34
35

10.5* Coast Dental Services, Inc. Affiliated Professional Stock Plan

10.6* Services and Support Agreement dated October 1, 1996 between Coast Dental Services, Inc. and Coast
Florida, P.A

10.7** Asset Purchase Agreement dated April 1, 1996 by and among Adam Diasti, D.D.S., P.A., Coast Dental
Services, Inc., Richard J. Shawn D.M.D., P.A., East Coast Dental Management, Inc. and Richard J. Shawn,
D.M.D.

10.8* Promissory Note from Adam Diasti, DDS, P.A., dated June 30, 1996, payable to Coast Dental Services, Inc

10.9* Business Loan Agreement dated August 15, 1996 between Coast Dental Services, Inc. and Barnett Bank, N.A

10.10* Form of Indemnification Agreement with officers and directors

10.11** Asset Purchase Agreement dated October 31, 1996 by and among Coast Florida P.A., Coast Dental Services,
Inc., Seminole Dental Services, Inc., Seminole Dental Center, Seminole Dental West, Seminole Dental
South, Michael D. Witcher, D.D.S., P.A., Milo R. Novotny, D.D.S., P.A., and C.M. Garcia D.M.D. P.A.

10.12** Agreement to Transfer Stock and Stock Pledge dated November 1, 1996, by and between Adam Diasti, D.D.S.
and Coast Dental Services, Inc

10.13 First Amendment to Business Loan Agreement dated March 7, 1997 between Coast Dental
Services, Inc. and Barnett Bank, N.A. filed as Exhibit 4.3 to this Report on Form 10-K and incorporated
herein by reference.

16.1**** Letter from KPMG Peat Marwick LLP

27.1 Financial Data Schedule for year ended December 31, 1996 (for SEC use only)

_____________________________________

*Previously filed as an exhibit with the same exhibit number identification
in the Company's Registration Statement on Form S-1 filed on October 7,
1996 (File No. 333-13613) and incorporated herein by reference.
**Previously filed as an exhibit with the same exhibit number
identification in the Company's Amendment No. 1 to Form S-1 Registration
Statement filed on November 12, 1996 and incorporated herein by reference.
***Previously filed as an exhibit with the same exhibit number
identification in the Company's Amendment No. 4 to Form S-1 Registration
Statement filed on January 21, 1997 and incorporated herein by reference.
****Previously filed as an exhibit with the same exhibit number
identification in the Company's Amendment No. 5 to Form S-I Registration
Statement filed on February 10, 1997 and incorporated herein by reference.

(b) Reports on Form 8-K: During the last quarter of the year
ended December 31, 1996, the Company did not file any Reports
on Form 8-K:

(c) Exhibits: The exhibits listed under Item 14(a) are filed as
part of this Report.

(d) Financial Statements Schedules: Report of the Independent
Auditors' (Included with the Independent Auditors Report on
the Financial Statements of the Company at Page 17)

35
36

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 March 31, 1997.

COAST DENTAL SERVICES, INC.

By: /s/ Dr. Terek Diasti, DVM
-----------------------------------
DR. TEREK DIASTI, DVM, Chief Executive
Officer (Principal Executive Officer)

By: /s/ Joseph R. Smith
-----------------------------------
JOSEPH R. SMITH, Chief Financial Officer
(Principal Financial and Accounting
Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities indicated on
March 31, 1997.

SIGNATURE TITLE
- --------- -----

/s/ Dr. Terek Diasti, DVM
- ----------------------------------------
DR. TEREK DIASTI, DMV Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)

/s/ Dr. Adam Diasti, D.D.S.
- ----------------------------------------
DR. ADAM DIASTI, D.D.S. President, Chief Operating Officer and Director

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

/s/ Donald R. Millard
- ----------------------------------------
DONALD R. MILLARD Director

/s/ John H. Kang
- ----------------------------------------
JOHN H. KANG Director

36
37

1996 FORM 10-K
COAST DENTAL SERVICES, INC.
EXHIBIT INDEX

EXHIBIT # EXHIBIT DESCRIPTION
- --------- -------------------

2.1** Asset Purchase Agreement dated April 1, by and among Adam Diasti, D.D.S., P.A., Coast Dental Services,
Inc., Richard J. Shawn D.M.D., P.A., East Coast Dental Management, Inc. and Richard J. Shawn, D.M.D

2.2** Asset Purchase Agreement dated October 31, 1996 by and among Coast Florida P.A., Coast Dental
Services, Inc., Seminole Dental Services, Inc., Seminole Dental Center, Seminole Dental West, Seminole
Dental South, Michael D. Witcher, D.D.S., P.A., Milo R. Novotny, D.D.S., P.A., and C.M. Garcia,
D.M.D., P.A

3.1 **** Restated Certificate of Incorporation of Coast Dental Services, Inc

3.2* Bylaws of Coast Dental Services, Inc

4.1* Specimen of Coast Dental Services, Inc. Common Stock Certificate

4.2* Business Loan Agreement dated August 15, 1996 between Coast Dental Services, Inc. and Barnett Bank,
N.A. (Previously filed as Exhibit 10.9 to the Company's Registration Statement on Form S- I filed on
October 7, 1996 (File No. 333-13613) and incorporated herein by reference

4.3 First Amendment to Business Loan Agreement dated March 7, 1997 between Coast Dental Services, Inc. and
Barnett Bank, N.A.

(The Company is not filing any instrument with respect to long-term debt that does not exceed 10
percent of the total assets of the Company and the Company agrees to furnish a copy of such instrument
to the Commission upon request.)

10.1** Employment Agreement between Coast Dental Services, Inc. and Terek Diasti.

10.2** Employment Agreement between Coast Dental Services,Inc. and Adam Diasti, D.D.S

10.3* Employment Agreement between Coast Dental Services, Inc. and Joseph R. Smith

10.4* Coast Dental Services, Inc. Stock Option Plan

10.5* Coast Dental Services, Inc. Affiliated Professional Stock Plan

10.6* Services and Support Agreement dated October 1, 1996 between Coast Dental Services, Inc. and Coast
Florida, P.A

10.7** Asset Purchase Agreement dated April 1, 1996 by and among Adam Diasti, D.D.S., P.A., Coast Dental
Services, Inc., Richard J. Shawn D.M.D., P.A., East Coast Dental Management, Inc. and Richard J.
Shawn, D.M.D.

37
38

10.8* Promissory Note from Adam Diasti, DDS, P.A., dated June 30, 1996, payable to Coast Dental Services,
Inc

10.9* Business Loan Agreement dated August 15, 1996 between Coast Dental Services, Inc. and Barnett Bank,
N.A

10.10* Form of Indemnification Agreement with officers and directors

10.11** Asset Purchase Agreement dated October 31, 1996 by and among Coast Florida P.A., Coast Dental
Services, Inc., Seminole Dental Services, Inc., Seminole Dental Center, Seminole Dental West, Seminole
Dental South, Michael D. Witcher, D.D.S., P.A., Milo R. Novotny, D.D.S., P.A., and C.M. Garcia D.M.D.
P.A.

10.12** Agreement to Transfer Stock and Stock Pledge dated November 1, 1996, by and between Adam Diasti,
D.D.S. and Coast Dental Services, Inc

10.13 First Amendment to Business Loan Agreement dated March 7, 1997 between Coast Dental Services, Inc. and
Barnett Bank, N.A. filed as Exhibit 4.3 to this Report on Form 10-K and incorporated herein by
reference.

16.1**** Letter from KPMG Peat Marwick LLP

27.1 Financial Data Schedule for year ended December 31, 1996 (for SEC use only)

_______________________________________

*Previously filed as an exhibit with the same exhibit number identification
in the Company's Registration Statement on Form S-1 filed on October 7,
1996 (File No. 333-13613) and incorporated herein by reference.
**Previously filed as an exhibit with the same exhibit number
identification in the Company's Amendment No. I to Form S-1 Registration
Statement filed on November 12, 1996 and incorporated herein by reference.
***Previously filed as an exhibit with the same exhibit number
identification in the Company's Amendment No. 4 to Form S-1 Registration
Statement filed on January 21, 1997 and incorporated herein by reference.
****Previously filed as an exhibit with the same exhibit number
identification in the Company's Amendment No. 5 to Form S-I Registration
Statement filed on February 10, 1997 and incorporated herein by reference.
****Previously filed as an exhibit with the same exhibit number
identification in the Company's Post Effective Amendment No. 1 to Form S-I
Registration Statement filed on February 10, 1997 and incorporated herein
by reference.

38