S & P down grade of Smiles Brands put it a step closer to bankruptcy, hopefully

S & P cuts Smile Brand Group rating, revises outlook

http://www.reuters.com/article/2012/11/21/idUSWNA992520121121

Overview
-- U.S. dental practice management services provider Smile Brands Group Inc. had negative free operating cash flow after elevated capital spending for the past four quarters, resulting in depleted liquidity.

-- Early in 2013, we expect Smile Brands to bring capital expenditures, mainly for new dental offices, into line with internally generated cash flow.

-- We are lowering our corporate credit rating on Smile Brands to 'B-' from 'B' and revising our rating outlook to negative. At the same time, we are lowering our rating on the company's senior secured debt to 'B-' from 'B'.

-- The negative rating outlook reflects the possibility that Smile Brands will exhaust the $13.5 million of funds available from its revolving credit facility as of Sept. 30, 2012, or breach a loan agreement covenant.

Rating Action

On Nov. 21, 2012, Standard & Poor's Ratings Services lowered its corporate credit rating on Irvine, Calif.-based Smile Brands Group Inc. to 'B-'from 'B'. At the same time, we revised the outlook on the rating to negative

In addition, we lowered our rating on Smile Brands' senior secured debt to 'B-', in conjunction with the downgrade, from 'B'. Our recovery rating on this debt remains unchanged at '3', indicating our expectation for meaningful (50% to 70%) recovery of principal in the event of payment default.

Rationale

The rating on dental practice management (DPM) services provider Smile Brands Group Inc. continues to reflect its "vulnerable" business risk profile (according to Standard & Poor's Ratings Services' criteria), characterized by its narrow scope of operations in intensely competitive markets with low barriers to entry.

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Smile Brands had negative free operating cash flow (FOCF) after elevated capital spending for the past four quarters and we expect this to continue in the fourth quarter of 2012. Our downgrade is based on the expectation that early in 2013, Smile Brands will stem the trend of negative FOCF by reducing spending for new dental offices or taking other actions, such as paying interest on its holding company debt in kind, rather than in cash. 

We also expect adjusted debt to EBITDA will rise to about 8x by the end of 2012, significantly higher than our prior expectations, but still consistent with a "highly leveraged" financial risk profile. As of Sept. 30, 2012, debt to EBITDA was 7.7x, adjusted to capitalize operating leases and including holding company debt. We have lowered our expectations for Smile Brands' revenue growth, EBITDA generation, and cash flow over the next one to two years.

We expect revenues will grow at a mid-single-digit annual rate, somewhat faster than the total U.S. dental services industry over the next few years, primarily fueled by Smile Brands' geographic expansion and a slowly strengthening economic climate. Our prior growth expectations were mid- to high-single-digit annual growth. 

Although Smile Brands' revenue growth slowed in the second and third quarter of 2012, revenues increased 4.2% for the 12 months ended Sept. 30, 2012. 

We believe an unsuccessful marketing strategy, which was subsequently abandoned, contributed to the growth slowdown. Still, we believe underlying industry fundamentals remain sound and relatively resistant to downturns. During the 2008 to 2010 recession, when revenue for the total U.S. industry was nearly flat (according to data from the Centers for Medicare and Medicaid Services), Smile Brands grew modestly, supporting our expectation for continued, albeit modest, growth.

As newer offices mature, we expect the lease-adjusted EBITDA margin (11.7% in the third quarter of 2012, compared with 12.8% in the third quarter of 2011) to gradually recover to the 12% to 14% range, with some quarter-to-quarter variation. 

Smile Brands' profitability is supported by its infrastructure, economies of scale, and supplier discounts. More rapid office expansion in recent quarters contributed to lower profitability. Smile Brands' EBITDA margin (adjusted for leases, stock compensation and nonrecurring items) began to dip in the fourth quarter of 2011, after rising substantially and steadily from 8.9% in 2005 to 14.8% for the 12 months ended Sept. 30, 2011. Our lowered expectations for 2012 and 2013 EBITDA also affect cash flow generation Smile Brands' affiliated dental practices operate a network of approximately 350 dental offices that offer general and specialty dental services. 

The $110 billion U.S. dental practice industry is extremely fragmented and highly competitive, contributing to our vulnerable business risk assessment.

Treatment volume, especially for more discretionary services such as orthodontics, and patient financial capacity exhibit some sensitivity to economic conditions. The availability of financing for patients influences demand. 

We also see vulnerabilities in the nature of the DPM structure. While we believe potential changes in state or federal laws, regulations, or accounting rules could hurt the DPM industry, we do not currently incorporate any adverse developments in our base-case scenario.

The DPM business model has many retail industry attributes, and so carries risks associated with advertising and promotion, branding, and real estate selection, among others. Smile Brands markets its brands, selects high-traffic office locations, and offers customers convenient hours, comprehensive treatment, financing, and prices typically 15% to 25% below those of traditional dentists. It targets middle-income patients in growing metropolitan areas. Affiliated offices operate in 18 states, but there are material concentrations in Texas and California.

The company provides administrative, financial, and operating services to affiliated professional corporations (PCs). Although the company does not own the affiliated PCs, its financial statements consolidate them. Smile Brands generally owns the dental office assets, but dentists and hygienists generally are not employees of the company, in accordance with state laws. 

We analyze the consolidated financial statements on the basis presented (adjusted for the capitalization of operating leases and other standard adjustments) because we believe they best reflect the economic substance of the company's business model.

Liquidity

We revised our assessment of Smile Brands' liquidity to "less than adequate" (according to our criteria), reflecting its diminished liquid resources.

As of Sept. 30, 2012, Smile Brands reported a negative cash balance of $0.5 million, and $13.5 million was available from its $35 million revolving credit facility. We believe Smile Brands may borrow an additional $1 million to $5 million in the fourth quarter of 2012.

We estimate Smile Brands will generate about $20 million of funds from operations (FFO) in 2012 and $25 million in 2013. We expect small, if any,annual increases in working capital. We project about $32 million of capital expenditures in 2012 (actual spending for the first nine months was $27.5 million), including the recently completed roll out of digital x-rays. In 2013, we expect Smile Brands to bring capital expenditures, mainly for new dental offices, into line with internally generated cash flow. We believe annual maintenance capital spending is less than $10 million.

Our assessment of Smile Brands' liquidity profile incorporates the following assumptions and expectations:

-- Over the next 12 months, we expect sources of liquidity, including potential borrowing under the revolver, to exceed uses by 1.2x. Even if EBITDA is 15% below our projections, we estimate liquidity sources would cover cash needs, although in that scenario the revolver could be fully drawn.

-- Debt amortization is only $2.4 million annually through 2014.

-- Our analysis of Smile Brands includes unrated holding company notes with a face value of $100 million ($87 million after the original issue discount). Smile Brands has been paying the 10% coupon in cash. To conserve cash, we believe it may begin to pay interest in kind at 13%.

-- We expect Smile Brands to remain in compliance with its loan agreement covenants, notwithstanding requirement tightening. As of Sept. 30, 2012, there was a 17% cushion under the tightest covenant.

-- We assume Smile Brands will not make any acquisitions over the next two years.

Recovery analysis

For our complete recovery analysis, see our recovery report on Smile Brands, to be published following this report on RatingsDirect.

Outlook

Our negative rating outlook on Smile Brands reflects the possibility that it will exhaust the $13.5 million of funds available from its revolving credit facility as of Sept. 30, 2012, or breach a loan agreement covenant. We would consider lowering the rating if negative FOCF persists in the first quarter of 2013 or we expect the covenant cushion to approach 5%.

We would consider revising the outlook to stable if Smile Brands generates discretionary cash flow (through a combination of improved EBITDA and lower capital spending), restores availability of its revolver, and we expect the covenant cushion to stay above 15%.

Report on Small Smiles Dental Centers to air

 

	Tomorrow morning, Tuesday December 11, 2012 the Today Show will air a piece on Small Smiles Dental Centers – scheduled to air between 7:30 – 8:00 AM Eastern Time.

NCDR - Kool Smiles changing it’s management structure Jan 2013.

It appears either

1. There is pressure on NCDR & Kool Smiles to ditch the traveling trainers.
2. Strapped for cash and need to increase the bottom line in hopes of a sale.
3. Planning to hang the clinical leaders out to dry.
4. All of the above

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Friday December 7, 2012
Dear NCDR, Kool Smiles and Resolution Dental colleagues:

We continue to make great progress toward our dream of creating a world of happy, healthy smiles through access to quality dental care.

In the middle of this year, we launched a cultural initiative, developed with your constructive input during 2011, to create balance within our offices. To that end, our Kool Smiles and NCDR employees worked together to create an action plan for their vision of their office, or department. As you have seen for the last year, we have made many big steps toward achieving that vision, which include:

• The roll out of SmileOn, our new dream, mission and the Priority Pledge;
• Improved office level decision tools and responsibility; and
• Stronger focus on patient satisfaction and retention.

Today, we are announcing that NCDR is reorganizing its field leadership team to better support the evolving needs of the Kool Smiles and Resolution dental offices.

Effective January 14, 2013, the Kool Smiles and Resolution Dental clinical leaders will assume additional responsibilities over their respective offices. These changes will unify field leadership into a single structure in an effort to improve communication and local accountability for your offices.

Just saying...

The Ontario Teachers Union is to Heartland Dental as the Teamsters Union was to the Mob - bankrolling illegal business.

Actually if you think about it the DSO is modeled much like a mafia organization. They steam roll over your business, telling the people, the state agencies, the dental associations and the dentist exactly what they want to hear. But as soon as they have infiltrated, it's their way or the highway. Laws? What laws? They are the Mob.

This is the Dental Service Organization! This IS the DSO!

The DSO model mostly originated in Pueblo, Colorado; rich is mafia bloodlines and history. So what else should be expected?

Moody rates Heartland Dental

http://www.finanzen.net/nachricht/anleihen/Heartland-Dental-Care-LLC-Moody-s-assigns-B2-CFR-to-Heartland-Dental-B1-and-Caa1-to-proposed-1st-and-2nd-credit-facilities-respectively-2174193

Morgan Stanely’s Reachout Healthcare Mobile Dental Clinics continue breaking new rules put in place to protect children from their abuse of children

I realize it’s hard to believe someone, i.e. R. Kirk Huntsman, convinced Morgan Stanley that driving up to schools, sending criminally incompetent dentists and employees inside to zap them with as much radiation as possible, restrain children and perform dental procedures with or without consent, then bill the taxpayer was a great idea. But it happened.

Below is an update on the lawsuit filed by Darren and Stacey Gagnon on behalf of their son, who was traumatized by Reachout Healthcare mobile dental clinic employees in Arizona. Imagine the stuff that was too “hot” to include in the following piece.

WATCH this video!

Don’t forget to comment here and over at My Fox Phoenix here

PHOENIX – December 3, 2012

As we first reported back in June, a mobile dentistry operation is being sued by an Arizona family. They allege their special needs son received unnecessary dental work at school.

Tonight, we revisit the Gagnons, to see how their son Isaac is doing, and update a case that may have already forced the state to make changes in the way dentists do business.

The first time we met the Gagnons, Isaac was kept from our cameras because they might scare him.

This time, we got a chance to watch Isaac color a picture for his friend's birthday party.

Isaac gets night terrors after what happened to him.

"He was diagnosed with post-traumatic stress disorder… he was a very fragile emotionally child in the first place," says mom Stacey Gagnon.

Fragile in the first place because Isaac was adopted after surviving severe shaken baby syndrome.

"He was horribly injured as an infant including five skull fractures."

But Isaac had come a long way with the Gagnons.

"We saw this little boy emerge who loved tractor trucks and run and play in the dirt."

That ended about a year ago.

"October 4th, Isaac was seen by a dentist at school," says dad Darren Gagnon.

A dentist from Big Smiles, a part of Reachout Healthcare America, treated Isaac inside his school's art room.

"He says you know the dentist man got me… we didn't know what had happened."

Reachout paperwork in Isaac's backpack showed the boy had been given two pulpotomies - or baby root canals - and 10 X-rays. Something his parents say they never approved. Isaac's mother called Reachout for an explanation.

"They told me it was a training error on their part," says Stacey.

Everything the Gagnons allege is part of this lawsuit they filed against Reachout, Big Smiles, and two dentists.

It alleges among other things, battery, fraud, intentional infliction of emotional distress and racketeering.

"We found out from the school they had actually held Isaac down for somewhere in the neighborhood of 40 to 45 minutes, that they physically restrained him to do the work on him because obviously he was in a lot of pain," says Darren.

The two dentists named in the lawsuit include Doctor Ralph Green who works at Reachout Corporate offices in north Phoenix -- and Doctor Alvin J. Coon, who performed the work on Isaac.

Children’s Dentistry of Rome bills taxpayers $13,407,134.34 in less than 4 years

Bet’cha some these folks used to (or still does!) work for Small Smiles, Kool Smiles, Ocean Dental maybe… or one of the other Medicaid dental mills?

At least in Georgia, the police departments are using the tools in their toolbox. -O.C.G.A. Title 16, Section 16-5-70, Cruelty to Children. #dentalboardsareuselessinprotectingpatients

UPDATE December 4, 2012 – 9:42 AM

Office bills $13 million in Medicaid claims since ’08

by Lauren Jones, Staff Writer

After numerous allegations of child abuse and fraudulent activity flooded the Rome Police Department over the weekend, detectives are continuing their criminal investigation into Children’s Dentistry of Rome, officials said on Monday.

According to the search warrant affidavit filed in Floyd County Superior Court, MCG Management Inc., doing business as Children’s Dentistry of Rome, billed more than $13 million in Medicaid claims since 2008, and some victims and other dentists alleged that dental work provided by the doctors and hygienists was unnecessary.

Employees from the dentist office issued the following statement on Monday evening: “The dentists operating their practice at the MCG facility care about patients and provide quality care. Dental visits are not always pleasant, but we believe that the practitioners will be able to show they exercised sound judgment and compassion when treating young patients with significant dental problems.”

Following complaints of improper use of restraints and improper or unnecessary performance of dental work on children, agents with the Department of Health and Human Services Office of the Inspector General and Rome Police Department investigators executed a warrant on Thursday and searched the office for billing and medical records pertinent to the criminal investigation.
No arrests have been made in the case and Rome police Lt. Gary Clayton declined to comment on the number of reports the detectives division has received.

The affidavit listed more than 300 patients with Medicaid whose records are being thoroughly investigated.

Medicaid claims
The affidavit, written by detective Joe Costolnick, lists 11 reports of excessive dentistry work performed on 14 children that resulted in serious medical problems and trauma. Reports recounted that children left the office traumatized, scratched and bruised.

Some children were allegedly tied down on papoose boards for unnecessary dental work, and some children needed additional medical attention for improperly done dental work they received at Children’s Dentistry of Rome.

Costolnick, who is specially trained with regard investigating criminal violations relating to cruelty and abuse to children, is working with Special  Agent Connie Murray with the Department of Health and Human Services who investigates Health Care fraud.

Murray obtained a summary of the dental office’s Medicaid claims data from January 2008 to August 2012, the affidavit reported.

The Georgia Medicaid program provides health services to beneficiaries who qualify based on financial need or other circumstances.

In providers’ contracts, the provider agrees to abide by state and federal laws when submitting claims and the Medicaid program requires that providers not bill for services not performed or delivered, and not to submit false or inaccurate claims.

Providers must maintain records to fully disclose the extent of services provided to members for a minimum of five years and the records must also explain the medical necessity for the services provided.

Since 2008, the company billed Medicaid for a total of
$13,407,134.34.

• $3,146,084.38 in 2008,
• $3,215,831.81 in 2009,
• $2,908,993.61 in 2010,
• $2,395,811.79 in 2011
• $1,740,412.75 as of August of 2012

Unnecessary dental work?
In the affidavit, some reports by parents of children who received dental work at Children’s Dentistry of Rome claimed that children went in to the office for routine checkups but left having had more dental work performed, as well as traumatized and in tears.