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Celebrity invests in Coast Dental

Arnold Schwarzenegger's mutual fund has increased its holding in the struggling Tampa management company.

By KRIS HUNDLEY
Published August 15, 2003

TAMPA - Coast Dental Services Inc., faced with losses, a stagnant share price and a failed bid to go private, has attracted the attention of the Terminator.

Dimensional Fund Advisors, a mutual fund company in which actor and California gubernatorial candidate Arnold Schwarzenegger holds a significant ownership stake, has taken a growing interest in the struggling Tampa dental management company. Though Dimensional Fund has been a long-term investor in Coast, in recent months it has increased its holdings to 8 percent.

Coast Dental could use the type of action hero rescue that is Schwarzenegger's trademark. The company, which went public in 1997 with big expansion plans, saw its stock price top $90 a share in the heady early days. But by early 1998, the idea of selling dental care cheap through a string of dental practices lost its luster. Shares slid to 62 cents in 2001 before they were boosted through a three-to-one reverse stock split. Then they bounced along at less than $5 a share while the company continued to post losses. On Thursday, the stock closed at $4.52, down 10 cents.

The only winners at Coast Dental appear to be three brothers, Terek, Adam and Tim Diasti, who founded the company in 1992 and own more than 50 percent of its shares. Though the company is losing money, Terek Diasti, Coast Dental's chief executive, and Adam Diasti, president, continue to receive healthy pay increases. Terek earned $273,077 last year, up 20 percent from 2001; Adam's pay of $219,231 was up 15.5 percent over the prior year.

Rather than putting purchases out for competitive bid, Coast Dental also has bought a growing assortment of supplies from Diasti-controlled enterprises. Among them was more than $4-million in dental supplies last year from a company controlled by Tim Diasti. Last year, Coast Dental also started buying dentures and lab products from Diasti-related companies. A Diasti-controlled company also receives fees for marketing Coast Dental's private credit card program.

In February, Coast Dental's board, which includes Terek and Adam Diasti, thought it had an answer to the company's problems: Go private. The company offered stockholders $4.50 a share, close to the market price, and were quickly rebuffed. Two outside companies entered the fight, offering as much as $7.50 a share for Coast Dental if the Diastis would sell their majority shares.

The Diastis refused. All but about 50 shareholders thumbed their noses at the company's offer. The privatization effort fizzled.

Tim Merrick, Coast Dental's vice president of finance, said the company bought back about 11,500 shares under the terms of the self-tender offer, while about 2-million shares remain outstanding.

"It amounted to a stock buyback," Merrick said. "We have no current plans to go forward with the self-tender offer. Our plans are to just operate the company."

Coast Dental now provides business services to 109 dental centers operated by Coast P.A., which is owned by Adam Diasti. For the quarter ending June 30, Coast Dental reported a loss of $324,229, or 15 cents a share, on revenues of $14.6-million. That compares to earnings of $23,957, or 1 cent a share, on revenues of $14.2-million in the same quarter a year ago.

Bruce Galloway, a New York City investor who owns about 42,000 shares of Coast Dental, is undeterred by the bottom-line losses. Noting that the company had cash flow of about $1.4-million last quarter, he thinks Coast Dental is poised for long-promised growth.

"They're doing the right things, investing in the business through added training and expecting to hire a lot of dentists in the second half of the year," Galloway said. "The problem is the public doesn't really trust the sincerity of management to enhance the share price."

Galloway is encouraged by Dimensional Fund Advisors' growing investment in Coast Dental. Asked what he thinks about Schwarzenegger becoming a fellow investor in the company, he said, "That's absolutely a good sign."

- Kris Hundley can be reached at hundley@sptimes.com or 727 892-2996.

[Last modified August 15, 2003, 01:17:11]

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