MEMORANDUM
June 30, 200X
Edward Implant, D.D.S.
Dental Associates, PA
Route 76
Anytown, USA
This memorandum was prepared for Bank of Norwest to enable the Bank to evaluate the request of Edward Implant, D.D.S. for a construction mortgage in the amount of $700,000, a permanent mortgage loan in the amount of $900,000, a $350,000 term loan to finance the purchase of clinical equipment, furniture and office equipment including computing equipment and a $50,000 line of credit to finance working capital.
This memorandum contains confidential information. Bank of Norwest understands this and agrees to maintain it, in whole and in part, as strictly confidential, and use the information exclusively to evaluate the credit worthiness of Edward Implant, D.D.S. and grant the credit request as aforesaid. The memorandum should not be used for any other purpose.
If you need assistance or clarification, feel free to contact David J. Shuffler.
LOAN REQUEST
Borrower: Edward Implant, D.D.S or a real estate L.L.C. to be formed.
| Credit Facility: | Construction Mortgage |
| Loan Amount: | $700,000 |
Purpose: |
Renovation and site development re: 6,500 square foot professional building located at Route 76, Anytown, USA. |
| Term: | Six months |
| Rate: | To be determined |
| Credit Facility: | Permanent Mortgage Loan |
| Amount: | $900,000 |
| Purpose: | Provide borrower with a purchase money mortgage re: acquisition of Route 76, Anytown, USA and refinance construction mortgage in favor of Sunset Bank. Purchase price of Route 76 property is $525,000. |
| Term: | Twenty Years |
| Rate: | To be determined |
| Borrower: | Edward Implant, D.D.S. d/b/a Dental Associates, PA |
| Credit Facility: | Term Loan |
| Loan Amount: | $350,000 |
| Purpose: | Purchase clinical equipment, furniture and fixtures and office equipment including computing equipment. |
| Term: | Seven years |
| Rate: | To be determined |
| Credit Facility: | Line of Credit |
| Loan Amount: | $50,000 |
| Purpose: | Working Capital. |
| Term: | One Year |
| Rate: | To be determined |
Edward Implant, D.D.S. graduated from New York University College of Dentistry in 1981 and, in 1983; he completed a two year general practice residency program at Brookdale Hospital Medical Center.
Doctor Implant was an associate doctor prior to establishing the predecessor to Dental Associates in 1987. The writer, who has known the doctor for seventeen years, provided Doctor Implant with start up financing.
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Doctor Implant would like to expand Dental Associates, PA clinical capacity and, in that regard, he purchased real estate located at Route 76. in July 2007. The building is nearby the 74 Route 9 office site.
The doctor will renovate the existing structure, a residential home, and construct a two story 6,500 square foot professional building. Dental Associates, PA will occupy 2,350 square feet on floor one. Doctor Implant will let the remaining two first floor office suites to a pedodontist and a physical therapist. The two second floor suites will be let to one unnamed tenant and a two attorney law firm.
Excepting Dental Associates, PA, the projected tenant rental income is $9,000 per month or $108,000 per annum.
The purchase price of the Route 76 property was $525,000. The building is owned free and clear of all liens and encumbrances.
The cost of renovation and site development is $700,000. The cost of clinical equipment, furniture and office equipment including computing equipment is $350,000.
The Anytown Village Township Planning Board approved the renovation project at their March 200X meeting.
Dental Associates conducts a general dental practice with emphasis on prosthodontics.
The following table indicates the mix of services rendered:
| Operative, i.e., restoration amalgams, inlays et cetera | 5.0% |
| Preventive, i.e., fluoride treatment, prophylaxis et cetera | 15.0% |
| Prosthodontic | 45.0% |
| Diagnostic, i.e. examinations, x-ray et cetera | 10.0% |
| Endodontic | 15.0% |
| Periodontic | 5.0% |
| Oral/Maxillofacial Surgery including Oral Implants | 2.0% |
| Orthodontic and TMJ Appliances | 3.0% |
The practice currently occupies 1,176 square feet in a medical professional building located at. The rent, which is $32.00 per square foot, is above market. The office lease is month to month.
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Schedule C (Profit or Loss From Business) for the twelve months ended December 31, 200X, December 31, 200X and December 31, 200X prepared by Trattner & Trattner, PC, indicates the practice generated the following collections. Gross billings were provided by the doctor.
YEAR ENDED GROSS BILLINGS COLLECTIONS
12/31/0X $793,012 $603,614
12/31/0X $792,793 $631,913
12/31/0X $791,018 $637,755
For the six month interim period ended June 30, 200X, Dental Associates, PA generated collections of $332,761 compared to $305,950 for the prior interim period. Fiscal 200X collections are projected at $755,451.
Fiscal 12/31/0X |
Interim 6/30/0X |
Interim 6/30/0Y |
|||
| Total Income Collected | $694,574 |
$305,950 |
$332,761 |
||
| New Patients per Month | 8 |
6 |
10 |
||
| Recall Patients per Month | 76 |
72 |
80 |
||
Total
Patient Encounters per Month |
187 |
195 |
187 |
At the present time, the active-patient population or the number of patients seen within the past twelve months numbers 1,100. The practice maintains 2,048 active and inactive patient charts.
Existing patients account for 33% of new patient referrals. Internal and external marketing generates 60% of new patients with the balance, 7%, generated from managed care organizations and a network of dentist referents.
The following table compares the practice overhead expenses of Dental Associates, PA for the fiscal 200X with Carlin, Charron & Rosen, LLP, Certified Public Accountants and Business Advisors 200X Report: General Dentists.
Fiscal |
Carlin
et al 200X Report: Dentistry Mean |
||
| Practice Overhead Expense Ratio | 46.7% |
56.3% |
|
| Cost of Clinical Supplies | 9.7% |
12.9% |
|
| Office Payroll | 17.9% |
23.1% |
|
| Office Space | 5.9% |
2.9% |
|
| Insurance | 1.5% |
.9% |
|
| Non-Primary Expenses | 11.7% |
13.4% |
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Expenses are well managed. Gross practice income and professional compensation exceed comparable practices in the Carlin 200X Report.
The payer profile of Dental Associates is as follows:
| Dental Indemnity Insurance | 52.0% |
|
| Self Pay | 34.0% |
|
| Managed Care Plans | 11.0% |
|
| Blue Shield | 3.0% |
As of June 30, 200X, accounts receivable were $362,236. The practice estimates that 60% of accounts receivable is eligible for collection. Eligible accounts receivable equal 92 days collections. Accounts receivable management is good.
The socio-economic profile of the primary catchment area is excellent; the office is well located and easily accessed and an extensive secondary catchment area provides a reservoir of potential new patients.
The service mix and payer profile show the breadth and broad scope of the practice.
Patient service capacity is extensive; the active patient population is sizable; internal referral patterns are strong and internal and external marketing produces strong results.
Operations indicate a strong upward trend, expenses are well managed; accounts receivable management is good. Doctor compensation and normalized EBITDA is above market.
The following tables summarize the financial performance of Dental Associates, PA.
| $000s) | 12/31/0X |
% |
12/31/0X |
% |
*12/31/0X |
% |
| Total Revenue | $603,614 |
100.0 |
$631,913 |
100.0 |
$694,574 |
100.0 |
| Operating Expenses | $351,478 |
58.2 |
$375,843 |
59.5 |
$283,049 |
40.8 |
| Depreciation/Amortization | $22,262 |
1.0 |
$8,220 |
1.3 |
$13,251 |
2.1 |
| DDS Compensation | $252,136 |
41.8 |
$256,070 |
40.5 |
$254,367 |
36.6 |
| Net Income | 0 |
NA |
0 |
NA |
$157,158 |
22.6 |
| EBITDA | $22,262 |
3.7 |
$8,220 |
1.3 |
$170,409 |
24.5 |
*Normalized Schedule C.
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Net cash flow generation is strong. The risk of attrition is negligible and, it is probable, that future net income and EBITDA will continue to rise. The proposed new office facility will expand clinical capacity ought to spur additional production. Strong expense management should generate a disproportionate increase in future EBITDA.
Fiscal 200X normalized EBITDA is $170,409 or 24.5% of total income collected.
Actual doctor compensation, $254,367, which exceeds the Medical Group Management Association Physician Compensation and Production Survey: 200X Report Based on 200X Data benchmark of $148,613 by $105,754, expands fiscal 2008 normalized EBITDA.
Projected tenant rental income at 32 Route 76 is $109,000 per year.
The Debt Service Coverage Ratio (DSCR) on a fixed principal reduction 5/20 $900,000 permanent mortgage at 6.5% fixed and a $350,000 seven year fixed principal reduction term loan at 6.5% fixed is .92. The DSCR does not include projected annual tenant rental income. Including said income, the DSCR is 2.51.
The DSCR on a fixed rate, level payment permanent mortgage together with the aforementioned term loan is 1.04. Including projected tenant rental income, the DSCR is 3.69.
Eligible accounts receivable of $217,342 together with a security interest in the tangible assets and patient records of the practice provides additional collateral support.
The guarantee of Edward Implant, D.D.S. and Sheila Implant further support the credit request.
A PFS for Edward Implant, D.D.S. and Sheila Implant dated May 1, 200X indicates a net worth of $1,767,408. Cash and marketable securities account for $541,536; equity in real estate located at Lane Cove, Anytown, USA and Route 76, Anytown, USA account for $375,872; the value of other assets and Dental Associates account for the balance.
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Edward Implant, D.D.S.
Dental Associates
Notes to the Adjusted 12/31/0X Statement of Revenue and Expense
NOTE 1: Production
The Schedule C (Profit or Loss From Business) for fiscal 200X, 200X and 200X prepared by Trattner & Trattner, PC indicates practice revenue and expense.
The actual and projected production was provided by the practice.
NOTE 2: Rent
The adjusted statement assumes the expense center Rent will contribute to the amortization of the $900,000 permanent mortgage as well as the $300,000 term loan.
NOTE 3: Insurance
The adjusted statement considers a portion of the expense center Insurance to be extra ordinary and non-recurring. Said expense is associated with the acquisition of the property located at Route 76, Anytown, USA.
NOTE 4: Automobile Expense
The adjusted statement considers the expense center Automobile Expense a discretionary fringe benefit which is a component of professional compensation not a practice expense.
NOTE 5: Legal and Professional Fees
The adjusted statement considers a portion of the expense center Legal and Professional Fees to be extra ordinary and non-recurring. Said expenses, architect, attorney and engineering fees, are associated with the acquisition of the property located at Route 76, Anytown, USA.
NOTE 6: Repairs and Maintenance
The adjusted statement considers a portion of the expense center Repairs and Maintenance to be extra ordinary and non-recurring. Said expense is associated with the acquisition of the property located at Route 76, Anytown, USA.
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NOTE 7: Professional Development
The adjusted statement of revenue and expense considers the expense center Professional Development optional. If the doctor-owner chooses to expend monies for professional development activities, cash flow would be reduced accordingly.
NOTE 8: Travel and Entertainment
The adjusted statement considers the expense center Travel and Entertainment a discretionary fringe benefit which is a component of professional compensation not a practice expense.
NOTE 9: Professional Compensation
Gross practice income is made up of two components: professional compensation and net income before taxes. Professional compensation, includes, but is not limited to wages, incentive compensation, and voluntary contributions to a 401 (k), 403 (b), Keogh or Section 125 plan, but not employer contributions to any pension, profit-sharing or other retirement accounts, life and health insurance, automobile or other expense reimbursements, is the income earned by a doctor for rendering professional services.
Market conditions determine the amount of professional compensation.
Net income before taxes is the earning capacity of the practice. It is profit that accrues to the practice owner(s) and compensates him/her for capital risk. Entrepreneurship and expertise in management, marketing and administration determine the amount of net income before taxes.
In order to determine professional compensation, the appraiser reviewed the following professional publications and compensation studies: Medical Group Management Association Physician Compensation and Production Survey: 200X Report Based on 200x Data and Carlin, Charron & Rosen, LLP, Certified Public Accountants and Business Advisors 200x Report: General Dentists.
Upon careful examination of the aforementioned data, it is the opinion of Appraiser that a market rate of professional compensation is $148,613 or 21.4% of total income collected. Actual doctor compensation is $254,367.
NOTE 10: Federal Tax Provision
Appraiser does not provide accounting advice or legal counsel. Individual income tax strategies as well as provisions of the federal and state tax code are complex and ever-changing. Tax questions, as well as the provisions of contract law, should be reviewed carefully with accounting and legal professionals.
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NOTE 11: State Tax Provision
Appraiser does not provide accounting advice or legal counsel. Individual income tax strategies as well as provisions of the federal and state tax code are complex and ever-changing. Tax questions, as well as the provisions of contract law, should be reviewed carefully with accounting and legal professionals.
NOTE 12: Debt Service Coverage Ratio (DSCR)
The adjusted statement of revenue and expense assumes the following terms and conditions for the permanent real estate mortgage and term loan requested by Doctor Implant.
Credit Facility: Permanent Mortgage Loan
Loan Amount: $900,000
Term: Twenty year amortization period with a five year balloon
Rate: 6.5% fixed
Credit Facility: Term Loan
Loan Amount: $350,000
Term: Seven year amortization period
Rate: 6.5% fixed
The DSCR re: a fixed principal reduction amortization permanent mortgage in the amount of $900,000 together with a fixed principal reduction term loan in the amount of $350,000 is .92.
The aforementioned DSCR does not include projected annual tenant rental income. If said income is taken into account, the DSCR is 2.51.
The DSCR re: a fixed rate level payment permanent mortgage in the amount of $900,000 together with a fixed principal reduction term loan in the amount of $350,000 is 1.04.
The aforementioned DSCR does not include projected annual tenant rental income. If said income is taken into account, the DSCR is 3.69.
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