Table of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x
|
Quarterly report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
|
For the
quarterly period ended
March 31, 2009
or
o
|
Transition report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
|
For the
transition period from to
Commission file number: 1-32203
Prospect
Medical Holdings, Inc.
(Exact name of registrant as
specified in its charter)
Delaware
(State or other jurisdiction of incorporation or
organization)
|
|
33-0564370
(I.R.S. Employer Identification No.)
|
|
|
|
10780
Santa Monica Blvd., Suite 400
Los Angeles, California
(Address of principal executive offices)
|
|
90025
(Zip Code)
|
(310) 943-4500
(Registrants telephone number, including area code)
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes
x
No
o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post
such files). Yes
o
No
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer
o
|
Accelerated filer
o
|
|
|
Non-accelerated filer
o
|
Smaller reporting company
x
|
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act): Yes
o
No
x
The number of shares of the
issuers Common Stock, par value $0.01 per share, outstanding as of May 08,
2009 was 20,575,111.
Table
of Contents
PART IFINANCIAL INFORMATION
Item 1.
Financial Statements.
PROSPECT MEDICAL HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
March 31,
2009
|
|
September 30,
2008
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
31,533,427
|
|
$
|
33,582,686
|
|
Investments, primarily restricted certificates of deposit
|
|
664,172
|
|
637,213
|
|
Patient accounts receivable, net of allowance for doubtful accounts of
$4,616,977 and $3,890,762 at March 31, 2009 and September 30, 2008
|
|
22,570,809
|
|
18,314,495
|
|
Government program receivables
|
|
2,853,507
|
|
4,365,063
|
|
Risk pool receivables
|
|
|
|
337,948
|
|
Other receivables
|
|
2,750,866
|
|
2,598,466
|
|
Third party settlements
|
|
1,136,589
|
|
216,198
|
|
Notes receivable, current portion
|
|
204,267
|
|
224,063
|
|
Refundable income taxes, net
|
|
728,070
|
|
2,653,634
|
|
Deferred income taxes, net
|
|
5,788,068
|
|
5,788,068
|
|
Prepaid expenses and other current assets
|
|
4,674,155
|
|
4,235,925
|
|
Total current assets
|
|
72,903,930
|
|
72,953,759
|
|
Property, improvements and equipment:
|
|
|
|
|
|
Land and land improvements
|
|
18,501,280
|
|
18,452,000
|
|
Buildings
|
|
22,412,976
|
|
22,233,000
|
|
Leasehold improvements
|
|
1,912,247
|
|
1,504,656
|
|
Equipment
|
|
10,622,681
|
|
10,627,945
|
|
Furniture and fixtures
|
|
912,622
|
|
912,622
|
|
|
|
54,361,806
|
|
53,730,223
|
|
Less accumulated depreciation and amortization
|
|
(9,374,768
|
)
|
(7,911,229
|
)
|
Property, improvements and equipment, net
|
|
44,987,038
|
|
45,818,994
|
|
Notes receivable, less current portion
|
|
236,430
|
|
238,334
|
|
Deposits and other assets
|
|
2,221,872
|
|
778,343
|
|
Deferred financing costs, net
|
|
593,791
|
|
661,481
|
|
Goodwill
|
|
128,877,234
|
|
128,877,234
|
|
Other intangible assets, net
|
|
45,615,301
|
|
47,739,873
|
|
Total assets
|
|
$
|
295,435,596
|
|
$
|
297,068,018
|
|
The accompanying notes are
an integral part of the unaudited condensed consolidated financial statements.
3
Table of Contents
PROSPECT MEDICAL HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
March 31,
2009
|
|
September 30,
2008
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accrued medical claims and other health care costs payable
|
|
$
|
19,374,178
|
|
$
|
20,480,380
|
|
Accounts payable and other accrued liabilities
|
|
11,227,474
|
|
16,295,770
|
|
Accrued salaries, wages and benefits
|
|
12,852,577
|
|
11,256,563
|
|
Income taxes payable, net
|
|
1,997,875
|
|
|
|
Current portion of capital leases
|
|
403,404
|
|
340,681
|
|
Debt, due on demand (see Note 7)
|
|
137,832,056
|
|
12,100,000
|
|
Interest rate swap liability, due on demand (see Note 7)
|
|
14,725,992
|
|
|
|
Other current liabilities
|
|
689,082
|
|
107,181
|
|
Total current liabilities
|
|
199,102,638
|
|
60,580,575
|
|
Long-term debt, less current portion (see Note 7)
|
|
|
|
131,920,730
|
|
Deferred income taxes
|
|
21,129,238
|
|
24,433,362
|
|
Malpractice reserve
|
|
786,000
|
|
786,000
|
|
Capital leases, net of current portion
|
|
380,385
|
|
442,191
|
|
Interest rate swap liability
|
|
|
|
6,013,168
|
|
Other long-term liabilities
|
|
15,000
|
|
|
|
Total liabilities
|
|
221,413,261
|
|
224,176,026
|
|
Minority interest
|
|
84,997
|
|
80,664
|
|
Commitments, Contingencies and Subsequent Event
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
Common stock, $0.01 par value; 40,000,000 shares authorized;
20,508,444 shares issued and outstanding at March 31, 2009 and
September 30, 2008
|
|
205,084
|
|
205,084
|
|
Additional paid-in capital
|
|
93,989,465
|
|
93,407,031
|
|
Accumulated other comprehensive loss
|
|
(4,477,548
|
)
|
(4,917,384
|
)
|
Accumulated deficit
|
|
(15,779,663
|
)
|
(15,883,403
|
)
|
Total shareholders equity
|
|
73,937,338
|
|
72,811,328
|
|
Total liabilities and shareholders equity
|
|
$
|
295,435,596
|
|
$
|
297,068,018
|
|
The accompanying notes are
an integral part of the unaudited condensed consolidated financial statements.
4
Table of Contents
PROSPECT MEDICAL HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Managed care revenues
|
|
$
|
48,159,102
|
|
$
|
50,680,973
|
|
$
|
96,290,351
|
|
$
|
101,249,529
|
|
Net hospital services revenues
|
|
37,908,033
|
|
32,396,126
|
|
73,230,440
|
|
59,682,354
|
|
Total revenues
|
|
86,067,135
|
|
83,077,099
|
|
169,520,791
|
|
160,931,883
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Managed care cost of revenues
|
|
36,955,503
|
|
40,208,302
|
|
74,567,432
|
|
81,475,734
|
|
Hospital services operating expenses
|
|
22,857,814
|
|
20,966,977
|
|
45,003,369
|
|
38,968,324
|
|
General and administrative
|
|
13,379,522
|
|
14,280,993
|
|
25,765,025
|
|
26,935,282
|
|
Depreciation and amortization
|
|
1,822,715
|
|
1,907,412
|
|
3,588,649
|
|
3,807,935
|
|
Total operating expenses
|
|
75,015,554
|
|
77,363,684
|
|
148,924,475
|
|
151,187,275
|
|
Operating income from unconsolidated joint venture
|
|
594,623
|
|
694,219
|
|
947,205
|
|
1,168,959
|
|
Operating income
|
|
11,646,204
|
|
6,407,634
|
|
21,543,521
|
|
10,913,567
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
(19,500
|
)
|
(149,068
|
)
|
(67,745
|
)
|
(443,192
|
)
|
Interest expense and amortization of deferred financing costs
|
|
6,576,053
|
|
5,293,849
|
|
12,713,951
|
|
9,493,304
|
|
(Gain) loss in value of interest rate swap arrangements
|
|
(955,201
|
)
|
|
|
8,712,824
|
|
876,680
|
|
Total other (income) expense, net
|
|
5,601,352
|
|
5,144,781
|
|
21,359,030
|
|
9,926,792
|
|
Income from continuing operations before income taxes
|
|
6,044,852
|
|
1,262,853
|
|
184,491
|
|
986,775
|
|
Provision for income taxes
|
|
2,495,832
|
|
456,123
|
|
76,417
|
|
355,391
|
|
Income from continuing operations before minority interest
|
|
3,549,020
|
|
806,730
|
|
108,074
|
|
631,384
|
|
Minority interest
|
|
781
|
|
3,000
|
|
4,335
|
|
8,497
|
|
Income from continuing operations
|
|
3,548,239
|
|
803,730
|
|
103,739
|
|
622,887
|
|
Loss from discontinued operations, net of tax (see Note 4)
|
|
|
|
(75,743
|
)
|
|
|
(391,899
|
)
|
Net income before preferred dividend
|
|
3,548,239
|
|
727,987
|
|
103,739
|
|
230,988
|
|
Dividends to preferred stockholders
|
|
|
|
(1,982,999
|
)
|
|
|
(3,864,989
|
)
|
Net income (loss) attributable to common stockholders
|
|
$
|
3,548,239
|
|
$
|
(1,255,012
|
)
|
$
|
103,739
|
|
$
|
(3,634,001
|
)
|
Per share data:
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.17
|
|
$
|
(0.10
|
)
|
$
|
0.01
|
|
$
|
(0.28
|
)
|
Discontinued operations
|
|
$
|
|
|
$
|
(0.01
|
)
|
$
|
|
|
$
|
(0.03
|
)
|
|
|
$
|
0.17
|
|
$
|
(0.11
|
)
|
$
|
0.01
|
|
$
|
(0.31
|
)
|
Diluted:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.17
|
|
$
|
(0.10
|
)
|
$
|
0.01
|
|
$
|
(0.28
|
)
|
Discontinued operations
|
|
$
|
|
|
$
|
(0.01
|
)
|
$
|
|
|
$
|
(0.03
|
)
|
|
|
$
|
0.17
|
|
$
|
(0.11
|
)
|
$
|
0.01
|
|
$
|
(0.31
|
)
|
The accompanying notes are
an integral part of the unaudited condensed consolidated financial statements.
5
Table of Contents
PROSPECT MEDICAL HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
Operating activities
|
|
|
|
|
|
Net income before preferred dividends
|
|
$
|
103,739
|
|
$
|
230,988
|
|
Adjustments to reconcile net income before preferred dividends to net
cash provided by (used in) operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
3,588,649
|
|
3,807,935
|
|
Amortization of deferred financing costs
|
|
67,690
|
|
447,255
|
|
Provision for bad debts
|
|
3,708,943
|
|
2,039,172
|
|
Payment-in-kind interest expense
|
|
276,675
|
|
|
|
Amortization of other accumulated comprehensive income related to
interest rate swap arrangements
|
|
439,836
|
|
|
|
Deferred income taxes, net
|
|
(3,304,124
|
)
|
(1,234,948
|
)
|
Stock-based compensation
|
|
582,434
|
|
57,763
|
|
Loss on interest rate swap agreements
|
|
8,712,824
|
|
876,681
|
|
Pre-tax loss from discontinued operations
|
|
|
|
610,121
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
Risk pool receivables
|
|
460,194
|
|
(5,330
|
)
|
Patient, government program and other receivables
|
|
(7,523,738
|
)
|
(4,266,721
|
)
|
Prepaid expenses and other current assets
|
|
(438,230
|
)
|
(1,195,531
|
)
|
Refundable income taxes and taxes payable
|
|
3,923,439
|
|
1,527,192
|
|
Deposits and other assets
|
|
(1,654,309
|
)
|
(153,366
|
)
|
Accrued medical claims and other health care costs payable
|
|
(1,106,202
|
)
|
398,419
|
|
Accounts payable, accrued liabilities, and other liabilities
|
|
(2,789,600
|
)
|
(1,151,430
|
)
|
Net cash used in operating activities from discontinued operations
|
|
|
|
(573,350
|
)
|
Net cash provided by operating activities
|
|
5,048,220
|
|
1,414,850
|
|
Investing activities
|
|
|
|
|
|
Purchases of property, improvements and equipment
|
|
(436,639
|
)
|
(952,149
|
)
|
Proceeds from notes receivable
|
|
21,700
|
|
25,813
|
|
Capitalized expenses related to acquisitions
|
|
|
|
(15,864
|
)
|
Increase in restricted certificates of deposits
|
|
(26,959
|
)
|
|
|
Other investing activities
|
|
4,331
|
|
8,497
|
|
Net cash used in investing activities from discontinued operations
|
|
|
|
(2,535
|
)
|
Net cash used in investing activities
|
|
(437,567
|
)
|
(936,238
|
)
|
Financing activities
|
|
|
|
|
|
Borrowings on line of credit
|
|
|
|
10,750,000
|
|
Repayments on line of credit
|
|
|
|
(8,000,000
|
)
|
Repayments of long-term debt
|
|
(6,465,348
|
)
|
(2,500,000
|
)
|
Payments on capital leases
|
|
(194,564
|
)
|
(171,257
|
)
|
Proceeds from exercises of stock options
|
|
|
|
1,200,000
|
|
Net cash (used in) provided by financing activities
|
|
(6,659,912
|
)
|
1,278,743
|
|
Increase (decrease) in cash and cash equivalents
|
|
(2,049,259
|
)
|
1,757,356
|
|
Cash and cash equivalents at beginning of period
|
|
33,582,686
|
|
22,094,693
|
|
Cash and cash equivalents at end of period
|
|
$
|
31,533,427
|
|
$
|
23,852,048
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
Equipment acquired under capital lease
|
|
$
|
195,481
|
|
$
|
170,077
|
|
Accrued dividend to preferred shareholders
|
|
$
|
|
|
$
|
3,864,989
|
|
Interest paid
|
|
$
|
11,865,690
|
|
$
|
9,106,085
|
|
Income taxes paid
|
|
$
|
3,148,000
|
|
$
|
500,000
|
|
The accompanying notes are
an integral part of the unaudited condensed consolidated financial statements.
6
Table of Contents
PROSPECT MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
1. Business
Prospect Medical Holdings, Inc.
(Prospect or the Company) is a Delaware corporation. Prior to the August 8,
2007 acquisition of Alta Hospitals System, LLC (Alta), which was
previously known as Alta Healthcare System, Inc., the Company was
primarily engaged in providing management services to affiliated physician
organizations that operate as independent physician associations (IPAs) or
medical clinics. With the acquisition of Alta, the Company now owns and operates
several community-based hospitals in Southern California, and its operations
are now organized into three primary reportable segments: IPA Management,
Hospital Services, and Corporate as discussed below.
Liquidity and Recent Operating
Results
As discussed in Note 7,
the Company is subject to certain financial and administrative covenants, cross
default provisions and other conditions required by the loan agreements with
its lenders, including a maximum senior debt/EBITDA ratio, a minimum fixed-charge
coverage ratio and, effective May 15, 2008, a minimum EBITDA level. While
the Company has met all debt service requirements timely, it did not comply
with certain financial and administrative covenants as of September 30,
2007, December 31, 2007 and March 31, 2008. The Company and its
lenders entered into a series of forbearance agreements and on May 15,
2008, the credit agreements were formally modified to waive past defaults,
amend certain covenant provisions prospectively and make changes to the interest
rates and payment terms. These changes resulted in a substantial modification
to the credit facilities, which was accounted for as an extinguishment of the
existing debt during the quarter ended June 30, 2008, with the modified
debt recorded as new debt.
The Company has met all of
the May 15, 2008 amended financial covenant provisions for all subsequent
reporting periods and continues to meet all debt service requirements on a
timely basis. However, on March 19,
2009, the Company received notices from its lenders asserting that the Company
was in default of a requirement to sell certain assets by a specified
date. Additionally, on April 17, 2009, the Company received notices
from its lenders asserting that the Companys April 14, 2009 increase in
ownership of Brotman Medical Center, Inc. (see Note 15) violated certain
provisions of the amended credit agreements.
Based on such notices of default, the Company has classified all amounts
due under the credit agreements as current, due on demand at March 31,
2009 (See Note 7). Also, due to cross default provisions, the swap liability
was also classified as current at March 31, 2009. The Company has contested both assertions and
is currently in discussions with its lenders to seek resolution of these matters. However, there can be no assurance that these
matters will be resolved on a basis favorable to the Company. The lenders
may not grant waivers and could require full repayment of the loans and
settlement of the swap liability, which would negatively impact the Companys
liquidity, its ability to operate and raises substantial doubt about its
ability to continue as a going concern.
The lenders also began assessing default interest (additional 2% per
annum) effective with the first asserted event of default, or as of March 19,
2009.
During the six-month period
ended March 31, 2009 and fiscal 2008 and 2007, the Company reported
operating losses associated with legacy IPA entities within its IPA Management
segment. Any future improvement of the Companys legacy IPA Management
operations will require significant investment and management attention.
Management is reviewing its operations to improve profitability and efficiency
and to reduce costs, which may include the divestiture of non-strategic assets (see
Note 4).
Management has implemented a
plan to improve the operating results of the legacy IPA Management operation,
including measures to retain enrollment, increase health plan reimbursement and
reduce medical and operating costs. However, there can be no assurance that the
Companys operational improvement efforts will have a successful outcome and
that the Company will be able to meet all of the financial covenants and other
conditions required by the loan agreements for future periods.
7
Table
of Contents
IPA Management
The IPA Management segment
is comprised of Prospect Medical Systems and ProMed HealthCare Administrators,
two health care management services organizations that provide management
services to affiliated physician organizations that operate as IPAs. The
affiliated physician organizations enter into agreements with health
maintenance organizations (HMOs) to provide enrollees of the HMOs with a full
range of medical services in exchange for fixed, prepaid monthly fees known as capitation
payments. The IPAs contract with physicians (primary care and specialist) and
other health care providers to provide all of their medical services.
Hospital Services
Alta, which was acquired on August 8,
2007, is a wholly-owned subsidiary of Prospect Medical Holdings, Inc. Alta
owns and operates (i) Alta Hollywood Hospitals, Inc., a California
corporation dba Hollywood Community Hospital and Van Nuys Community Hospital;
and (ii) Alta Los Angeles Hospitals, Inc., a California corporation
dba Los Angeles Community Hospital and Norwalk Community Hospital. As of March 31,
2009, Alta and its subsidiaries (collectively, the Hospital Services segment)
owns and operates four hospitals in the greater Los Angeles area, with a
combined 339 licensed beds, served by 315 on-staff physicians. The hospitals in Hollywood, Los Angeles and
Norwalk offer a comprehensive range of medical and surgical services, including
inpatient, outpatient, skilled nursing and urgent care services. The hospital
in Van Nuys provides acute inpatient and outpatient psychiatric services to
patients who are admitted on a voluntary basis. Admitting physicians are
primarily practitioners in the local area. The hospitals have payment
arrangements with Medicare, Medi-Cal (the California version of Medicaid) and
other third-party payers, including some commercial insurance carriers, HMOs
and preferred provider organizations (PPOs).
Effective April 14, 2009 (the Effective Date), the Company
increased its approximately 33.1% ownership stake in Brotman Medical Center, Inc.,
a California corporation (Brotman), to approximately 71.9% via an incremental
investment of approximately $2.5 million, $1.8 million of which had been paid
as of March 31, 2009 and $0.7 million of which will be paid within six
months thereafter. Brotman is a 420-bed
licensed and accredited acute care hospital located in Culver City,
California. The Company will begin
consolidating the results of Brotman, as part of its Hospital Services segment,
as of the Effective Date, and expects to file its amended Form 8K(A) with
proforma financial informtion by no later than June 30, 2009. Accordingly, results for the second quarter
of fiscal 2009 exclude Brotman.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited
condensed consolidated financial statements of the Company have been prepared
in conformity with generally accepted accounting principles in the United
States of America (U.S. GAAP) for interim consolidated financial information
and with the instructions for Form 10-Q and Article 10 of Regulation
S-X. In accordance with the instructions
and regulations of the Securities and Exchange Commission (SEC) for interim
reports, certain information and footnote disclosures normally included in
financial statements prepared in conformity with U.S. GAAP for annual reports
have been omitted or condensed. All
adjustments (consisting of normal recurring adjustments) and disclosures
considered necessary for fair presentation have been included in the
accompanying unaudited condensed consolidated financial statements.
The results of operations
for the three months and six months ended March 31, 2009 are not
necessarily indicative of the results to be expected for the full year. The
information included in this Quarterly Report on Form 10-Q should be read
in conjunction with the audited consolidated financial statements for the year
ended September 30, 2008 and notes thereto included in the Companys
Annual Report on Form 10-K filed with the SEC on December 29, 2008.
Principles of Consolidation
The unaudited interim
condensed consolidated financial statements include the accounts of the Company
and all majority owned subsidiaries and controlled entities under Emerging
Issues Task Force (EITF) No. 97-2,
Application
of FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice
Management Entities and Certain Other Entities with Contractual Management
Arrangements
and Financial Accounting Standards Board (FASB)
Interpretation No. 46,
Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51
(FIN 46). All adjustments considered necessary for a fair presentation
of the results as of the date of, and for the interim periods presented, which
consist solely of normal recurring adjustments, have been included. All
significant inter-company balances and transactions have been eliminated in
consolidation.
8
Table
of Contents
Discontinued Operations
As discussed in Note 4,
effective August 1, 2008, the Company sold all of the issued and
outstanding stock of Sierra Medical Management (SMM), Sierra Primary Care
Medical Group, Antelope Valley Medical Associates, Inc. and Pegasus
Medical Group, Inc., (collectively, the AV Entities) to a third party.
As required by the Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal
of Long-Lived Assets
(SFAS No. 144), the assets and
liabilities of the AV Entities and their operations have been presented in the
condensed consolidated financial statements as discontinued operations for all
periods presented. All prior year amounts have been reclassified in accordance
with the provisions of SFAS No. 144. All references to operating results
reflect the ongoing operations of the Company, excluding the AV Entities,
unless otherwise noted.
Revenues
Revenues by reportable
segment are comprised of the following amounts:
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
|
|
|
2009
|
|
2008(1)
|
|
2009
|
|
2008(1)
|
|
IPA Management
|
|
|
|
|
|
|
|
|
|
Capitation
|
|
$
|
47,874,277
|
|
$
|
50,464,854
|
|
$
|
95,636,452
|
|
$
|
100,775,264
|
|
Management fees
|
|
143,863
|
|
146,767
|
|
288,195
|
|
254,395
|
|
Other
|
|
140,962
|
|
69,352
|
|
365,704
|
|
219,870
|
|
Total revenues: IPA Management
|
|
$
|
48,159,102
|
|
$
|
50,680,973
|
|
$
|
96,290,351
|
|
$
|
101,249,529
|
|
Hospital Services
|
|
|
|
|
|
|
|
|
|
Inpatient
|
|
$
|
35,560,711
|
|
$
|
30,159,537
|
|
$
|
68,800,172
|
|
$
|
55,250,624
|
|
Outpatient
|
|
1,941,093
|
|
1,860,356
|
|
3,663,137
|
|
3,581,715
|
|
Other
|
|
406,229
|
|
376,233
|
|
767,131
|
|
850,015
|
|
Total revenues: Hospital Services
|
|
$
|
37,908,033
|
|
$
|
32,396,126
|
|
$
|
73,230,440
|
|
$
|
59,682,354
|
|
Total revenues
|
|
$
|
86,067,135
|
|
$
|
83,077,099
|
|
$
|
169,520,791
|
|
$
|
160,931,883
|
|
(1)
The above amounts exclude
revenue related to the AV Entities, given their classification as discontinued
operations in the accompanying Condensed Consolidated Financial Statements.
The Company presents segment
information externally the same way management uses financial data internally
to make operating decisions and assess performance. With the acquisition of
Alta in August 2007, the Companys operations are now organized into three
reporting segments: (i) IPA Management, (ii) Hospital Services, and (iii) Corporate
(see Note 9). Corporate represents expenses incurred in Prospect Medical
Holdings, Inc., which were not allocated to the IPA Management and
Hospital Services segments.
Comprehensive Income (Loss)
Comprehensive income (loss)
includes net income (loss) and changes in the fair value of interest rate swaps
subject to hedge accounting that are recorded as other comprehensive income. As
of April 1, 2008, the swaps ceased to be eligible for hedge accounting
under SFAS No. 133,
Accounting For Derivatives
And Hedging Activities
(SFAS No. 133). As a result, all
subsequent changes in the fair value of the swaps were recorded in the
condensed consolidated statements of operations and the effective portion of
the swaps of approximately $5.4 million, after tax, that was recorded in
other comprehensive income through March 31, 2008 continues to be
amortized to interest expense, using the effective interest method, over the
remaining life of the swaps.
9
Table of Contents
The components of
comprehensive income (loss) for the periods ended March 31 are as follows:
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net income (loss) including discontinued operations
|
|
$
|
3,548,239
|
|
$
|
727,987
|
|
$
|
103,739
|
|
$
|
230,988
|
|
Change in fair value of interest rate swaps, net of tax
|
|
|
|
(2,951,145
|
)
|
|
|
(5,153,624
|
)
|
Amortization of fair value of interest rate swaps, net of tax
|
|
219,918
|
|
|
|
439,836
|
|
|
|
Comprehensive income (loss)
|
|
$
|
3,768,157
|
|
$
|
(2,223,158
|
)
|
$
|
543,575
|
|
$
|
(4,922,636
|
)
|
3. Equity-Based Compensation Plans
On August 13, 2008, following
stockholder approval, the Company adopted the 2008 Omnibus Equity Incentive
Plan (2008 Plan) to provide flexibility in implementing equity awards,
including incentive stock options (ISO), non-qualified stock options (NQSO),
restricted stock grants, stock appreciation rights (SAR) and performance
based awards to employees, directors and outside consultants, as determined by
the Compensation Committee of the Board of Directors (the Committee). In
conjunction with the adoption of the 2008 Plan, effective August 13, 2008,
additional equity awards under the Companys 1998 Stock Option Plan (1998 Plan)
have been discontinued and new equity awards are now granted under the 2008
Plan. Remaining authorized shares under the 1998 Plan that were not subject to
outstanding awards as of August 13, 2008, were canceled on August 13,
2008. The 1998 Plan will remain in effect as to outstanding equity awards
granted under the 1998 Plan prior to August 13, 2008. At the inception of
the 2008 Plan, 4,000,000 shares were reserved for issuance under the Plan. As
of March 31, 2009, there were 1,896,250 shares available for future grants
under the 2008 Plan.
Under the terms of the 2008
Plan, the exercise price of an ISO may not be less than 100% of the fair market
value of the Companys Common Stock on the date of grant and, if granted to a
shareholder owning more than 10% of the Companys Common Stock, then not less
than 110%. Stock options granted under the 2008 Plan have a maximum term of
10 years from the grant date, and will be exercisable at such time and
upon such terms and conditions as determined by the Committee. Stock options
granted to employees generally vest over four years, while options granted to
certain executives typically vest over a shorter period, subject to continued
service. In the case of an ISO, the amount of the aggregate fair market value
of Common Stock (determined at the time of grant) with respect to which ISO are
exercisable for the first time by an employee during any calendar year may not
exceed $100,000.
The base price, above which
any appreciation of a SAR issued under the 2008 Plan is measured, will in no
event be less than 100% of the fair market value of the Companys stock on the
date of grant of the SAR or, if the SAR is granted in tandem with a stock
option, the exercise price under the associated option. The restrictions
imposed on shares granted under a restricted stock award will lapse in
accordance with the vesting requirements specified by the Committee in the
award agreement. Such vesting requirements may be based on the continued
service of the participant with the Company for a specified time, or on the
attainment of specified performance goals established by the Committee in its
discretion. If the vesting requirements of a restricted stock award are not
satisfied prior to the termination of the participants service, the unvested
portion of the award will be forfeited and the shares of Common Stock subject
to the unvested portion of the award will be returned to the Company.
Stock Options Activities
The following table
summarizes information about our stock options outstanding at March 31,
2009 and activity during the six-month period then ended:
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Weighted
Average
Remaining
Contractual
Term
(Months)
|
|
Outstanding as of September 30, 2008
|
|
5,087,637
|
|
$
|
3.17
|
|
|
|
|
|
Granted
|
|
57,500
|
|
$
|
2.25
|
|
|
|
|
|
Exercised
|
|
|
|
$
|
|
|
|
|
|
|
Forfeited
|
|
(692,180
|
)
|
$
|
4.56
|
|
|
|
|
|
Outstanding as of March 31, 2009
|
|
4,452,957
|
|
$
|
2.94
|
|
$
|
|
|
41
|
|
Vested and Exercisable as of March 31, 2009
|
|
2,896,331
|
|
$
|
3.20
|
|
$
|
|
|
35
|
|
10
Table of Contents
The aggregate intrinsic value
of the options exercised during the six months ended March 31, 2008 was
$741,700.
The aggregate intrinsic
value is calculated as the difference between the exercise price of the
underlying awards and the quoted price of our common stock for those awards
that have an exercise price currently below the quoted value. As discussed in
Note 7, due to untimely filing of its Form 10-K for the year ended December 31,
2007 and its Forms 10-Q for the quarters ended December 31, 2007 and March 31,
2008, trading of the Companys shares was suspended effective January 16,
2008. As such, the aggregate intrinsic value of the outstanding and the vested
and exercisable stock options at March 31, 2008, could not be determined.
Stock-Based Compensation Expense
Under SFAS No. 123(R),
Share-Based Payment
, compensation cost
for all share-based payments in exchange for employee services (including stock
options and restricted stock) is measured at fair value on the date of grant,
estimated using an option pricing model.
Compensation costs for
stock-based awards are measured and recognized in the financial statements, net
of estimated forfeitures over the awards requisite service period. The Company
uses the Black-Scholes option pricing model and a single option award approach
to estimate the fair value of options granted. Estimated forfeitures will be
revised in future periods if actual forfeitures differ from the estimates and
will impact compensation cost in the period in which the change in estimate
occurs. The determination of fair value using the Black-Scholes option-pricing
model is affected by the Companys stock price as well as assumptions regarding
a number of complex and subjective variables, including expected stock price
volatility, risk-free interest rate, expected dividends and projected employee
stock option exercise behaviors. Equity-based compensation is classified within
the same line items as cash compensation paid to employees. Cash retained as a
result of excess tax benefits relating to share-based payments are presented in
the statement of cash flows as a financing cash inflow.
The weighted average
assumptions used in determining the value of options granted and a summary of
the methodology applied to develop each assumption are as follows:
|
|
Six Months Ended
March 31, 2009
|
|
Weighted average fair value of option grants
|
|
$0.71
|
|
Market price of the Companys common stock on the date of grant
|
|
$2.25
|
|
Weighted average expected life of the options
|
|
3.18 years
3.5 years
|
|
Risk-free interest rate
|
|
1.07%
|
|
Weighted average expected volatility
|
|
43.14%
|
|
Dividend yield
|
|
0.00%
|
|
Expected TermThe expected
term of options granted represents the period of time that they are expected to
be outstanding. The Company has adopted the simplified method of determining
the expected term for plain vanilla options, as allowed under Staff
Accounting Bulletin (SAB) No. 107. The simplified method states that the
expected term is equal to the sum of the vesting term plus the contract term,
divided by two. Plain vanilla options are defined as those granted
at-the-money, having service time vesting as a condition to exercise, providing
that non-vested options are forfeited upon termination and that there is a
limited time to exercise the vested options after termination of service,
usually 90 days, and providing the options are non-transferable and
non-hedgeable. We will continue to gather additional information about the
exercise behavior of participants and will adjust the expected term of our
option awards to reflect the actual exercise experience when such historical
experience becomes sufficient.
Expected VolatilityThe
Company estimates the volatility of the common stock at the date of grant based
on the average of the historical volatilities of a group of peer companies.
Since the Companys shares did not become publicly traded until May 2005,
management believes there is currently not enough historical volatility data
available to predict the stocks future volatility. The Company has identified
a group of comparable companies to calculate historical volatility from
publicly available data for sequential periods approximately equal to the
expected terms of the option grants. In selecting comparable companies,
management considered several factors including industry, stage of development,
size and market capitalization.
11
Table of Contents
Risk-Free Interest RateThe
Company bases the risk-free interest rate on the implied yield in effect at the
time of option grant on U.S. Treasury zero-coupon issues with equivalent
remaining terms.
DividendsThe Company has
never paid any cash dividends on its common stock and does not anticipate
paying any cash dividends in the foreseeable future.
ForfeituresShare based
compensation is recognized only for those awards that are ultimately expected
to vest. Compensation expense is recorded net of estimated forfeitures. Those
estimates are revised in subsequent periods if actual forfeitures differ from
those estimates. The Company used historical data since May 2005 to
estimate pre-vesting option forfeitures for all our employees on a combined
basis.
Stock-based compensation
expense, related to stock options under the fair value method, recognized in
the six months ended March 31, 2009 and 2008 was approximately $502,000
and $58,000, respectively. At March 31, 2009, there were 1,566,626
unvested options with related compensation expense of approximately $735,000,
which will be recognized ratably over a weighted average remaining vesting
period of 53 months.
Restricted Stock Award Activities
As of March 31, 2009,
the Company had 66,667 unvested shares of restricted stock outstanding that
were granted on August 15, 2008, with a weighted-average grant date fair
value of $2.40 and an aggregated unrecognized compensation expense of
approximately $56,000. Compensation expense of approximately $80,000 was
recorded during the six months ended March 31, 2009.
4. Discontinued Operations
On August 1, 2008, the
Company sold all of the outstanding stock of Sierra Medical Management, Inc.
(SMM), a management subsidiary, and all of the outstanding stock of Sierra
Primary Care Medical Group, Antelope Valley Medical Associates, Inc. and
Pegasus Medical Group, Inc., each of which is an independent physician
association (collectively with SMM, the AV Entities) pursuant to a Stock
Purchase Agreement (SPA). As part of the sale, the Company also entered into
a non-competition agreement in the Antelope Valley region of Los Angeles County
for the benefit of the buyer.
Total consideration paid by
the buyer was $8,000,000, of which $2,000,000 was paid into an escrow account
to fund certain AV Entities liabilities and approximately $815,000 was paid
directly to AV Entities vendors, employees and physicians. Of the remaining
amount totaling approximately $5,185,000, $4,219,000 was paid directly to the
Companys lenders as required under the modified debt facilities, and approximately
$966,000 was retained by the Company for transaction expenses and the required
balance sheet reconciliation items.
The Company recorded a gain
of approximately $7.1 million in connection with this transaction in the
fourth quarter of fiscal 2008. The SPA contains certain post-acquisition
purchase price adjustment provisions for working capital and claims liabilities
which require a final determination of the gain by August 10, 2010. Once
the purchase price has been finalized and the net gain on the transaction
determined, any adjustment to the gain will be recorded in discontinued
operations.
Pursuant to SFAS No. 144
and EITF Issue 03-13,
Applying the
Conditions in Paragraph 42 of FASB Statement No. 144 in Determining
Whether to Report Discontinued Operations
, the AV Entities have
been classified as discontinued operations for all periods presented. As
discontinued operations, revenues and expenses of the AV Entities have been
aggregated and stated separately from the respective captions of continuing
operations in the unaudited interim condensed consolidated statements of
operations. Expenses include direct costs of the business that will be
eliminated from future operations as a result of the sale. The Company also
allocated interest expense associated with the portion of debt required to be
repaid for the six months ended March 31, 2008 to discontinued operations
in accordance with EITF Issue 87-24,
Allocation
of Interest to Discontinued Operations.
12
Table of Contents
The results of operations of
the AV Entities reported as discontinued operations are summarized as follows:
|
|
Three Months Ended
March 31, 2008
|
|
Six Months Ended
March 31, 2008
|
|
Managed care revenues
|
|
$
|
4,265,647
|
|
$
|
8,671,476
|
|
Operating expenses:
|
|
|
|
|
|
Managed care cost of revenues
|
|
2,622,153
|
|
5,743,831
|
|
General and administrative
|
|
1,655,563
|
|
3,314,551
|
|
Depreciation and amortization
|
|
11,131
|
|
37,441
|
|
Total operating expenses
|
|
4,288,847
|
|
9,095,823
|
|
Operating loss
|
|
(23,200
|
)
|
(424,347
|
)
|
Other expense
|
|
89,143
|
|
185,774
|
|
Loss before income taxes
|
|
(112,343
|
)
|
(610,121
|
)
|
Income tax benefit
|
|
(36,600
|
)
|
(218,222
|
)
|
Loss from discontinued operations
|
|
$
|
(75,743
|
)
|
$
|
(391,899
|
)
|
5. Earnings per Share
The Company follows SFAS No. 128,
Earnings per Share,
which
established standards regarding the computation of basic and diluted earnings
per share (EPS). Basic net income (loss) per share is calculated by dividing
net income (loss) attributable to common stockholders by the weighted average
number of common shares outstanding. Diluted earnings (loss) per share is
computed by dividing net income (loss) attributable to common stockholders by
the weighted average number of common shares outstanding, after giving effect
to potentially dilutive shares computed using the treasury stock method. Such
shares are excluded if determined to be anti-dilutive.
The calculations of basic
and diluted net income (loss) per share for the three months and six months
ended March 31, 2009 and 2008 are as follows:
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
3,548,239
|
|
$
|
803,730
|
|
$
|
103,739
|
|
$
|
622,887
|
|
Dividends to preferred stockholders
|
|
|
|
(1,982,999
|
)
|
|
|
(3,864,989
|
)
|
|
|
3,548,239
|
|
(1,179,269
|
)
|
103,739
|
|
(3,242,102
|
)
|
Discontinued operations
|
|
|
|
(75,743
|
)
|
|
|
(391,899
|
)
|
Net income (loss) attributable to common stockholders
|
|
$
|
3,548,239
|
|
$
|
(1,255,012
|
)
|
$
|
103,739
|
|
$
|
(3,634,001
|
)
|
Weighted average number of common shares outstanding
|
|
20,508,444
|
|
11,782,567
|
|
20,508,444
|
|
11,747,942
|
|
Basic net income (loss) per share attributable to common
stockholders:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.17
|
|
$
|
(0.10
|
)
|
$
|
0.01
|
|
$
|
(0.28
|
)
|
Discontinued operations
|
|
$
|
|
|
$
|
(0.01
|
)
|
$
|
|
|
$
|
(0.03
|
)
|
|
|
$
|
0.17
|
|
$
|
(0.11
|
)
|
$
|
0.01
|
|
$
|
(0.31
|
)
|
13
Table of
Contents
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
3,548,239
|
|
$
|
(1,179,269
|
)
|
$
|
103,739
|
|
$
|
(3,242,102
|
)
|
Discontinued operations
|
|
|
|
(75,743
|
)
|
|
|
(391,899
|
)
|
Net income (loss) attributable to common stockholders
|
|
$
|
3,548,239
|
|
$
|
(1,255,012
|
)
|
$
|
103,739
|
|
$
|
(3,634,001
|
)
|
Weighted average number of common shares outstanding
|
|
20,508,444
|
|
11,782,567
|
|
20,508,444
|
|
11,747,942
|
|
Weighted average number of dilutive common equivalents from options
and warrants to purchase common stock
|
|
170,803
|
|
|
|
173,078
|
|
|
|
|
|
20,679,247
|
|
11,782,567
|
|
20,681,522
|
|
11,747,942
|
|
Diluted net income (loss) earnings per share attributable to common
stockholders
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.17
|
|
$
|
(0.10
|
)
|
$
|
0.01
|
|
$
|
(0.28
|
)
|
Discontinued operations
|
|
$
|
|
|
$
|
(0.01
|
)
|
$
|
|
|
$
|
(0.03
|
)
|
|
|
$
|
0.17
|
|
$
|
(0.11
|
)
|
$
|
0.01
|
|
$
|
(0.31
|
)
|
The number of stock options
and warrants excluded from the computation of diluted earnings per share during
the three and six months ended March 31, 2009 were 4,452,957 and 475,774
respectively, prior to the application of the treasury stock method, due to
their anti-dilutive effect. Due to net losses, all potentially dilutive
securities were excluded from the calculation of diluted loss per share attributable
to common stockholders during the three and six months ended March 31,
2008, as their effect would be anti-dilutive. The number of stock options and
warrants excluded from the computation of diluted earnings per share during the
three and six months ended March 31, 2008 were 1,830,886, and 1,016,536,
respectively. 1,672,880 Series B preferred shares were also excluded from
diluted earnings per share during the three months and six months ended March 31,
2008, since their conversion was contingent upon stockholder approval and would
have been anti-dilutive.
Following stockholder
approval on August 13, 2008, the holders of all of the outstanding shares
of Series B Preferred Stock elected to convert their preferred shares into
Common Stock. The former holders also ceased to have any right to receive
dividends on the preferred shares. All such dividends terminated and ceased to
accrue, and all previously accrued dividends through August 13, 2008 were
forgiven and the liability was reclassified to additional paid-in capital.
Accordingly, an adjustment to additional paid-in-capital in the amount of
$7,881,890 was recorded as of that date.
The following proforma basic
and diluted earnings per share assume the conversion of preferred shares into
common stock at a ratio of 1:5 at the beginning of the quarter ended December 31,
2007:
|
|
Three Months Ended
March 31, 2008
|
|
Six Months Ended
March 31, 2008
|
|
Basic and diluted:
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
803,730
|
|
$
|
622,887
|
|
Loss from discontinued operations
|
|
(75,743
|
)
|
(391,899
|
)
|
Net income attributable to common stockholdersproforma
|
|
$
|
727,987
|
|
$
|
230,988
|
|
Weighted average number of common shares outstandinghistorical
|
|
11,782,567
|
|
11,747,942
|
|
Add weighted number of preferred shares converted to common shares
|
|
8,364,400
|
|
8,364,400
|
|
Add weighted average number of dilutive common equivalent shares from
options and warrants to purchase common stock
|
|
*
|
|
*
|
|
Weighted average number of common shares outstandingproforma
|
|
20,146,967
|
|
20,112,342
|
|
Basic and diluted net income per shareproforma
|
|
$
|
0.04
|
|
$
|
0.03
|
|
Continuing operations
|
|
$
|
|
|
$
|
(0.02
|
)
|
Discontinued operations
|
|
$
|
0.04
|
|
$
|
0.01
|
|
14
Table of Contents
* No effect has been given
to the dilutive common equivalent shares from options and warrants since the
Companys common stock suspended trading during the period January 16,
2008 through June 17, 2008 and thus, the weighted average share price
cannot be determined for the periods presented.
6. Related Party Transactions
Prospect Medical Holdings, Inc.
has a controlling financial interest in the affiliated physician organizations
included in its unaudited interim condensed consolidated financial statements
which are owned by a nominee physician shareholder designated by the Company.
The control is effectuated through assignable option agreements and management
services agreements, which provide the Company a unilateral right to establish
or effect a change of the nominee shareholder for the affiliated physician
organizations at will, and without the consent of the nominee, on an unlimited
basis and at nominal cost through the term of the management agreement. Jacob
Y. Terner, M.D. was, through August 8, 2008, the sole shareholder, sole
director and Chief Executive Officer of Prospect Medical Group, Inc. (PMG)
and was the Chief Executive Officer of each of PMGs subsidiary physician
organizations, except for AMVI/Prospect Health Network and Nuestra Familia
Medical Group. Dr. Terner is a shareholder of the Company, and formerly
served as its Chairman and Chief Executive Officer through part of fiscal 2008.
The Company had an
employment agreement with Dr. Terner that expired on August 1, 2008
and provided for base compensation (most recently $400,000 per year) and
further provided that if the Company terminated Dr. Terners employment
without cause, the Company would be required to pay him $12,500 for each month
of past service as the Chief Executive Officer, commencing as of July 31,
1996, up to a maximum of $1,237,500. Dr. Terner resigned as the Chief
Executive Officer of the Company effective March 19, 2008 and resigned as
the chairman of the board of directors effective May 12, 2008. In
consideration of Dr. Terners resignation and other provisions in his
resignation agreement, the Company agreed to pay to his family trust the sum of
$19,361 each month during the twelve-month period ending on April 30, 2009
and the sum of $42,694 each month during the twenty-four month period ending on
April 30, 2011, for the total sum of $1,257,000, which amount was recorded
as a general and administrative expense in fiscal 2008.
Dr. Terner continued to
serve temporarily as the sole shareholder, sole director and Chief Executive
Officer of Prospect Medical Group, Inc. and its subsidiary physician
organizations until a suitable replacement was found. Dr. Arthur Lipper
currently serves as the nominee shareholder of Prospect Medical Group and as
the sole director of all subsidiary physician organizations (except Nuestra
Familia Medical Group, where he is one of two directors) and the Chief
Executive Officer, President and Treasurer of all legacy subsidiary physician
organizations (i.e., not including the ProMed Entities).
Through the ProMed
Acquisition (See Note 8), the Company acquired the lease of an office facility
which is jointly owned by a former officer of the ProMed Entities. The total
lease payments during the six months ended March 31, 2009 and 2008 under
that lease were approximately $240,000 and $232,000, respectively.
7. Debt
Debt at March 31, 2009
and September 30, 2008, respectively, consists of the following:
|
|
March 31,
2009
|
|
September 30,
2008
|
|
|
|
(unaudited)
|
|
|
|
Term loans
|
|
$
|
130,732,056
|
|
$
|
136,920,730
|
|
Revolving credit facility
|
|
7,100,000
|
|
7,100,000
|
|
|
|
|
137,832,056
|
|
|
144,020,730
|
|
Less current maturities (*)
|
|
(137,832,056
|
)
|
(12,100,000
|
)
|
Long-term portion
|
|
$
|
|
|
$
|
131,920,730
|
|
* Due to default on the
amended credit facility agreements (see below), all payments due after 12
months, as of March 31, 2009, were reclassified as current.
15
Table
of Contents
On June 1, 2007, the
Company entered into a three-year senior secured credit facility with Bank of
America, N.A. in connection with the purchase of the ProMed Entities (see
Note 8). The Bank of America facility totaled $53,000,000, and was
comprised of a $48,000,000 variable-rate term loan and a $5,000,000 revolver
(which was not drawn at the date of acquisition). $8,051,000 of the term loan
proceeds were used to repay existing debt and the balance was used to finance
the ProMed Acquisition. The $48,000,000 term loan was repaid on August 8,
2007, with proceeds from a new $155,000,000 syndicated senior secured credit
facility arranged by Bank of America in connection with the acquisition of Alta
(see Note 8), comprised of a $95,000,000 seven-year first-lien term loan at
LIBOR plus 400 basis points, with quarterly principal payments of $1,250,000
and an annual principal payment of 50% of excess cash flow, as defined in the
loan agreement; a $50,000,000 seven and one-half year second-lien term loan at
LIBOR plus 825 basis points, with all principal due at maturity and a revolving
credit facility of $10,000,000 bearing interest at prime plus a margin that
ranged from 275 to 300 basis points based on the consolidated leverage ratio.
The Company could borrow, make repayments and re-borrow under the revolver
until August 8, 2012, at which time all outstanding amounts must be
repaid.
The Company recorded an
interest charge of $895,914 to write off deferred financing costs upon the
extinguishment of the $53 million credit facility and capitalized
approximately $6.9 million in deferred financing costs on the
$155 million credit facility in August 2007, which was being
amortized over the term of the related debt using the effective interest
method.
The Company is subject to
certain financial and administrative covenants, cross default provisions and
other conditions required by the loan agreements with the lenders, including a
maximum senior debt/EBITDA (earnings before interest, taxes, depreciation and
amortization) ratio, and a minimum fixed-charge coverage ratio, and, effective May 15,
2008, a minimum EBITDA level, each computed quarterly (except for the test
periods from April 30, 2008 through June 30, 2009, when computations
are monthly) based on consolidated trailing twelve-month operating results. The
administrative covenants and other restrictions with which the Company must
comply include, among others, restrictions on additional indebtedness, incurrence
of liens, engaging in business other than the Companys primary business,
paying dividends, acquisitions and asset sales. The credit facilities provide
that an event of default will occur if there is a change in control of the
Company. The payment of principal and interest under the credit facilities is
guaranteed, jointly and severally, by the Company and most of its existing
wholly-owned subsidiaries. Substantially all of the Companys assets are
pledged to secure the credit facilities.
Default and Debt Modification
The Company exceeded the
maximum senior debt/EBITDA ratio of 3.75 as of September 30, 2007, December 31,
2007 and March 31, 2008. The Company also failed to meet the minimum fixed
charge coverage ratio of 1.25 as of and for the trailing twelve-month periods
ended December 31, 2007 and March 31, 2008. In addition, the Company
did not comply with certain administrative covenants, including the timely
filing of its Form 10-K for the year ended September 30, 2007 and its
Forms 10-Q for the quarters ended December 31, 2007 and March 31,
2008.
On February 13, 2008, April 10,
2008 and May 14, 2008, the Company and its lenders entered into
forbearance agreements, whereby the lenders agreed not to exercise their rights
under the credit facilities through May 15, 2008, subject to satisfaction
of specified conditions. For the period January 28, 2008 through April 10,
2008, interest was assessed at default rates of 11.4% with respect to the first
lien term loan and 15.4% with respect to the second-lien term loan. Under the April 2008
forbearance agreements, the applicable margins on the first and second lien
term loans were permanently increased to 750 and 1,175 basis points,
respectively, and the range of applicable margins on the revolving line of
credit was increased from 500 to 750 basis points effective April 10,
2008. The modified agreements also stipulate that the LIBOR rate shall not be
less than 3.5% for the term of the credit facilities. Additionally, the
available line of credit under the revolving credit facility was permanently
reduced from $10,000,000 to $7,250,000. The Company also agreed to pay certain
fees and expenses to the lenders and their advisors.
On May 15, 2008, the
Company and its lenders entered into agreements to waive past covenant
violations and amended the financial covenant provisions prospectively,
starting in April 2008, to modify the required ratios and to increase the
frequency of compliance reporting from quarterly to monthly for a specified
period. Effective May 15, 2008, the maximum senior debt/EBITDA ratios were
increased to levels ranging from 3.90 to 7.15 for future monthly reporting
periods from April 30, 2008 through June 30, 2009 and were increased
to levels ranging from 3.30 to 3.75 beginning with the September 30, 2009
quarterly reporting period, through maturity of the term loan. The minimum
fixed charge coverage ratios were reduced to levels ranging from 0.475 to 0.925
for monthly reporting periods from April 30, 2008 through June 30,
2009 and were reduced to levels ranging from 0.85 to 0.90 beginning with the September 30,
2009 quarterly reporting period, through maturity of the term loan. The Company
is also required to meet a new minimum EBITDA requirement for monthly reporting
periods from April 30, 2008 through June 30, 2009 and the remaining
quarterly reporting periods through maturity of the term loan.
16
Table
of Contents
In connection with obtaining
forbearance and waivers of past covenant violations, during the second and
third quarters of fiscal 2008, the Company paid $450,000 in fees to Bank of
America, which was included in general and administrative expenses and $1,525,000
in forbearance fees to the lenders, which was included in interest expense. In
addition, the Company incurred $860,000 in legal and consulting fees to the
lenders advisors related to the forbearance activities, which was included in
general and administrative expenses. Pursuant to the amended senior credit
facility agreement, the Company was also required to pay an amendment fee of
$758,000 in cash and to add 1% to the principal balance of the first and
second-lien debt and the revolving line of credit, totaling $1,514,000. The
amendment fees were expensed as loss on debt extinguishment in the third
quarter of 2008. The Company also began to incur an additional 4%
payment-in-kind (PIK) interest expense on the second lien debt, which accrued
and was added to the principal balance on a monthly basis. The 4% could be
reduced on a quarterly basis by 0.50% for each 0.25% reduction in the Companys
consolidated leverage ratio. Effective January 2009,
the Companys consolidated leverage ratio had been sufficiently reduced to end
this PIK interest accrual.
In the third quarter of
fiscal 2008, the Company accounted for the modifications of its first and
second-lien term debt in accordance with EITF Issue 96-19,
Debtors Accounting for a Modification or Exchange of
Debt Instruments
, and the modification of its revolving credit
facility in accordance with EITF Issue 98-14,
Debtors
Accounting for Changes in Line-of-Credit or Revolving Debt Arrangements
.
Pursuant to EITF Issue 96-19 and EITF Issue 98-14, the Company is required to
account for these modifications as debt extinguishments if the terms of the
debt have changed substantially. A substantial modification occurs when the
discounted future cash flows have changed by more than 10% before and after the
modification in the case of the term loans; and if the product of the remaining
term and the maximum available credit (i.e. the borrowing capacity) of the
new revolver has decreased in relation to the existing line of credit. As a
result of the increased interest and principal payments (including payment-in-kind
interest) under the term loans and reduction in the maximum borrowing limit for
the revolver, the Company determined that these modifications should be
accounted for as an extinguishment of the existing credit facilities effective April 10,
2008. The modified facilities are recorded as new debt instruments at fair
value, which equal their face value.
In connection with the
modifications of the first and second-lien term debt and the revolving line of
credit, considered as an early extinguishment of debt, the Company wrote off
the remaining unamortized discount and debt issuance costs of $6,036,000, and
expensed as debt extinguishment loss $758,000 in amendment fees paid to lenders
and $1,514,000 of PIK interest added to the new debt, resulting in a total
charge of $8,308,000 in connection with this debt extinguishment. Additionally,
the Company capitalized $327,000 of deferred financing costs related to the new
credit agreements, which is being amortized over their remaining terms. Under
the amended senior credit facility agreement, all net proceeds from any future
sale of one or more of the Companys IPAs are to be used to prepay the
outstanding balance of the first lien debt (see Note 4).
The Company filed its 2007 Form 10-K on June 2, 2008 and its Forms 10-Q for the quarters ended December 31, 2007 and March 31, 2008 on June 9, 2008 and June 16, 2008, respectively, and was in compliance with the amended financial covenant provisions for the April 2008 through March 2009 monthly reporting periods. While the Company continues to meet all debt service requirements on a timely basis, on March 19, 2009, the Company received written notices from its lenders asserting that the Company was in default of a requirement to sell certain assets by a specified date. Additionally, on April 17, 2009, the Company received notices from its lenders asserting that the Companys April 14, 2009 increase in ownership of Brotman Medical Center, Inc. violated certain provisions of the amended credit agreements. Based on such notices and in accordance with SFAS No. 78,
Classification of Obligations That Are Callable by the Creditor - An Amendment to ARB 43, Chapter 3A
, the Company has classified all scheduled payments due after twelve months as current at March 31, 2009. The Company has contested both assertions and is currently in discussions with its lenders to seek resolution of these matters; however, there can be no assurance that these matters will be resolved on a basis favorable to the Company. The lenders may not grant waivers and could require full repayment of the loans, which would negatively impact the Companys liquidity, ability to operate and its ability to continue as a going concern. Effective with the first asserted default, the lenders instituted default rates of 13.0% with respect to the first lien term loan, 17.25% with respect to the second lien term loan and 13.25% with respect to the revolving line of credit.
Interest Rate Swaps
As required by the
$53 million credit facility, on May 16, 2007, the Company entered
into a $48 million interest rate swap, to effectively convert the variable
interest rate (the LIBOR component) under the original credit facility to a
fixed rate of 5.3%, plus the applicable margin per year throughout the term of
the loan. This interest rate swap remains in effect even though the related
term loan was repaid in August 2007.
17
Table
of Contents
In addition to the
pre-existing $48,000,000 interest rate swap described above, on September 5,
2007, the Company entered into a separate interest rate swap agreement for the
incremental debt, initially totaling $97,750,000, to effectively convert the
variable interest rate (the LIBOR component) under the incremental portion of
the original $155 million credit facility to a fixed rate of 5.05%, plus
the applicable margin, per year, throughout the term of the loan. The notional
amounts of these interest rate swaps are scheduled to decline as the principal
balances owing under the term loans decline. Under these swaps, the Company is
required to make monthly fixed-rate payments to the swap counterparties
calculated on the notional amount of the swap and the interest rate for the
particular swap, while the swap counterparties are obligated to make certain
monthly floating rate payments to the Company referencing the same notional
amount. These interest rate swaps effectively fix the weighted average annual
interest rate payable on the term loans to 5.13%, plus the applicable margin.
Notwithstanding the terms of the interest rate swap transactions, the Company
is ultimately obligated for all amounts due and payable under its credit
facilities.
The interest rate swap
agreements contain cross-default provisions whereby, in the event the Company
is in default under its credit agreements, the Company is also deemed to be in
default under the swap agreements. Given
the asserted credit agreement defaults, the interest rate swap liability has
been classified as a current liability at March 31, 2009.
The interest rate swap
agreements were designated as cash flow hedges of expected interest payments on
the term loans with the effective date of the $48,000,000 swap being December 31,
2007 and the effective date of the $97,750,000 swap being September 6,
2007. Prior to the hedge effective dates, all mark-to-market adjustments in the
value of the swaps were charged to expense. After the hedge effective date, the
effective portions of the fair value gains or losses on these cash flow hedges
were recorded as a component of other comprehensive income, net of tax, to be
subsequently reclassified into earnings when the forecasted transaction affects
earnings. Effective April 1, 2008, in anticipation of changes to the loan
agreements that would impact recording of interest rate swaps, the Company
elected to discontinue hedge accounting. Changes in the fair value of the
interest rate swaps after March 31, 2008 are recorded as other income or
expense. Total net loss on the interest rate swaps included in earnings for the
six months ended March 31, 2009 and 2008 were approximately $8,713,000 and
$877,000, respectively. The effective portion of the swaps of approximately
$5.4 million, after tax, that was recorded in other comprehensive income
through March 31, 2008 will continue to be amortized as expense over the
remaining life of the swaps. Approximately $440,000 was amortized to expense
for the six months ended March 31, 2009.
8. Acquisitions
ProMed Health Services Company
On June 1, 2007, the
Company and its affiliated physician organization, Prospect Medical Group, Inc.
(PMG) completed the acquisition of ProMed Health Services Company, a
California corporation, and its subsidiary, ProMed Health Care Administrators, Inc.
(PHCA) (collectively ProMed Health Care Administrators), and two affiliated
IPAs: Pomona Valley Medical Group, Inc. dba ProMed Health Network (Pomona
Valley Medical Group), and Upland Medical Group, Inc. (Upland Medical
Group) (collectively the ProMed Entities). PHCA manages the medical care of
HMO enrollees served by Pomona Valley Medical Group and Upland Medical Group.
Total purchase consideration of $48,000,000 included $41,040,000 of cash and
1,543,237 shares of Prospect Medical Holdings, Inc. common stock valued at
$6,960,000, or $4.51 per share. The transaction is referred to as the ProMed
Acquisition.
The ProMed Acquisition, and
$392,000 in related transaction costs, was financed by $48,000,000 in
borrowings (less $896,000 in debt issuance costs) and $2,379,000 from cash
reserves. The debt proceeds and cash reserves were used to fund the cash
consideration of $41,040,000 and to repay all existing debt of Prospect Medical
Holdings, Inc. ($7,842,000 plus $209,000 of prepayment penalties). The
$48,000,000 in borrowings used to finance the acquisition of the ProMed
Entities was refinanced in August 2007, using proceeds from the
$155,000,000 credit facility entered into in connection with the Alta
transaction, described below. The purchase agreements provide for certain
post-closing working capital and medical claims reserve adjustments. During
fiscal 2008, the Company recorded a post-closing working capital adjustment of
approximately $560,000 as a reduction in goodwill.
18
Table
of Contents
Alta Healthcare System, Inc.
On August 8, 2007, the
Company acquired all of the outstanding common shares of Alta and the name of
the surviving entity was changed to Alta Hospitals System, LLC. The
purchase transaction is referred to as the Alta Acquisition. Alta is a
for-profit hospital management company that, through two subsidiary
corporations, owns and operates four community-based hospitalsVan Nuys
Community Hospital, Hollywood Community Hospital, Los Angeles Community
Hospital and Norwalk Community Hospital. These hospitals provide a comprehensive
range of medical, surgical and psychiatric services and have a combined 339
licensed beds served by 315 on-staff physicians. Total purchase consideration,
including transaction costs, was approximately $154,935,000, comprised of
repayment of approximately $41,500,000 of Altas existing debt, payment of
approximately $51,300,000 in cash to the former Alta shareholders, issuance of
1,887,136 shares of Prospect common stock, issuance of 1,672,880 shares of
Prospect convertible preferred stock valued, for purposes of the transaction,
at $61,030,000, and payment of transaction costs of approximately
$1.2 million. Each share of preferred stock was convertible into five
common shares upon stockholder approval (which occurred on August 13,
2008). Prior to conversion, each share of preferred stock accrued dividends at
18% per year, compounding annually. Such dividends (amounting to $7,881,890)
were canceled upon conversion to common shares on August 13, 2008, and the
related liability reclassified to additional paid in capital. For purposes of
determining the number of shares to be issued in connection with the
transaction, Prospect common stock was valued at $5.00 per share and Prospect
preferred stock was valued at $25.00 per share. However, for purposes of recording
the transaction, (i) the value per share of common stock was estimated at
$5.58, based on the average of the stocks closing prices before and after the
acquisition announcement date of July 25, 2007, and (ii) the value
per share of preferred stock was estimated at $30.19, based on the closing
stock price of a common share on the acquisition date, plus a premium for the
preference features of the stock. As such, total recorded purchase
consideration, exclusive of transaction costs, was approximately $153,772,000.
The Alta Acquisition, the
extinguishment of Altas existing debt and the refinancing of the ProMed
Acquisition debt described above were financed by a $155,000,000 senior secured
credit facility arranged by Bank of America, comprised of $145,000,000 in term
loans and a $10,000,000 revolver, of which $3,000,000 was drawn at closing (see
Note 7 for discussion of debt). Net proceeds of $141.1 million (net
of issuance discount and financing costs of $6.9 million) were used to
repay Altas existing borrowings of $41.5 million, refinance
$47.0 million in outstanding ProMed Acquisition debt, pay the cash portion
of the purchase price of $51.3 million and fund approximately
$1.2 million in transaction costs.
Investment in Brotman Medical Center, Inc
Effective August 31,
2005, the Company acquired an approximately 33.1% stake in Brotman, for
$1,000,000. The Company made the investment with the intention that it, with
Brotman, would be able to offer joint contracting to HMOs operating in Brotmans
service area. Brotman, previously owned by Tenet HealthCare, had been incurring
significant operating deficits. The new investors, including Prospect, hoped to
help turn around Brotmans operations and restore profitability.
During September 2005,
the first month of operation under new ownership, Brotman experienced a net
loss of approximately $1,000,000, of which Prospects portion totaled
approximately $350,000. Brotman continued to incur significant losses after September 30,
2005 and, based on these significant operating deficits, uncertain ability to
increase revenues and reduce costs, and limited capital, management of Prospect
believed that the remaining investment in Brotman at September 30, 2005
was impaired and wrote off its entire investment as of September 30, 2005.
The Company has not recognized any equity in earnings since its initial
investment as Brotman continued to incur losses.
The Company had entered into
a consulting services agreement with Brotman on August 1, 2005, pursuant
to which, the Company would receive a monthly consulting fee of $20,000,
amended on October 25, 2007 to
$100,000 monthly. The receivable balance due from Brotman under this
arrangement was $300,000 at March 31, 2009.
In October 2007,
Brotman filed for bankruptcy protection under Chapter 11 of the U.S.
Bankruptcy Code. Effective April 22, 2008, Samuel S. Lee (the Companys
CEO and Chairman of the Board) was appointed as the Chairman of the Board of
Directors of Brotman. The bankruptcy plan was confirmed by the U.S. Bankruptcy
Court, Central District of California, Los Angeles Division, on January 21,
2009, and was declared effective on April 14, 2009.
See Note 15 for discussion
of subsequent event relating to Brotman.
19
Table
of Contents
9. Segment Information
SFAS No. 131,
Disclosures about Segments of an Enterprise and
Related Information
, provides disclosure guidelines for segments of
a company based on a management approach to defining reporting segments.
With the acquisition of Alta
in August 2007, the Companys operations are now organized into three
reporting segments: (i) IPA Managementwhich is comprised of the Prospect
and ProMed reporting units, provides management services to affiliated
physician organizations that operate as independent physician associations (IPAs);
(ii) Hospital Serviceswhich owns and operates four community-based
hospitalsLos Angeles Community Hospital, Hollywood Community Hospital, Norwalk
Community Hospital and Van Nuys Community Hospital and (iii) Corporate.
Corporate represents expenses incurred in Prospect Medical Holdings, Inc.
(the Parent Entity), which were not allocated to the IPA Management and Hospital
Services segments.
The accounting policies of
the reporting segments are the same as those described in the summary of
significant accounting policies (see Note 2). The Company evaluates
financial performance and allocates resources primarily based on earnings from
continuing operations before interest expense, interest income, income taxes,
depreciation and amortization, as well as income or loss from operations before
income taxes, excluding infrequent or unusual items.
The reporting segments are strategic
business units that offer different services within the healthcare continuum.
Business in each reporting segment is conducted by one or more direct or
indirect wholly-owned subsidiaries of the Company.
20
Table
of Contents
The following table
summarizes certain information for each of the reporting segments regularly
provided to and reviewed by the chief operating decision maker as of and for
the three months ended March 31, 2009 and 2008:
|
|
As of and for the Three Months Ended March 31, 2009
|
|
|
|
IPA
Management
|
|
Hospital
Services
|
|
Corporate
|
|
Intersegment
Eliminations
|
|
Consolidated
|
|
Revenues from external customers
|
|
$
|
48,159,102
|
|
$
|
37,908,033
|
|
$
|
|
|
$
|
|
|
$
|
86,067,135
|
|
Intersegment revenues
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
48,159,102
|
|
37,908,033
|
|
|
|
|
|
86,067,135
|
|
Operating income (loss)
|
|
3,434,826
|
|
11,065,118
|
|
(2,853,740
|
)
|
|
|
11,646,204
|
|
Investment income
|
|
(5,461
|
)
|
388
|
|
(14,427
|
)
|
|
|
(19,500
|
)
|
Interest expense and amortization of deferred financing costs
|
|
19
|
|
51,258
|
|
6,524,776
|
|
|
|
6,576,053
|
|
Loss on interest rate swap arrangements
|
|
|
|
|
|
(955,201
|
)
|
|
|
(955,201
|
)
|
Income (loss) from continuing operations before income taxes
|
|
$
|
3,440,268
|
|
$
|
11,013,472
|
|
$
|
(8,408,888
|
)
|
$
|
|
|
$
|
6,044,852
|
|
Identifiable segment assets (liabilities)
|
|
$
|
161,714,515
|
|
$
|
208,207,429
|
|
$
|
(74,486,348
|
)
|
$
|
|
|
$
|
295,435,596
|
|
Segment capital expenditures, net of dispositions
|
|
$
|
20,686
|
|
$
|
194,202
|
|
$
|
|
|
$
|
|
|
$
|
214,888
|
|
Segment goodwill
|
|
$
|
22,338,519
|
|
$
|
106,538,715
|
|
$
|
|
|
$
|
|
|
$
|
128,877,234
|
|
|
|
As of and for the Three Months Ended March 31, 2008
|
|
|
|
IPA
Management
|
|
Hospital
Services
|
|
Corporate
|
|
Intersegment
Eliminations
|
|
Consolidated
|
|
Revenues from external customers
|
|
$
|
50,680,973
|
|
$
|
32,396,126
|
|
$
|
|
|
$
|
|
|
$
|
83,077,099
|
|
Intersegment revenues
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
50,680,973
|
|
32,396,126
|
|
|
|
|
|
83,077,099
|
|
Operating income (loss)
|
|
2,792,871
|
|
7,494,411
|
|
(3,879,648
|
)
|
|
|
6,407,634
|
|
Investment income
|
|
(81,048
|
)
|
|
|
(68,020
|
)
|
|
|
(149,068
|
)
|
Interest expense and amortization of deferred financing costs
|
|
|
|
41,279
|
|
5,252,570
|
|
|
|
5,293,849
|
|
Loss on interest rate swap arrangements
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
2,873,919
|
|
$
|
7,453,132
|
|
$
|
(9,064,198
|
)
|
$
|
|
|
$
|
1,262,853
|
|
Identifiable segment assets (liabilities)
|
|
$
|
146,701,440
|
|
$
|
176,084,131
|
|
$
|
(32,631,304
|
)
|
$
|
|
|
$
|
290,154,267
|
|
Segment capital expenditures, net of dispositions
|
|
$
|
95,081
|
|
$
|
216,931
|
|
$
|
4,305
|
|
$
|
|
|
$
|
316,317
|
|
Segment goodwill
|
|
$
|
22,623,230
|
|
$
|
106,493,715
|
|
$
|
|
|
$
|
|
|
$
|
129,116,945
|
|
21
Table
of Contents
The following table summarizes
certain information for each of the reporting segments regularly provided to
and reviewed by the chief operating decision maker as of and for the six months
ended March 31, 2009 and 2008:
|
|
As of and for the Six Months Ended March 31, 2009
|
|
|
|
IPA
Management
|
|
Hospital
Services
|
|
Corporate
|
|
Intersegment
Eliminations
|
|
Consolidated
|
|
Revenues from external customers
|
|
$
|
96,290,351
|
|
$
|
73,230,440
|
|
$
|
|
|
$
|
|
|
$
|
169,520,791
|
|
Intersegment revenues
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
96,290,351
|
|
73,230,440
|
|
|
|
|
|
169,520,791
|
|
Operating income (loss)
|
|
6,239,908
|
|
20,182,863
|
|
(4,879,250
|
)
|
|
|
21,543,521
|
|
Investment income
|
|
(30,643
|
)
|
|
|
(37,102
|
)
|
|
|
(67,745
|
)
|
Interest expense and amortization of deferred financing costs
|
|
19
|
|
92,926
|
|
12,621,006
|
|
|
|
12,713,951
|
|
Loss on interest rate swap arrangements
|
|
|
|
|
|
8,712,824
|
|
|
|
8,712,824
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
6,270,532
|
|
$
|
20,089,937
|
|
$
|
(26,175,978
|
)
|
$
|
|
|
$
|
184,491
|
|
Identifiable segment assets (liabilities)
|
|
$
|
161,714,515
|
|
$
|
208,207,429
|
|
$
|
(74,486,348
|
)
|
$
|
|
|
$
|
295,435,596
|
|
Segment capital expenditures, net of dispositions
|
|
$
|
61,661
|
|
$
|
374,978
|
|
$
|
|
|
$
|
|
|
$
|
436,639
|
|
Segment goodwill
|
|
$
|
22,338,519
|
|
$
|
106,538,715
|
|
$
|
|
|
$
|
|
|
$
|
128,877,234
|
|
|
|
As of and for the Six Months Ended March 31, 2008
|
|
|
|
IPA
Management
|
|
Hospital
Services
|
|
Corporate
|
|
Intersegment
Eliminations
|
|
Consolidated
|
|
Revenues from external customers
|
|
$
|
101,249,529
|
|
$
|
59,682,354
|
|
$
|
|
|
$
|
|
|
$
|
160,931,883
|
|
Intersegment revenues
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
101,249,529
|
|
59,682,354
|
|
|
|
|
|
160,931,883
|
|
Operating income (loss)
|
|
4,205,928
|
|
13,113,481
|
|
(6,405,842
|
)
|
|
|
10,913,567
|
|
Investment income
|
|
(140,742
|
)
|
|
|
(302,450
|
)
|
|
|
(443,192
|
)
|
Interest expense and amortization of deferred financing costs
|
|
|
|
79,823
|
|
9,413,481
|
|
|
|
9,493,304
|
|
Loss on interest rate swap arrangements
|
|
|
|
|
|
876,680
|
|
|
|
876,680
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
4,346,670
|
|
$
|
13,033,658
|
|
$
|
(16,393,553
|
)
|
$
|
|
|
986,775
|
|
Identifiable segment assets (liabilities)
|
|
$
|
146,701,440
|
|
$
|
176,084,131
|
|
$
|
(32,631,304
|
)
|
$
|
|
|
$
|
290,154,267
|
|
Segment capital expenditures, net of dispositions
|
|
$
|
215,220
|
|
$
|
720,028
|
|
$
|
16,901
|
|
$
|
|
|
$
|
952,149
|
|
Segment goodwill
|
|
$
|
22,623,230
|
|
$
|
106,493,715
|
|
$
|
|
|
$
|
|
|
$
|
129,116,945
|
|
(1)
|
Prospect Medical Holdings, Inc. files a consolidated tax
return and allocates costs for shared services and corporate overhead to each
of the reporting segments. All acquisition-related debt, including debt
related to the IPA Management and Hospital Services segment, is recorded at
the Parent entity level. As such, the Company does not allocate interest
expense, and gain or loss on interest rate swaps to the IPA Management and
Hospital Services segments.
|
|
|
(2)
|
Prospect Medical Group (which serves as a holding company for our affiliated
physician organizations and is itself an affiliated physician organization)
files a separate consolidated tax return.
|
|
|
(3)
|
During the six months ended March 31, 2008, the Company incurred
approximately $1,135,000 in costs related to the restatement of Altas
pre-acquisition financial statements, preparation of SEC filings and the
related special investigation by the Companys audit committee, which was
completed in March 2008. These expenses are included in general and
administrative expenses of the Corporate Entity. Also included in general and
administrative expenses of the Corporate Entity were employee stock
compensation expense totaling approximately $582,000 and $58,000 for the six
months ended March 31, 2009 and 2008, respectively.
|
|
|
(4)
|
Certain prior year amounts have been reclassified to conform to the
fiscal 2009 period presentation.
|
22
Table of Contents
10. Income Taxes
On July 13, 2006, the
FASB issued Interpretation No. 48,
Accounting
For Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an entitys financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes,
and prescribes a recognition threshold and measurement attributes for financial
statement disclosure of tax positions taken or expected to be taken on a tax
return. Under FIN 48, the impact of an uncertain income tax position on
the income tax return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Additionally, FIN 48
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 was
effective for fiscal years beginning after December 15, 2006.
In May 2007, the FASB
published FASB Staff Position FIN 48-1 (FSP FIN 48-1),
Definition of Settlement in FASB Interpretation No. 48
.
FSP FIN 48-1 is an amendment to FIN 48. It clarifies how an
enterprise should determine whether a tax position is effectively settled for
the purpose of recognizing previously unrecognized tax benefits.
The Company adopted the provisions
of FIN 48 and FSP FIN 48-1 on October 1, 2007. There were no
unrecognized tax benefits or interest and penalties recorded on income tax
matters as of the date of adoption. As a result of the implementation of
FIN 48 and FSP FIN 48-1, the Company recognized no decrease in
deferred tax assets or changes in the valuation allowance. There are no
unrecognized tax benefits included in the consolidated balance sheet that
would, if recognized, affect the effective tax rate.
The Companys practice is to
recognize interest and/or penalties related to income tax matters in income tax
expense.
Consolidated and separate
income tax returns are filed with the U.S. Federal jurisdiction and in the
State of California. The Companys filed tax returns are subject to examination
by the IRS for tax years 2007, 2006 and 2005 and the State of California for
fiscal years 2007, 2006, 2005 and 2004. Net operating losses that were incurred
in prior years may still be adjusted by taxing authorities.
The Company recorded a tax provision of approximately $2,496,000 and $76,000
for the three months and six months ended March 31, 2009, at effective tax
rates of 41% and 41%, respectively and a tax provision of approximately $456,000
and $355,000 for the three months and six months ended
m
arch 31, 2008, at effective tax rates of 36% and 36%, respectively.
The effective tax rates for the three months and six months ended March 31,
2009, differ from the federal statutory rate of 34% and the rate for the same
period in fiscal 2008 primarily due to state income tax and permanent
differences.
11. Use of Estimates
The preparation of Consolidated
financial statements in conformity with accounting principles generally
accepted in the U.S. requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, and
the disclosure of contingent assets and liabilities at the dates, and for the
periods, that the financial statements are prepared. Actual results could
materially differ from those estimates. Principal areas requiring the use of
estimates include third-party cost report settlements, risk-sharing programs,
patient and medical related receivables, determination of allowances for
contractual discounts and uncollectible accounts, medical claims and accruals,
impairment of goodwill, long-lived and intangible assets, valuation of interest
rate swaps, share-based payments, professional and general liability claims,
reserves for the outcome of litigation, liabilities for uncertain income tax
positions and valuation allowances for deferred tax assets.
During the six months ended March 31,
2009 and 2008, the
c
ompany
recorded approximately $1,891,000 and $2,128,000 in favorable changes in
estimates during the respective periods related to medical claims development
from the prior periods.
12. Fair Value Measurements
Effective October 1,
2008, the Company adopted SFAS No. 157,
Fair
Value Measurements
, (SFAS No. 157) for all financial assets
and liabilities measured at fair value on a recurring basis. SFAS 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. In February 2008, the FASB staff issued Staff Position
No. 157-2
Effective Date of FASB
Statement No. 157,
(FSP SFAS 157-2). FSP
SFAS 157-2 delayed the effective date of FAS 157 for nonfinancial
assets and nonfinancial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually). In accordance with the provisions of FSP SFAS 157-2, the
23
Table
of Contents
Company has elected to defer implementation
of SFAS 157 until October 1, 2009 as it relates to its non-financial
assets and non-financial liabilities that are not permitted or required to be
measured at fair value on a recurring basis. Management is currently evaluating
the impact, if any, SFAS No. 157 will have on those non-financial assets
and liabilities.
The FASB also issued FASB
Staff Position No. 157-3,
Determining
the Fair Value of a Financial Asset when the Market for that Asset is not Active
,
(FSP 157-3) in October 2008. FSP 157-3 clarifies the application of
SFAS 157 in an inactive market and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. FSP 157-3 is effective
immediately and was adopted by the Company as of October 1, 2008. The
impact of adopting FSP 157-3 was not material to the Companys consolidated
financial statements.
SFAS No. 157
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value
hierarchy under SFAS No. 157 are described below:
·
Level 1Unadjusted
quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities;
·
Level 2Quoted
prices in markets that are not active, or inputs that are observable, either
directly or indirectly, for substantially the full term of the asset or
liability; and
·
Level 3Prices
or valuation techniques that require inputs that are both significant to the
fair value measurement and unobservable (supported by little or no market
activity).
The following table sets
forth the Companys financial assets and liabilities measured at fair value on
a recurring basis and where they are classified within the hierarchy as of March 31,
2009:
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
664,172
|
|
$
|
664,172
|
|
$
|
|
|
$
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Interest rate swap liability
|
|
$
|
14,725,992
|
|
$
|
|
|
$
|
14,725,992
|
|
$
|
|
|
A financial asset or
liability is categorized within the hierarchy based upon the lowest level of
input that is significant to the fair value measurement. Following is a
description of the valuation methodologies used by the Company as well as the
general classification of such instruments pursuant to the hierarchy.
Investments
The Companys investments
are classified within Level 1 of the fair value hierarchy because they are
valued using quoted market prices. The investment instruments that are valued
based on quoted market prices in active markets are primarily restricted
certificates of deposit.
Interest Rate Derivative Liabilities
The Company has two interest
rate swap agreements in place for an initial notional amount of
$48 million and $97.75 million, respectively. These instruments
effectively cause a portion of the Companys floating rate debt to become fixed
rate debt and are held with a major financial institution, which is expected
to, and is expecting the Company to, fully perform under the terms of the
agreements. A mark-to-market valuation that takes into consideration
anticipated cash flows from the transaction using quoted market prices, other
economic data and assumptions, and pricing indications used by other market
participants is used to value the swaps. Given the degree of varying
assumptions used to value the swaps, they are deemed to be Level 2
instruments.
In February 2007, the
FASB issued FASB Statement No. 159,
The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159).
SFAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value, with the objective of improving
financial reporting by mitigating volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. The provisions of SFAS 159 were
adopted October 1, 2008. The Company did not elect the Fair Value Option
for any of its financial assets or liabilities, and therefore, the adoption of
SFAS 159 had no impact on the Companys consolidated financial position,
results of operations or cash flows.
24
Table
of Contents
13. Recent Accounting Pronouncements
In December 2007, the
FASB issued SFAS No. 141 (revised 2007),
Business
Combinations
(SFAS No. 141(R)). SFAS No. 141(R) establishes
new principles and requirements for how the acquirer of a business recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree. SFAS No. 141(R) also
provides guidance for recognizing and measuring the goodwill acquired in the
business combination and determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. In general, SFAS No. 141(R) requires the
acquiring entity to recognize all the assets acquired and liabilities assumed
in the transaction and establishes the acquisition-date fair value as the
measurement objective. This standard will, among other things, impact the
determination of acquisition-date fair value of consideration paid in a
business combination, including recognition of contingent consideration and
most pre-acquisition loss and gain contingencies at their acquisition-date fair
values. It will also require companies to expense, as incurred, transaction costs,
and recognize changes in income tax valuation allowances and tax uncertainty
accruals that result from a business combination as adjustments to income tax
expense. SFAS 141(R) will also place new restrictions on the ability
to capitalize acquisition-related restructuring costs. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15,
2008. The Company will adopt SFAS No. 141(R) on October 1, 2009.
Management is currently evaluating the potential impact of the adoption of SFAS
No. 141(R) on its consolidated financial statements.
In December 2007, the
FASB issued SFAS No. 160,
Noncontrolling
Interests in Consolidated Financial Statementsan Amendment of ARB No. 51
(SFAS No. 160). SFAS No. 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a non-controlling minority
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the accompanying Consolidated Financial
Statements separate from the parent companys equity. Net income attributable
to the non-controlling interest will be included in consolidated net income on
the face of the income statement. SFAS No. 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after December 15,
2008. SFAS No. 160 requires retroactive adoption of the presentation and
expanded disclosure requirements for existing minority interests. All other
requirements of SFAS No. 160 shall be applied prospectively. The Company
will adopt SFAS No. 160 on October 1, 2009 and is currently evaluating
the potential impact of the adoption of SFAS No. 160 on its consolidated
financial statements.
In March 2008, the FASB
issued SFAS No. 161,
Disclosures about
Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133
(SFAS No. 161). SFAS No. 161 enhances required disclosures
regarding derivatives and hedging activities, including enhanced disclosures
regarding how: (a) an entity uses derivative instruments, (b) derivative
instruments and related hedged items are accounted for under FASB Statement No. 133,
Accounting for Derivative Instruments and
Hedging Activities
, and (c) derivative instruments and related
hedged items affect an entitys financial position, financial performance and
cash flows. SFAS No. 161 is effective for the fiscal years beginning after
November 15, 2008. Early adoption is permitted. The Company is currently
reviewing the provisions of SFAS No. 161 and has not yet adopted the
statement. However, as the provisions of SFAS No. 161 are only related to
disclosure of derivative and hedging activities, we do not believe the adoption
of SFAS No. 161 will have a material impact on our consolidated operating
results, financial position, or cash flows.
In April 2008, the FASB
issued FASB Staff Position SFAS No. 142-3,
Determination of the Useful Life of Intangible Assets
(FSP
SFAS No. 142-3). FSP SFAS No. 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used in
determining the useful life of a recognized intangible asset under Statement of
Financial Accounting Standard No. 142,
Goodwill
and Other Intangible Assets
. This new guidance applies
prospectively to intangible assets that are acquired individually or with a
group of other assets in business combinations and asset acquisitions. FSP SFAS
No. 142-3 is effective for fiscal years beginning after December 15,
2008, and early adoption is prohibited. The impact of FSP SFAS No. 142-3
will depend upon the nature, terms, and size of the acquisitions the Company consummates
after the effective date.
In May 2008, the FASB
issued Staff Position (FSP) APB 14-1,
Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement
. FSP APB 14-1
clarifies that convertible debt instruments that may be settled in cash upon
either mandatory or optional conversion (including partial cash settlement) are
not addressed by paragraph 12 of APB Opinion No. 14,
Accounting for Convertible Debt and Debt issued with
Stock Purchase Warrants
. Additionally, FSP APB 14-1 specifies
that issuers of such instruments should separately account for the liability
and equity components in a manner that will reflect the entitys nonconvertible
debt borrowing rate when interest cost is recognized in subsequent periods. FSP
APB 14-1 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. The Company will adopt FSP APB 14-1 beginning in the first quarter of
fiscal 2010, and this standard must be applied on a retrospective basis. We are
evaluating the impact the adoption of FSP APB 14-1 will have on our
consolidated financial position and results of operations.
25
Table
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In September 2008, the
FASB issued FASB Staff Position No. 133-1,
Disclosures about Credit Derivatives and Certain Guarantees: An
Amendment of FASB Statement No. 133
(FSP SFAS No. 133-1)
and FASB Interpretation No. 45-4,
Clarification
of the Effective Date of FASB Statement No. 161
(FIN 45-4).
FSP SFAS No. 133-1 and FIN 45-4 amends FASB Statement No. 133 (SFAS 133),
Accounting for Derivative Instruments and
Hedging Activities
, to require disclosures by sellers of credit
derivatives, including credit derivatives embedded in hybrid instruments. FSP
SFAS 133-1 and FIN 45-4 also amend FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to
Others
, to require additional disclosure about the current status
of the payment/performance risk of a guarantee. The provisions of the FSP that
amend SFAS No. 133 and FIN 45 are effective for reporting periods
ending after November 15, 2008. FSP SFAS No. 133-1 and FIN 45-4
also clarifies the effective date in FASB Statement No. 161 (SFAS No. 161),
Disclosures about Derivative Instruments
and Hedging Activities
. Disclosures required by SFAS No. 161
are effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. Because FSP SFAS No. 133-1
and FIN 45-4 only require additional disclosures, the adoption will not
impact the Companys consolidated financial position, results of operations or
cash flows.
In June 2008, the EITF
reached a consensus in Issue No. 07-5,
Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock
(EITF 07-5). This Issue addresses the determination of whether an instrument
(or an embedded
feature
) is indexed to an entitys
own stock, which is the first part of the scope exception in paragraph 11(a) of
SFAS No. 133. EITF 07-5 is effective for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Early application is not
permitted. The Company will adopt EITF 07-5 on October 1, 2009 and is
currently evaluating the potential impact of the adoption of EITF 07-5 on its
consolidated financial statements.
14. Litigation and Contingencies
Many of the Companys payer
and provider contracts are complex in nature and may be subject to differing
interpretations regarding amounts due for the provision of medical services.
Such differing interpretations may not come to light until a substantial period
of time has passed following contract implementation. Liabilities for claims
disputes are recorded when the loss is probable and can be estimated. Any
adjustments to reserves are reflected in current operations.
The Company is subject to a
variety of claims and suits that arise from time to time in the ordinary course
of its business. While management currently believes that resolving all of
these matters, individually or in aggregate, will not have a material adverse
impact on the Companys financial position or its results of operations, the
litigation and other claims that the Company faces are subject to inherent
uncertainties and managements view of these matters may change in the future.
Should an unfavorable final outcome occur, there exists the possibility of a
materially adverse impact on the Companys financial position, results of
operations and cash flows for the period in which the effect becomes probable
and reasonably estimable.
15. Subsequent Event
On April 14, 2009, the
U.S. Bankruptcy Court confirmed and declared the Second Amended Chapter 11 Plan
of Reorganization (the Plan) of Brotman effective. Effective on such date, the Company acquired
an additional 38.86% ownership interest in Brotman, which brought it to its
current total ownership of 71.96% of the outstanding common stock of
Brotman. The Companys ownership
interest in Brotman continues to be held through its wholly-owned subsidiary,
Prospect Hospital Advisory Services, Inc., a Delaware corporation. Pursuant to the terms of the bankruptcy plan,
the Company made an additional $1,800,000 investment in Brotman on January 13,
2009, which amount was recorded in Deposits and Other Assets at March 31,
2009, and has made a commitment to invest approximately an additional $700,000
within six months after the effective date of the plan.
26
Table
of Contents
As part of its bankruptcy
plan, Brotman obtained a commitment from Gemino Healthcare Finance, LLC for a
three-year, $6.0 million, senior credit facility secured by accounts receivable
at an interest rate of LIBOR plus 7% per annum.
In addition, the Los Angeles Jewish Home for the Aging (JHA) provided
an aggregate of $22.25 million in financing through a $16.0 million loan (Term
A loan) with a two-year term and a $6.25 million loan (Term B loan) with a
three-year term. The entire financing is
secured by Brotmans real estate and personal property. The interest rate on the $16.0 million loan
is 10% per annum during the first year of the loan and 7.5% thereafter. Under the $6.25 million loan, the interest
rate is 10% per annum during the life of the loan. The proceeds of the JHA loans were used to
repay all existing senior secured loans at Brotman, including
Debtor-In-Possession financing. The
Company has not guaranteed any portion of the Gemino or JHA financing.
As part of the JHA
financing, Brotman has granted JHA an option to purchase certain Brotman-owned
land adjacent to the hospital, where JHA plans to construct a senior living
facility, for a purchase price equal to the outstanding principal balance of
the JHA Term A loan plus any prepaid
amounts.
27
Table of Contents
Item 2.
Managements Discussion and Analysis of Financial Condition and Results
of Operations.
Forward-Looking Statements
The following discussion of
our financial condition and results of operations should be read in conjunction
with the accompanying unaudited interim condensed consolidated financial
statements and the notes to those statements appearing elsewhere in this report
and the audited consolidated financial statements for the year ended September 30,
2008 appearing in our annual report on Form 10-K filed with the Securities
and Exchange Commission.
This discussion contains
forward-looking statements that involve risks and uncertainties. These
forward-looking statements are often accompanied by words such as believe, should,
anticipate, plan, expect, potential, scheduled, estimate, intend,
seek, goal, may and similar expressions. These statements include,
without limitation, statements about our market opportunity, our growth
strategy, competition, expected activities and future acquisitions and
investments and the adequacy of our available cash resources. Investors are
urged to read these statements carefully, and are cautioned that matters
subject to forward-looking statements involve risks and uncertainties,
including economic, regulatory, competitive and other factors that may affect
our business. These statements are not guarantees of future performance and are
subject to risks, uncertainties and assumptions. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance, or
achievements. Moreover, we do not assume any responsibility for the accuracy
and completeness of such statements in the future. Subject to applicable law,
we do not plan to update any of the forward-looking statements after the date of
this report to conform such statements to actual results.
Forward-looking statements
involve known and unknown risks and uncertainties that may cause our actual
results in future periods to differ materially from those projected or
contemplated in the forward-looking statements as a result of, but not limited
to, the following factors:
·
We are subject
to certain financial and administrative covenants under our loan agreements.
Our lenders have asserted that we are not in compliance with certain administrative
covenants, which could result in the requirement to repay our loans in full,
thus jeopardizing our ability to operate and raises substantial doubt about our
ability to continue as a going concern.
·
Changes in the
fair market value of our interest rate swap arrangements are included in
earnings. These amounts are unpredictable and likely to be significant. Cumulative changes in the value of these swap
arrangements have been significant and reflected as a liability in our
financial statements. These swaps have
cross-default provisions, whereby defaults under our loan agreements cause
defaults under the swap agreements, which could potentially result in the
recorded swap liability becoming immediately payable, and thus jeopardize our
ability to operate and continue as a going concern.
·
Our revenue and
profitability may be significantly reduced or eliminated if management is
unable to successfully execute our turnaround plan to improve the operating
results of our legacy IPA Management segment.
·
Decreases in
the number of HMO enrollees using our provider networks reduce our
profitability and inhibit future growth.
·
A deficit in
working capital could adversely affect our ability to satisfy our obligations
as they come due and, accordingly, jeopardize our ability to operate as a going
concern.
·
If our goodwill
and intangible assets become impaired, the impaired portion has to be written
off, which will materially reduce the value of our assets and reduce our net
income for the year in which the write-off occurs.
·
We may not be
able to make any additional acquisitions without first obtaining additional
financing and obtaining the consent of our lenders.
28
Table
of Contents
·
Substantially
all of our IPA revenues are generated from contracts with a limited number of
HMOs, and if our affiliated physician organizations were to lose HMO contracts
or to renew HMO contracts on less favorable terms, our revenues and
profitability could be significantly reduced.
·
Our
profitability may be reduced or eliminated if we are not able to manage
healthcare costs of our affiliated physician organizations effectively.
·
Our revenue and
profitability could be significantly reduced and could also fluctuate
significantly from period to period under Medicares Risk Adjusted payment
methodology.
·
Our operating
results could be adversely affected if our actual healthcare claims exceed our
reserves.
·
We may be
exposed to liability or fail to estimate IBNR claims accurately if we cannot
process any increased volume of claims accurately and timely.
·
Medicare,
Medi-Cal and private third-party payer cost containment efforts and reductions
in reimbursement rates could reduce our hospital revenue and our cash flow.
·
Risk-sharing
arrangements that our affiliated physician organizations have with HMOs and
hospitals could result in their costs exceeding the corresponding revenues,
which could reduce or eliminate any shared risk profitability.
·
If we do not
successfully integrate the operations of acquired physician organizations, our
costs could increase, our business could be disrupted, and we may not be able
to realize the desired benefits from those acquisitions.
·
The acquisition
of hospitals and subsequent integration with our business of managing physician
organizations may prove to be difficult and may outweigh the associated
benefits.
·
Our hospital
with a union contract could experience setbacks from unfavorable negotiations
with union members.
·
Hospital
operations are capital intensive and could prove to be a drain on cash.
·
If we do not
continually enhance our hospitals with the most recent technological advances
in diagnostic and surgical equipment, our ability to maintain and expand our
markets will be adversely affected.
·
The continued
growth of uninsured and underinsured patients or further deterioration in the
collectibility of the accounts of such patients could harm our results of
operations.
·
Because we are
obligated to provide care in certain circumstances regardless of whether we
will get paid for providing such care, if the number of uninsured patients
treated at our hospitals increases, our results of operations may be harmed.
·
Controls
designed to reduce inpatient services may reduce our hospital revenue.
·
Our hospital
revenues and volume trends may be adversely affected by certain factors over
which we have no control, including weather conditions, severity of annual flu
seasons and other factors.
·
An increasing
portion of our IPA revenue is at risk and difficult to project, which
increases uncertainty regarding future revenues, cash flow projections, and
profitability.
·
If we are
unable to identify suitable acquisition candidates or to negotiate or complete
acquisitions on favorable terms, our prospects for growth could be limited.
·
Any
acquisitions we complete in the future could potentially dilute the equity
interests of our current stockholders or could increase our indebtedness and
cost of debt service, thereby reducing our profitability.
·
Our acquisition
initiatives may be put on hold until such time that we achieve a lower
financial leverage.
29
Table
of Contents
·
Our increased
ownership stake in Brotman Medical Center, Inc. (Brotman) will require
us to consolidate Brotman in our financial statements, including all assets,
liabilities, and results of operations.
Brotman has, in its past, incurred significant operating losses. Such
n
et
o
perating
l
osses may be significantly limited as to its utilization
under section IRC 382 of the I.R.S. Tax Code.
·
The Brotman
acquisition could potentially expose us to significant outlier liability, which
may be subject to audit.
·
We operate in a
highly competitive market. Increased
competition could adversely affect our revenues.
·
We are subject
to extensive government regulation regarding the conduct of our operations. If
we fail to comply with any existing or new regulations, we could suffer civil
or criminal penalties or be required to make significant changes to our
operations.
·
Providers in
the hospital industry have been the subject of federal and state investigations
and we could become subject to such investigations in the future.
·
The healthcare
industry is subject to many laws and regulations designed to deter and prevent
practices deemed by the government to be fraudulent or abusive.
·
We may be
subjected to actions brought by the government under anti-fraud and abuse
provisions or by individuals on the governments behalf under the False Claims
Acts qui tam or whistleblower provisions.
·
Future reforms
in healthcare legislation and regulation could reduce our revenues and
profitability.
·
If our
affiliated physician organizations are not able to satisfy California
Department of Managed Health Care financial solvency requirements, we could
become subject to sanctions and our ability to do business in this segment in
California could be limited or ended.
·
Our
profitability could be adversely affected by any changes that would reduce
payments to HMOs under government-sponsored healthcare programs.
·
If any of our
hospitals lose their accreditation, such hospitals could become ineligible to
receive reimbursement under Medicare or Medi-Cal.
·
Our revenues
and profits could be diminished if we lose the services of key physicians in
our affiliated physician organizations.
·
Our hospitals
face competition for medical support staff, including nurses, pharmacists,
medical technicians and other personnel, which may increase our labor costs and
harm our results of operations.
·
If we were to
lose the services of Sam Lee, our CEO, or other key members of management, we
might not be able to replace them in a timely manner with qualified personnel,
which could disrupt our business and reduce our profitability and revenue
growth.
·
Because our
business is currently limited to the Southern California area, any reduction in
our revenues and profitability from a local economic downturn would not be
offset by operations in other geographic areas.
·
We are required
to upgrade and modify our management information systems to accommodate growth
in our business and changes in technology and to satisfy new government
regulations. As we seek to implement these changes, we may experience
complications, delays and increasing costs, which could disrupt our business
and reduce our profitability.
·
Our ability to
control labor and employee benefit costs could be hindered by continued
acquisition activity.
·
We and our
hospitals and affiliated physician organizations may become subject to claims
of medical malpractice or HMO bad-faith liability claims for which our
insurance coverage may not be adequate. Such claims could materially increase
our costs and reduce our profitability.
30
Table
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·
Fluctuations in
our quarterly operating results may make it difficult to predict our future
results of operations, which could decrease the market value of our common
stock.
·
If we are not
able to develop or sustain an active trading market for our common stock, it
may be difficult for stockholders to dispose of their common stock.
·
Even if an
active market develops for our common stock, the market price of our stock is
likely to be volatile.
·
If the current
weakness in the U.S. economy and job market continues unabated, revenue and
profitability within our Hospital Services and IPA Management segments could be
adversely affected.
·
While the
Company and its lenders remain in discussion to resolve the asserted defaults,
there can be no assurance that the matter will be resolved on a basis favorable
to the Company. The lenders may not grant waivers and could require full
repayment of the loans, which would negatively impact the Companys liquidity,
ability to operate and its ability to continue as a going concern.
·
If the
disruptions in the global financial and capital markets continue, debt or
equity financing may not be available to us on acceptable terms, if at all. If
we are unable to fund future operations by way of financing, including public
or private offerings of equity or debt securities, our business, financial
condition and results of operations will be adversely impacted.
·
We also face
other risks that could adversely affect our business, financial condition or
results of operations, which include: any requirement to restate financial
results in the event of inappropriate application of accounting principles; a
significant failure of our internal control over financial reporting; failure
of our prevention and control systems related to employee compliance with
internal polices, including data security; failure to protect our proprietary
information; and failure of our corporate governance policies or procedures.
Investors should also refer
to our Form 10-K annual report filed with the Securities and Exchange
Commission on December 29, 2008 for a discussion of risk factors. A copy
of the Form 10-K annual report can be found on the internet at
www.prospectmedicalholdings.com
or through
the SECs electronic data system called EDGAR at
www.sec.gov
. Given these risks and uncertainties, we can
give no assurances that results projected in any forward-looking statements
will in fact occur and therefore caution investors not to place undue reliance
on them.
Overview
Prior to the August 8,
2007 acquisition of Alta, the Company was primarily a healthcare management
services organization that developed integrated delivery systems and provides
medical management systems and services to affiliated medical organizations.
With the acquisition of Alta, the Company now owns and operates four
community-based hospitals in Southern California and its operations are now
organized into three reporting segments: IPA Management, Hospital Services and
Corporate.
IPA Management
The IPA Management segment
is a healthcare management services organization that provides management
services to affiliated physician organizations that operate as independent
physician associations (IPAs). The affiliated physician organizations enter
into agreements with health maintenance organizations (HMOs) to provide
enrollees of the HMOs with a full range of medical services in exchange for
fixed, prepaid monthly fees known as capitation payments. The IPAs contract
with physicians (primary care and specialist) and other healthcare providers to
provide all of their medical services.
Through our management
subsidiariesProspect Medical Systems, Inc., Sierra Medical Management
(through August 1, 2008) and ProMed Health Care Administrators, Inc.we
have entered into long-term agreements to provide management services to each
of our affiliated physician organizations in exchange for a management fee. The
management services we provide include HMO contracting, physician recruiting,
credentialing and contracting, human resources services, claims administration,
financial services, provider relations, patient eligibility and other services,
medical management including utilization management and quality assurance, data
collection, and management information systems.
Effective August 1,
2008, the Company sold all of the issued and outstanding stock of Sierra
Medical Management (SMM), Sierra Primary Care Medical Group, Antelope Valley
Medical Associates, Inc. and Pegasus Medical Group, Inc.,
31
Table
of Contents
(the AV Entities). As discussed in
Note 4 to the accompanying unaudited interim condensed consolidated
financial statements, the assets, liabilities and operating results of the AV
Entities have been classified as discontinued operations and are excluded from
the disclosures below.
Our management subsidiaries
currently provide management services to twelve affiliated physician
organizations, which include Prospect Medical Group, ten other affiliated
physician organizations that Prospect Medical Group owns or controls, and one
affiliated physician organization (AMVI/Prospect Health Network) that is an
unconsolidated joint venture in which Prospect Medical Group owns a 50% interest.
Prospect Medical Group, which was our first affiliated physician organization, has
acquired the ownership interest in all of our other affiliated physician
organizations. Thus, while Prospect Medical Group is itself an affiliated
physician organization that does the same business in its own service area as
all of our other affiliated physician organizations do in theirs, Prospect
Medical Group also serves as a holding company for our other affiliated
physician organizations.
The twelve affiliated physician
organizations provide medical services to a combined total of approximately
183,200 HMO enrollees at March 31, 2009, including approximately 9,300
AMVI Prospect Health Network enrollees that we manage for the economic benefit
of an independent third party, and for which we earn management fee income.
Currently, our affiliated
physician organizations have contracts with approximately 16 HMOs, from which
our revenue is primarily derived. HMOs offer a comprehensive healthcare
benefits package in exchange for a capitation fee per enrollee that does not
vary through the contract period regardless of the quantity or cost of medical
services required or used. HMOs enroll members by entering into contracts with
employer groups or directly with individuals to provide a broad range of
healthcare services for a prepaid charge, with minimal deductibles or
co-payments required of the members. All of the contracts between our
affiliated physician organizations and the HMOs provide for the provision of
medical services by the affiliated physician organization to the HMO enrollees
in consideration for the prepayment of the fixed monthly capitation fee per
enrollee.
Our IPA Management business
has grown through the acquisition of IPAs by Prospect Medical Group. We do not
currently have plans to acquire any additional IPAs.
We have chosen to
concentrate our growth geographically by limiting our acquisitions to IPAs in
Orange County, California, Los Angeles County, California and San Bernardino
County, California.
Managed care revenues
consist primarily of fees for medical services provided by our affiliated
physician organizations under capitated contracts with various HMOs. Capitation
revenue under HMO contracts is prepaid monthly to the affiliates based on the
number of enrollees electing any one of the affiliates as their healthcare
provider. Capitation revenue may be subsequently adjusted to reflect changes in
enrollment as a result of retroactive terminations or additions. These
adjustments have not had a material effect on capitation revenue. Capitation
revenue is also subject to risk adjustment. Beginning in calendar 2004,
Medicare began a four year phase-in of a revised capitation model referred to
as Risk Adjustment. Under this model, capitation with respect to Medicare
enrollees is subject to subsequent adjustment for the acuity of the enrollees
to whom services were provided. Capitation for the current year is paid based
on data submitted for each enrollee for the preceding year. Capitation is paid
at interim rates during the year and is adjusted in subsequent periods
(generally in the fourth fiscal quarter) after the final data is compiled.
Positive or negative capitation adjustments are made for seniors with
conditions requiring more or less healthcare services than assumed in the
interim payments. Since we do not currently have the ability to reliably
predict these adjustments, periodic changes in capitation amounts earned as a
result of Risk Adjustment are recognized when those changes are communicated from
the health plans, generally in the fourth quarter of the fiscal year to which
the adjustments relate. Management fees primarily comprise amounts earned from
managing the operations of AMVI, Inc., which is our joint venture partner
in the AMVI/Prospect Health Network joint venture. Management services have
historically related only to Medi-Cal members. However, starting in fiscal
2006, this was expanded to also include management services related to Medicare
members enrolling in CalOPTIMAs OneCare HMO, as well as management services
provided to Brotman Medical Center, an equity investee as of March 31, 2009 in
which we held an initial 33.1% interest (increased to approximately 72% in April 2009).
OneCare is a Medicare Advantage Special Needs Plan launched in August 2005
by CalOPTIMA to serve dually-eligible members in Orange County who are entitled
to Medicare benefits and are also Medi-Cal eligible. Management fee revenue is
earned in the month the services are delivered.
Managed care revenues also
include incentive payments from HMOs under pay-for-performance programs for
quality medical care based on various criteria. These incentives are generally
received in the third and fourth quarters of our fiscal year and are recorded
when such amounts are known since we do not have the information to
independently and reliably estimate these amounts.
32
Table of
Contents
We
also earn additional incentive revenue or incur penalties under HMO contracts
by sharing in the risk for hospitalization based upon inpatient services
utilized. These amounts are included in capitation revenue. Except for two
minor contracts where we are contractually obligated for down-side risk, shared
risk deficits are not payable until and unless we generate future risk sharing
surpluses. Risk pools are generally settled in the following year. Management
estimates risk pool incentives based on information received from the HMOs or
hospitals with whom the risk-sharing arrangements are in place, and who
typically maintain the information and record keeping related to the risk pool
arrangements. Differences between actual and estimated settlements are recorded
when the final outcome is known. Risk pool and pay-for-performance incentives
are affected by many factors, some of which are beyond the Companys control,
and may vary significantly from year to year.
Revenues from continuing
operations of the IPA Management segment are comprised of the following
amounts:
|
|
Three Months Ended
March 31,
|
|
% Increase
|
|
Six Months Ended
March 31,
|
|
% Increase
|
|
|
|
2009
|
|
2008(1)
|
|
(Decrease)
|
|
2009
|
|
2008(1)
|
|
(Decrease)
|
|
Capitation
|
|
$
|
47,874,277
|
|
$
|
50,464,854
|
|
(5.1
|
)%
|
$
|
95,636,452
|
|
$
|
100,775,264
|
|
(5.1
|
)%
|
Management fees
|
|
143,863
|
|
146,767
|
|
(2.0
|
)%
|
288,195
|
|
254,395
|
|
13.3
|
%
|
Other
|
|
140,962
|
|
69,352
|
|
103.3
|
%
|
365,704
|
|
219,870
|
|
66.3
|
%
|
Total
|
|
$
|
48,159,102
|
|
$
|
50,680,973
|
|
(5.0
|
)%
|
$
|
96,290,351
|
|
$
|
101,249,529
|
|
(4.9
|
)%
|
(1)
|
The above amounts exclude capitation revenue related to the AV
Entities, given their classification as discontinued operations in the
accompanying unaudited condensed consolidated financial statements
|
We have increased our
membership through acquisitions. These increases through acquisition are offset
by HMO enrollment declines at our affiliated physician organizations, similar
to the general HMO enrollment trends in California in recent years. The
following table sets forth the approximate number of members, by category:
|
|
As of March 31,
|
|
Member Category
|
|
2009
|
|
2008(2)
|
|
% Increase
(Decrease)
|
|
Commercial
|
|
140,900
|
|
161,100
|
|
(12.5
|
)%
|
Commercialmanaged(1)
|
|
1,300
|
|
1,300
|
|
0.0
|
%
|
Seniorowned
|
|
21,600
|
|
22,100
|
|
(2.3
|
)%
|
Seniormanaged(1)
|
|
100
|
|
100
|
|
0.0
|
%
|
Medi-Calowned
|
|
11,400
|
|
16,100
|
|
(29.2
|
)%
|
Medi-Calmanaged(1)
|
|
7,900
|
|
7,300
|
|
8.2
|
%
|
Total
|
|
183,200
|
|
208,000
|
|
(11.9
|
)%
|
(1)
|
Represent members of AMVI, Inc., our joint venture partner,
which we manage on their behalf in exchange for a fee.
|
|
|
(2)
|
The above amounts exclude HMO enrollment related to the AV Entities,
given their classification as discontinued operations.
|
The following table details
total paid member months, by member category, for the three-month and six-month
periods ended March 31, 2009 and 2008:
|
|
Three Months Ended
March 31,
|
|
% Increase
|
|
Six Months Ended
March 31,
|
|
% Increase
|
|
|
|
2009
|
|
2008(2)
|
|
(Decrease)
|
|
2009
|
|
2008(2)
|
|
(Decrease)
|
|
Commercialowned
|
|
427,500
|
|
487,800
|
|
(12.4
|
)%
|
878,200
|
|
1,002,200
|
|
(12.4
|
)%
|
Commercialmanaged(1)
|
|
4,000
|
|
4,000
|
|
0.0
|
%
|
8,100
|
|
7,900
|
|
2.5
|
%
|
Seniorowned
|
|
64,800
|
|
66,800
|
|
(3.0
|
)%
|
129,700
|
|
133,400
|
|
(2.8
|
)%
|
Seniormanaged(1)
|
|
400
|
|
400
|
|
0.0
|
%
|
800
|
|
900
|
|
(11.1
|
)%
|
MediCalowned
|
|
34,200
|
|
49,300
|
|
(30.6
|
)%
|
68,000
|
|
98,100
|
|
(30.7
|
)%
|
MediCalmanaged(1)
|
|
23,600
|
|
21,700
|
|
8.8
|
%
|
46,800
|
|
41,300
|
|
13.3
|
%
|
|
|
554,500
|
|
630,000
|
|
(12.0
|
)%
|
1,131,600
|
|
1,283,800
|
|
(11.9
|
)%
|
33
Table of
Contents
(1)
|
Represent members of AMVI, Inc., our joint venture partner,
which we manage on their behalf in exchange for a fee.
|
|
|
(2)
|
The above amounts exclude HMO enrollment related to the AV Entities,
given their classification as discontinued operations.
|
Our operating expenses
include expenses related to the provision of medical care services (managed
care cost of revenues) and general and administrative, or G&A, costs. Our
results of operations depend on our ability to effectively manage expenses
related to health benefits and accurately predict costs incurred.
Expenses related to medical
care services include payments to contracted primary care physicians, payments
to contracted specialists and the cost of employed physicians at the Companys
medical clinics (through August 1, 2008). In general, primary care
physicians are paid on a capitation basis, while specialists are paid on either
a capitation or a fee-for-service basis.
Capitation payments are
fixed in advance of periods covered and are not subject to significant
accounting estimates. These payments are expensed in the period the providers
are obligated to provide services. Fee-for-service payments are expensed in the
period services are provided to our members. Medical care costs include actual
historical claims experience and estimates of medical expenses incurred but not
reported, or IBNR. Monthly, we estimate our IBNR based on a number of factors,
including prior claims experience. As part of this review, we also consider
estimates of amounts to cover uncertainties related to fluctuations in provider
billing patterns, claims payment patterns, membership and medical cost trends.
These estimates are adjusted monthly as more information becomes available. In
addition to our own IBNR estimation process, we obtain semi-annual
certifications of our IBNR liability from independent actuaries. We believe
that our process for estimating IBNR is adequate, but there can be no assurance
that medical care costs will not exceed such estimates. In addition to
contractual reimbursements to providers, we also make discretionary incentive
payments to physicians, which are in large part based on the
pay-for-performance, shared risk revenues and any favorable senior capitation
risk adjustment payments we receive. Since the Company records these revenues
generally in the third or fourth quarter of each fiscal year, when the
incentives and capitation adjustments due from the health plans are known, the Company
also historically adjusts interim accruals of discretionary physician bonuses
in the same period. Because incentives and risk-adjustment revenues form the
basis for these discretionary bonuses, variability in earnings due to
fluctuations in revenues are mitigated by reductions in bonuses awarded.
G&A costs are largely
comprised of wage and benefit costs related to our employee base and other
administrative expenses. G&A functions include claims processing,
information systems, provider relations, finance and accounting services, and
legal and regulatory services.
Hospital Services
The Hospital Services
segment owns and operates four urban acute-care community hospitals in the
greater Los Angeles area. The four urban
acute-care community hospitals, operated by Alta, have a combined 339 licensed
beds served by 315 on-staff physicians at March 31, 2009. Each of the
three hospitals in Hollywood, Los Angeles and Norwalk offers a comprehensive
range of medical and surgical services, including inpatient, outpatient,
skilled nursing and urgent care services. The hospital in Van Nuys provides
acute inpatient and outpatient psychiatric services to patients admitted on a
voluntary basis. Admitting physicians
are primarily practitioners in the local area. The hospitals have payment
arrangements with Medicare, Medi-Cal and other third-party payers including
some commercial insurance carriers, Health Maintenance Organizations (HMOs)
and Preferred Provider Organizations (PPOs). The basis for such payments involving
inpatient and outpatient services rendered includes prospectively determined
rates per discharge and cost-reimbursed methodologies. The hospitals are also
eligible to receive additional payment adjustments from Medicare and Medi-Cal
known as Disproportionate Share Hospital (DSH) payments based on a
prospective payment system for hospitals that serve large proportions of
low-income patients.
Operating revenue of our
Hospital Services segment consists primarily of payments for services rendered,
including estimated retroactive adjustments under reimbursement arrangements
with third-party payers. In some cases, reimbursement is based on formulas and
reimbursable amounts are not considered final until cost reports are filed and
audited or otherwise settled by the various programs. The Company accrues for
amounts that it believes will ultimately be due to or from Medicare and other
third-party payers and reports such amounts as net patient revenues in the
accompanying financial statements. We closely monitor our historical collection
rates, as well as changes in applicable laws, rules and regulations and
contract terms, to assure that provisions are made using the most accurate
information available. However, due to the complexities involved in these estimations,
actual payments from payers may be materially different from the amounts we
estimate and record. A summary of the payment arrangements with major
third-party payers follows:
34
Table of Contents
Medicare: Medicare is a
federal program that provides certain hospital and medical insurance benefits
to persons aged 65 and over, some disabled persons with end-stage renal disease
and certain other beneficiary categories. Inpatient services rendered to
Medicare program beneficiaries are paid at prospectively determined rates per
discharge, according to a patient classification system based on clinical,
diagnostic, and other factors. Outpatient services are paid based on a blend of
prospectively determined rates and cost-reimbursed methodologies. The Company
is also reimbursed for various disproportionate share and Medicare bad debt
components at tentative rates, with final settlement determined after
submission of annual Medicare cost reports and audit thereof by the Medicare
fiscal intermediary. Normal estimation differences between final settlements
and amounts accrued in previous years are reflected in net patient service
revenue in the year of final settlement.
Medi-Cal: Medi-Cal is a
joint federal-state funded healthcare benefit program that is administered by
the state of California to provide benefits to qualifying individuals who are
unable to afford care. As such, Medi-Cal constitutes the version of the federal
Medicaid program that is applicable to California residents. Inpatient services
rendered to Medi-Cal program beneficiaries are paid at contracted per diem
rates. The per diem rates are not subject to retrospective adjustment.
Outpatient services are paid based on prospectively determined rates per
procedure provided.
Managed Care: The Company
also receives payment from certain commercial insurance carriers, HMOs, and
PPOs, though generally does not enter into contracts with these entities. The
basis for payment under these agreements includes the Companys standard
charges for services.
Self Pay: Our hospitals
provide services to individuals that do not have any form of healthcare
coverage. Such patients are evaluated, at the time of service or shortly
thereafter, for their ability to pay based upon federal and state poverty
guidelines, qualifications for Medi-Cal, as well as our local hospitals
indigent and charity care policy.
The following tables show
the approximate net patient revenue from each major payer category during the
three-month and six-month periods ended March 31, 2009 and 2008. Net
patient revenues are defined as revenues from all sources of patient care after
deducting contractual allowances and discounts from established billing rates,
which we derived from various sources of payment for the periods indicated.
|
|
Three Months Ended
March 31,
|
|
% Increase
|
|
Six Months Ended
March 31,
|
|
%
Increase
|
|
|
|
2009
|
|
2008
|
|
(Decrease)
|
|
2009
|
|
2008
|
|
(Decrease)
|
|
Medicare
|
|
$
|
17,899,611
|
|
$
|
17,297,146
|
|
3.5
|
%
|
$
|
34,758,052
|
|
$
|
32,170,010
|
|
8.0
|
%
|
Medi-Cal
|
|
17,464,590
|
|
13,256,236
|
|
31.7
|
%
|
33,578,348
|
|
24,067,014
|
|
39.5
|
%
|
Managed care
|
|
1,511,323
|
|
954,193
|
|
58.4
|
%
|
2,994,078
|
|
1,656,679
|
|
80.7
|
%
|
Self pay
|
|
626,280
|
|
512,318
|
|
22.2
|
%
|
1,132,831
|
|
938,636
|
|
20.7
|
%
|
Other
|
|
406,229
|
|
376,233
|
|
8.0
|
%
|
767,132
|
|
850,015
|
|
(9.8
|
)%
|
Total
|
|
$
|
37,908,033
|
|
$
|
32,396,126
|
|
17.0
|
%
|
$
|
73,230,440
|
|
$
|
59,682,354
|
|
22.7
|
%
|
Hospital revenues depend
upon inpatient occupancy levels, the medical and ancillary services and therapy
programs ordered by physicians and provided to patients, the volume of
outpatient procedures and the charges or negotiated payment rates for such
services. Charges and reimbursement rates for inpatient routine services vary
depending on the type of services provided (e.g., medical/surgical,
intensive care or behavioral health) and the geographic location of the
hospital. Inpatient occupancy levels fluctuate for various reasons, many of
which are beyond our control. The percentage of patient service revenue
attributable to outpatient services has generally increased in recent years,
primarily as a result of advances in medical technology that allow more
services to be provided on an outpatient basis, as well as increased pressure
from Medicare, Medi-Cal and private insurers to reduce hospital stays and
provide services, where possible, on a less expensive outpatient basis. We
believe that our experience with respect to our increased outpatient levels
mirrors the general trend occurring in the healthcare industry and we are
unable to predict the rate of growth and resulting impact on our future
revenues.
Patients are generally not
responsible for any difference between customary hospital charges and amounts
reimbursed for such services under Medicare, Medicaid, some private insurance
plans, and managed care plans, but are responsible for services not covered by
such plans, exclusions, deductibles or co-insurance features of their coverage.
The amount of such exclusions, deductibles and co-insurance has generally been
increasing each year. Indications from recent federal and state legislation are
that this trend will continue. Collection of amounts due from individuals is
typically more difficult than from governmental or business payers and we
continue to experience an increase in uninsured and self-pay patients which
unfavorably impacts the collectability of our patient accounts, thereby
increasing our provision for doubtful accounts and charity care provided.
35
Table of Contents
The following table details
operating data of our hospital services facilities for the three-month and
six-month periods ended March 31, 2009 and 2008:
|
|
Three
Months Ended
March 31,
|
|
%
Increase
|
|
Six
Months Ended
March 31,
|
|
%
Increase
|
|
|
|
2009
|
|
2008
|
|
(Decrease)
|
|
2009
|
|
2008
|
|
(Decrease)
|
|
Total net
Hospital services revenues
|
|
$
|
37,908,033
|
|
$
|
32,396,126
|
|
17.0
|
%
|
$
|
73,230,440
|
|
$
|
59,682,354
|
|
22.7
|
%
|
Operating income
before income taxes
|
|
$
|
11,065,118
|
|
$
|
7,494,410
|
|
47.6
|
%
|
$
|
20,182,863
|
|
$
|
13,113,481
|
|
53.9
|
%
|
Total assets as
of March 31, 2009 and 2008
|
|
$
|
208,207,429
|
|
$
|
176,084,131
|
|
18.2
|
%
|
$
|
208,207,429
|
|
$
|
176,084,131
|
|
18.2
|
%
|
Average licensed
beds
|
|
339
|
|
339
|
|
0.0
|
%
|
339
|
|
339
|
|
0.0
|
%
|
Average
available beds
|
|
330
|
|
330
|
|
0.0
|
%
|
330
|
|
330
|
|
0.0
|
%
|
Inpatient
admissions
|
|
3,639
|
|
3,742
|
|
(2.8
|
)%
|
7,224
|
|
7,031
|
|
2.7
|
%
|
Average length
of patient stay (days)
|
|
6.0
|
|
5.5
|
|
9.1
|
%
|
5.9
|
|
5.3
|
|
11.3
|
%
|
Patient days
|
|
24,062
|
|
22,700
|
|
6.0
|
%
|
47,529
|
|
41,620
|
|
14.2
|
%
|
Occupancy rate
for licensed beds
|
|
78.9
|
%
|
73.4
|
%
|
7.5
|
%
|
77.0
|
%
|
67.1
|
%
|
14.8
|
%
|
Occupancy rate
for available beds
|
|
81.0
|
%
|
75.5
|
%
|
7.3
|
%
|
79.1
|
%
|
68.9
|
%
|
14.8
|
%
|
Operating expenses of our
Hospital Services segment include salaries, benefits and other compensation
paid to physicians and healthcare professionals that are employees of our
hospitals; medical supplies; consultant and professional services; and
provision for doubtful accounts.
General and administrative
expenses of our Hospital Services segment includes salaries, benefits and other
compensation for our Hospital administrative employees, insurance, rent,
operating supplies, legal, accounting and marketing.
Corporate
Certain expenses incurred in
Prospect Medical Holdings, Inc. (the Parent Entity) not specifically
allocable to the IPA Management or Hospital Services segments are recorded in
the Corporate segment. These include certain salaries, benefits and other
compensation for our corporate employees, financing, insurance, rent, operating
supplies, legal, accounting, SEC compliance, and Sarbanes-Oxley assessment and
compliance activities. We also do not allocate interest expense, debt
extinguishment loss, gain or loss on interest rate swaps and income taxes to
the other reporting segments.
36
Table of Contents
Results of Operations
IPA Management
The following tables
summarize our net operating revenue, operating expenses and operating income
from continuing IPA Management operations and are used in the discussions below
for the three-month and six-month periods ended March 31, 2009 and 2008.
Effective August 1, 2008, we sold the AV Entities operations. The
operating results of these operations are reflected as loss from discontinued
operations, net of income tax and are excluded from the disclosures below for
each period presented.
|
|
Three
Months Ended
March 31,
|
|
Six
Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
Increase
(Decrease)
|
|
%
|
|
2009
|
|
2008
|
|
Increase
(Decrease)
|
|
%
|
|
Managed
care revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitation
|
|
$
|
47,874,277
|
|
$
|
50,464,854
|
|
$
|
(2,590,576
|
)
|
(5.1
|
)%
|
$
|
95,636,452
|
|
$
|
100,775,264
|
|
$
|
(5,138,812
|
)
|
(5.1
|
)%
|
Management fees
|
|
143,863
|
|
146,767
|
|
(2,904
|
)
|
(2.0
|
)%
|
288,195
|
|
254,395
|
|
33,800
|
|
13.3
|
%
|
Other operating
revenue
|
|
140,962
|
|
69,352
|
|
71,610
|
|
103.3
|
%
|
365,704
|
|
219,870
|
|
145,834
|
|
66.3
|
%
|
Total
managed care revenues
|
|
48,159,102
|
|
50,680,973
|
|
(2,521,871
|
)
|
(5.0
|
)%
|
96,290,351
|
|
101,249,529
|
|
(4,959,178
|
)
|
(4.9
|
)%
|
Managed
care cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCP capitation
|
|
8,465,544
|
|
9,464,369
|
|
(998,825
|
)
|
(10.6
|
)%
|
17,134,584
|
|
18,995,591
|
|
(1,861,007
|
)
|
(9.8
|
)%
|
Specialist
capitation
|
|
11,128,335
|
|
10,449,154
|
|
679,181
|
|
6.5
|
%
|
22,146,827
|
|
20,962,690
|
|
1,184,137
|
|
5.6
|
%
|
Claims expense
|
|
17,470,089
|
|
19,749,143
|
|
(2,279,054
|
)
|
(11.5
|
)%
|
35,162,731
|
|
40,786,780
|
|
(5,624,049
|
)
|
(13.8
|
)%
|
Physician
salaries
|
|
286,578
|
|
318,154
|
|
(31,576
|
)
|
(9.9
|
)%
|
1,064,995
|
|
767,473
|
|
297,522
|
|
38.8
|
%
|
Other cost of
revenues
|
|
(395,044
|
)
|
227,482
|
|
(622,526
|
)
|
(273.7
|
)%
|
(941,706
|
)
|
(36,801
|
)
|
(904,905
|
)
|
2458.9
|
%
|
Total
managed care cost of revenues
|
|
36,955,502
|
|
40,208,302
|
|
(3,252,800
|
)
|
(8.1
|
)%
|
74,567,431
|
|
81,475,733
|
|
(6,908,302
|
)
|
(8.5
|
)%
|
Gross
margin
|
|
11,203,600
|
|
10,472,671
|
|
730,929
|
|
7.0
|
%
|
21,722,920
|
|
19,773,796
|
|
1,949,124
|
|
9.9
|
%
|
General and
administrative expenses
|
|
7,479,468
|
|
7,496,673
|
|
(17,205
|
)
|
(0.2
|
)%
|
14,675,358
|
|
15,006,977
|
|
(331,619
|
)
|
(2.2
|
)%
|
Depreciation and
amortization expense
|
|
883,929
|
|
877,344
|
|
6,585
|
|
0.8
|
%
|
1,754,859
|
|
1,729,850
|
|
25,009
|
|
1.4
|
%
|
Total non-medical
expenses
|
|
8,363,397
|
|
8,374,018
|
|
(10,620
|
)
|
(0.1
|
)%
|
16,430,217
|
|
16,736,827
|
|
(306,610
|
)
|
(1.8
|
)%
|
Income from
unconsolidated joint venture
|
|
594,623
|
|
694,219
|
|
(99,596
|
)
|
(14.3
|
)%
|
947,205
|
|
1,168,959
|
|
(221,754
|
)
|
(19.0
|
)%
|
Operating
income
|
|
$
|
3,434,826
|
|
$
|
2,792,873
|
|
$
|
641,953
|
|
23.0
|
%
|
$
|
6,239,908
|
|
$
|
4,205,928
|
|
$
|
2,033,980
|
|
48.4
|
%
|
The following table sets
forth selected operating items, expressed as a percentage of total revenue:
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Managed care revenues:
|
|
|
|
|
|
|
|
|
|
Capitation revenue
|
|
99.4
|
%
|
99.6
|
%
|
99.3
|
%
|
99.5
|
%
|
Management fees
|
|
0.3
|
%
|
0.3
|
%
|
0.3
|
%
|
0.3
|
%
|
Other revenues
|
|
0.3
|
%
|
0.1
|
%
|
0.4
|
%
|
0.2
|
%
|
Total managed care revenues
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Managed care cost of revenues:
|
|
|
|
|
|
|
|
|
|
PCP capitation
|
|
17.6
|
%
|
18.7
|
%
|
17.8
|
%
|
18.8
|
%
|
Specialists capitation
|
|
23.1
|
%
|
20.6
|
%
|
23.0
|
%
|
20.7
|
%
|
Claims expense
|
|
36.3
|
%
|
39.0
|
%
|
36.5
|
%
|
40.3
|
%
|
Physician salaries
|
|
0.6
|
%
|
0.6
|
%
|
1.1
|
%
|
0.8
|
%
|
Other cost of revenues
|
|
(0.8
|
)%
|
0.4
|
%
|
(1.0
|
)%
|
0.0
|
%
|
Total managed care cost of revenues
|
|
76.8
|
%
|
79.3
|
%
|
77.4
|
%
|
80.6
|
%
|
Gross margin
|
|
23.2
|
%
|
20.7
|
%
|
22.6
|
%
|
19.4
|
%
|
General and administrative expenses
|
|
15.5
|
%
|
14.8
|
%
|
15.2
|
%
|
14.8
|
%
|
Depreciation and amortization expense
|
|
1.8
|
%
|
1.7
|
%
|
1.8
|
%
|
1.7
|
%
|
Total non-medical expenses
|
|
17.3
|
%
|
16.5
|
%
|
17.1
|
%
|
16.5
|
%
|
Income from unconsolidated joint venture
|
|
1.2
|
%
|
1.4
|
%
|
1.0
|
%
|
1.2
|
%
|
Operating income
|
|
7.1
|
%
|
5.6
|
%
|
6.6
|
%
|
4.1
|
%
|
37
Table of Contents
Three Months Ended March 31, 2009 Compared to
Three Months Ended March 31, 2008
Capitation Revenue
Capitation revenue for the
three months ended March 31, 2009 was approximately $47,874,000,
representing a decrease of approximately $2,591,000, or 5.1% from capitation
revenue for the three months ended March 31, 2008, of approximately
$50,465,000.
The decrease was comprised
of two main factors: (i) member month declines in our IPA Management
operations reduced capitation revenue by approximately $6,604,000 during the
fiscal 2009 period, as compared to the fiscal 2008 period due to lower HMO
enrollment, and (ii) higher capitation rates on our IPA Management
operations increased capitation revenue by approximately $4,013,000 during the
fiscal 2009 period, as compared to the fiscal 2008 period. The decrease in
member months was partly due to the loss of several of our primary care
physicians and our cancellation of certain unprofitable Medi-Cal contracts
within our ProMed operating unit.
Management Fee Revenue
Management fee revenue for
the three months ended March 31, 2009 was approximately $144,000,
representing a decrease of approximately $3,000 or 2.0% from management fee
revenue for the three months ended March 31, 2008, of approximately
$147,000.
The decrease was primarily
due to lower accrual of Brotman management fee within our IPA Management
operation in the fiscal 2009 period as compared to the fiscal 2008 period,
offset by an increase in management fee resulting from an increase in the
number of members of AMVICare Health Network, Inc., which we manage on
their behalf in exchange for a fee.
Other Operating Revenue
Other operating revenue for
the three months ended March 31, 2009 was approximately $141,000,
representing an increase of approximately $72,000 or 103.3% from other
operating revenue for the three months ended March 31, 2008, of
approximately $69,000.
Amounts include incentive
payments from HMOs under pay-per-performance programs for quality medical
care based on various criteria. The incentives are recorded when such amounts
are known. The increase in other operating revenue during the fiscal 2009
period was primarily the result of timing of receipt of these incentives from
our contracted Health Plans.
PCP Capitation Expense
Primary care physician (PCP)
capitation expense for the three months ended March 31, 2009 was
approximately $8,466,000, representing a decrease of approximately $999,000 or
10.6% over PCP capitation expense for the three months ended March 31,
2008, of approximately $9,464,000.
The decrease was comprised
of two main factors: (i) member months declines related to our IPA
Management operations, reduced our PCP capitation expense by approximately
$1,239,000 during the fiscal 2009 period, as compared to the fiscal 2008 period
and (ii) higher capitation rates on our IPA Management operations
increased PCP capitation expense by approximately $240,000 during the fiscal
2009 period, as compared to the fiscal 2008 period.
Specialist Capitation Expense
Specialist capitation
expense for the three months ended March 31, 2009 was approximately
$11,128,000, representing an increase of $679,000, or 6.5%, over specialist
capitation expense for the three months ended March 31, 2008, of
$10,449,000.
The increase was comprised
of two main factors: (i) higher capitation rates on our IPA Management
operations increased specialist capitation expense by approximately $2,047,000
during the fiscal 2009 period, as compared to the fiscal 2008 period. Effective
November 1, 2008, we capitated radiology services for a significant number
of members in our Orange County area, which services had previously been
rendered on a fee-for-service basis; and (ii) member month declines in our
IPA Management operations reduced specialist capitation expense by
approximately $1,368,000 during the fiscal 2009 period, as compared to the
fiscal 2008 period.
38
Table of
Contents
Claims
Expense
Claims expense for the three
months ended March 31, 2009 was approximately $17,470,000, representing a
decrease of approximately $2,279,000 or 11.5% over claims expense for the three
months ended March 31, 2008, of approximately $19,749,000.
The decrease was comprised
of two main factors: (i) member month declines in our IPA operations
reduced claims expense by approximately $2,585,000 in the fiscal 2009 period,
as compared to the fiscal 2008 period. As indicated above, effective November 1,
2008, we capitated radiology services for a significant number of our Orange
County members, saving costs and effectively moving the related cost from
claims expense to specialist capitation expense and (ii) claims per member
rates on our IPA Management operations increased claims expense by
approximately $306,000 during the fiscal 2009 period as compared to the fiscal
2008 period.
Physician Salaries Expense
Physician salaries expense
for the three months ended March 31, 2009 was approximately $287,000,
representing a decrease of approximately $32,000 or 9.9% over physician
salaries expense for the three months ended March 31, 2008, of
approximately $318,000.
The decrease was primarily
due to the conversion of certain physicians from salary to capitation basis
effective November 11, 2008, offset by a higher physician bonus accrual
totaling $100,000 in the fiscal 2009 period as compared to $2,000 in the fiscal
2008 period.
Other Cost of Revenues
Other cost of revenues for
the three months ended March 31, 2009 was a negative expense of
approximately $395,000 as compared to an expense of approximately $227,000 for
the three months ended March 31, 2008.
The negative expense in the
fiscal 2009 period represents stop-loss recoveries, which have been offset
against premiums paid and are recorded as a reduction of other medical costs.
Gross Margin
Medical care costs as a
percentage of medical revenues (the medical care ratio) largely determine our
gross margin. Our gross margin increased to 23.3% for the three months ended March 31,
2009, from 20.7% for the three months ended March 31, 2008.
The increase in our gross
margin percentage between the fiscal 2009 period and the fiscal 2008 period was
primarily the result of the decreasing fee for service claims due to new
radiology specialty capitation service agreement, PCP capitation expense and
claims cost per member per month in the fiscal 2009 period, discussed above.
General and Administrative
General and administrative
expenses were approximately $7,479,000 for the three months ended March 31,
2009, representing 15.5% of total IPA Management revenues, as compared with
approximately $7,497,000, or 14.8% of total IPA Management revenues, for the
three months ended March 31, 2008.
The decrease of
approximately $17,000 in general and administrative expenses during the fiscal
2009 period primarily related to the reduction in the use of outside consulting
services and temporary personnel within our IPA Management operation.
Depreciation and Amortization
Depreciation and
amortization expense for the three months ended March 31, 2009 increased
to approximately $884,000 from approximately $877,000 for the three months ended
March 31, 2008. The increase of approximately $7,000 was due to additional
depreciation expense for increased capital expenditures.
Income from Unconsolidated Joint Venture
Income from unconsolidated
joint venture for the three months ended March 31, 2009 decreased to
approximately $595,000 from approximately $694,000 for the three months ended March 31,
2008. The decrease corresponds with membership levels and
39
Table of Contents
costs associated with participation in the
CalOptima OneCare program for Medicare/Medi-Cal eligible beneficiaries
effective January 1, 2006.
Operating Income
Our IPA Management segment
reported an operating income of approximately $3,435,000 for the three months
ended March 31, 2009, as compared to approximately $2,793,000 for the
three months ended March 31, 2008, which increase was the result of the
changes discussed above. The pre-tax operating results from the IPA Management
segment include certain corporate expense allocations for insurance,
professional services, and amortization of identifiable intangibles.
Six Months Ended March 31, 2009 Compared to Six
Months Ended March 31, 2008
Capitation Revenue
Capitation revenue for the
six months ended March 31, 2009 was approximately $95,636,000,
representing a decrease of approximately $5,138,000, or 5.1% from capitation
revenue for the six months ended March 31, 2008, of approximately
$100,775,000.
The decrease was comprised
of two main factors: (i) member month declines in our IPA Management
operations reduced capitation revenue by approximately $13,180,000 during the
fiscal 2009 period, as compared to the fiscal 2008 period due to lower HMO enrollment,
and (ii) higher capitation rates on our IPA Management operations
increased capitation revenue by approximately $8,042,000 during the fiscal 2009
period, as compared to the fiscal 2008 period. The decrease in member months
was partly due to the loss of several of our primary care physicians and our
cancellation of certain unprofitable Medi-Cal contracts within our ProMed
operating unit.
Management Fee Revenue
Management fee revenue for
six months ended March 31, 2009 was approximately $288,000, representing
an increase of approximately $34,000 or 13.3% from management fee revenue for
the six months ended March 31, 2008, of approximately $254,000.
The increase was primarily
due to an increase in the number of members of AMVICare Health Network, Inc.,
which we manage on their behalf in exchange for a fee.
Other Operating Revenue
Other operating revenue for
the six months ended March 31, 2009 was approximately $366,000,
representing an increase of approximately $146,000 or 66.3% from other operating
revenue for the six months ended March 31, 2008, of approximately
$220,000.
Amounts include incentive
payments from HMOs under pay-per-performance programs for quality medical
care based on various criteria. The incentives are recorded when such amounts
are known. The increase in other operating revenue during the fiscal 2009
period was primarily the result of timing of receipt of these incentives from
our contracted Health Plans and the settlement of claims under certain of our
HMO contracts.
PCP Capitation Expense
PCP capitation expense for
the six months ended March 31, 2009 was approximately $17,135,000,
representing a decrease of approximately $1,861,000 or 9.8% over PCP capitation
expense for the six months ended March 31, 2008, of approximately
$18,996,000.
The decrease was comprised
of two main factors: (i) member months declines related to our IPA
Management operations, reduced our PCP capitation expense by approximately
$2,484,000 during the fiscal 2009 period, as compared to the fiscal 2008 period
and (ii) higher capitation rates on our IPA Management operations
increased PCP capitation expense by approximately $623,000 during the fiscal
2009 period, as compared to the fiscal 2008 period.
40
Table
of Contents
Specialist Capitation Expense
Specialist capitation
expense for the six months ended March 31, 2009 was approximately
$22,147,000, representing an increase of $1,184,000, or 5.6%, over specialist
capitation expense for the six months ended March 31, 2008, of
$20,963,000.
The increase was comprised
of two main factors: (i) higher capitation rates on our IPA Management
operations increased specialist capitation expense by approximately $3,926,000
during the fiscal 2009 period, as compared to the fiscal 2008 period. Effective
November 1, 2008, we capitated radiology services for a significant number
of members in our Orange County area, which services had previously been
rendered on a fee-for-service basis; and (ii) member month declines in our
IPA Management operations, which reduced specialist capitation expense by
approximately $2,742,000 during the fiscal 2009 period, as compared to the
fiscal 2008 period.
Claims Expense
Claims expense for the six
months ended March 31, 2009 was approximately $35,162,000, representing a
decrease of approximately $5,624,000 or 13.8% over claims expense for the six
months ended March 31, 2008, of approximately $40,787,000.
The decrease was comprised
of two main factors: (i) member month declines in our IPA operations
reduced claims expense by approximately $5,334,000 in the fiscal 2009 period,
as compared to the fiscal 2008 period. As indicated above, effective November 1,
2008, we capitated radiology services for a significant number of our Orange
County members, saving costs and effectively moving the related cost from
claims expense to specialist capitation expense and (ii) claims per member
rates on our IPA Management operations decreased claims expense by
approximately $290,000 during the fiscal 2009 period as compared to the fiscal
2008 period.
Physician Salaries Expense
Physician salaries expense
for the six months ended March 31, 2009 was approximately $1,065,000,
representing an increase of approximately $298,000 or 38.8% over physician
salaries expense for the six months ended March 31, 2008, of approximately
$767,000.
The increase was primarily
due to physician bonus accrual totaling $600,000 in the fiscal 2009 period as
compared to $8,000 in the fiscal 2008 period, offset by the reduction in
salaries resulting from the conversion of certain physicians from salary to
capitation basis effective November 11, 2008.
Other Cost of Revenues
Other cost of revenues for
the six months ended March 31, 2009 was a negative expense of
approximately $942,000 as compared to a negative expense of approximately
$37,000 for the six months ended March 31, 2008.
The negative expense in the
fiscal 2009 and 2008 periods represent stop-loss recoveries, which have been
offset against premiums paid and are recorded as a reduction of other medical
costs.
Gross Margin
Medical care costs as a
percentage of medical revenues (the medical care ratio) largely determine our
gross margin. Our gross margin increased to 22.6% for the six months ended March 31,
2009, from 19.5% for the six months ended March 31, 2008.
The increase in our gross
margin percentage between the fiscal 2009 period and the fiscal 2008 period was
primarily the result of the decreasing fee for service claims due to new
radiology specialty capitation service agreement, PCP capitation expense and
claims cost per member per month in the fiscal 2009 period, discussed above.
General and Administrative
General and administrative
expenses were approximately $14,675,000 for the six months ended March 31,
2009, representing 15.2% of total IPA Management revenues, as compared with
approximately $15,007,000, or 14.8% of total IPA Management revenues, for the
six months ended March 31, 2009.
41
Table of Contents
The decrease of
approximately $332,000 in general and administrative expenses during the fiscal
2009 period primarily related to the reduction in the use of outside consulting
services and temporary personnel within our IPA Management operation.
Depreciation and Amortization
Depreciation and
amortization expense for the six months ended March 31, 2009 increased to
approximately $1,755,000 from approximately $1,730,000 for the six months ended
March 31, 2008. The increase of approximately $25,000 was due to
additional depreciation expense for increased capital expenditures.
Income from Unconsolidated Joint Venture
Income from unconsolidated
joint venture for the six months ended March 31, 2009 decreased to
approximately $947,000 from approximately $1,169,000 for the six months ended March 31,
2008. The decrease corresponds with membership levels and costs associated with
participation in the CalOptima OneCare program for Medicare/Medi-Cal eligible
beneficiaries effective January 1, 2006. We also reserved against
collectability of certain amounts related to the Joint Venture in the current
period.
Operating Income
Our IPA Management segment
reported an operating income of approximately $6,240,000 for the six months
ended March 31, 2009, as compared to approximately $4,206,000 for the six
months ended March 31, 2008, which increase was the result of the changes
discussed above. The pre-tax operating results from the IPA Management segment
include certain corporate expense allocations for insurance, professional
services, and amortization of identifiable intangibles.
42
Table
of Contents
Hospital Services
The following table sets
forth the results of operation for our Hospital Services segment and is used in
the discussion below for the three-month and six-month periods ended March 31,
2009 and 2008.
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
2009
|
|
2008
|
|
Increase
(Decrease)
|
|
%
|
|
2009
|
|
2008
|
|
Increase
(Decrease)
|
|
%
|
|
Net
Hospital Services revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
|
$
|
17,899,611
|
|
$
|
17,297,146
|
|
602,465
|
|
3.5
|
%
|
$
|
34,758,035
|
|
$
|
32,170,010
|
|
2,588,025
|
|
8.0
|
%
|
Medi-Cal
|
|
17,464,590
|
|
13,256,236
|
|
4,208,355
|
|
31.7
|
%
|
33,578,348
|
|
24,067,014
|
|
9,511,334
|
|
39.5
|
%
|
Managed care
|
|
1,511,323
|
|
954,193
|
|
557,130
|
|
58.4
|
%
|
2,994,078
|
|
1,656,679
|
|
1,337,399
|
|
80.7
|
%
|
Self pay
|
|
626,280
|
|
512,318
|
|
113,962
|
|
22.2
|
%
|
1,132,831
|
|
938,636
|
|
194,195
|
|
20.7
|
%
|
Other
|
|
406,228
|
|
376,233
|
|
29,995
|
|
8.0
|
%
|
767,148
|
|
850,015
|
|
(82,867
|
)
|
(9.8
|
)%
|
Total
Hospital Services revenues
|
|
37,908,033
|
|
32,396,126
|
|
5,511,907
|
|
17.0
|
%
|
73,230,440
|
|
59,682,354
|
|
13,548,086
|
|
22.7
|
%
|
Hospital
operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages
and benefits
|
|
15,922,785
|
|
15,063,696
|
|
859,089
|
|
5.7
|
%
|
31,816,949
|
|
28,942,386
|
|
2,874,562
|
|
9.9
|
%
|
Other operating
expenses
|
|
2,250,224
|
|
1,868,772
|
|
381,452
|
|
20.4
|
%
|
4,434,631
|
|
3,534,633
|
|
899,999
|
|
25.5
|
%
|
Supplies expense
|
|
2,184,130
|
|
2,268,317
|
|
(84,187
|
)
|
(3.7
|
)%
|
4,377,284
|
|
4,177,582
|
|
199,702
|
|
4.8
|
%
|
Provision for
doubtful accounts
|
|
2,216,414
|
|
1,512,030
|
|
704,384
|
|
46.6
|
%
|
3,708,943
|
|
1,860,809
|
|
1,848,134
|
|
99.3
|
%
|
Lease and rental
expense
|
|
284,260
|
|
254,162
|
|
30,098
|
|
11.8
|
%
|
665,562
|
|
452,915
|
|
212,647
|
|
47.0
|
%
|
Total
Hospital operating expenses
|
|
22,857,813
|
|
20,966,977
|
|
1,890,836
|
|
9.0
|
%
|
45,003,369
|
|
38,968,325
|
|
6,035,044
|
|
15.5
|
%
|
General and
administrative expenses
|
|
3,049,518
|
|
2,911,418
|
|
138,100
|
|
4.7
|
%
|
6,216,823
|
|
5,535,410
|
|
681,414
|
|
12.3
|
%
|
Depreciation and
amortization expense
|
|
935,583
|
|
1,023,320
|
|
(87,736
|
)
|
(8.6
|
)%
|
1,827,385
|
|
2,065,138
|
|
(237,755
|
)
|
(11.5
|
)%
|
Total non-medical
expenses
|
|
3,985,101
|
|
3,934,738
|
|
50,363
|
|
1.3
|
%
|
8,044,208
|
|
7,600,548
|
|
443,660
|
|
5.8
|
%
|
Operating
income
|
|
$
|
11,065,118
|
|
$
|
7,494,411
|
|
$
|
3,570,707
|
|
47.6
|
%
|
$
|
20,182,863
|
|
$
|
13,113,481
|
|
$
|
7,069,382
|
|
53.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets
forth selected operating items, expressed as a percentage of total revenue:
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net Hospital Services revenues:
|
|
|
|
|
|
|
|
|
|
Medicare
|
|
47.2
|
%
|
53.4
|
%
|
47.5
|
%
|
53.9
|
%
|
Medi-Cal
|
|
46.1
|
%
|
40.9
|
%
|
45.8
|
%
|
40.3
|
%
|
Managed care
|
|
4.0
|
%
|
2.9
|
%
|
4.1
|
%
|
2.8
|
%
|
Self pay
|
|
1.7
|
%
|
1.6
|
%
|
1.5
|
%
|
1.6
|
%
|
Other
|
|
1.1
|
%
|
1.2
|
%
|
1.1
|
%
|
1.4
|
%
|
Total Hospital Services revenues
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Hospital operating expenses:
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
42.0
|
%
|
46.5
|
%
|
43.4
|
%
|
48.5
|
%
|
Other operating expenses
|
|
5.9
|
%
|
5.8
|
%
|
6.1
|
%
|
5.9
|
%
|
Supplies expense
|
|
5.8
|
%
|
7.0
|
%
|
6.0
|
%
|
7.0
|
%
|
Provision for doubtful accounts
|
|
5.8
|
%
|
4.7
|
%
|
5.1
|
%
|
3.1
|
%
|
Lease and rental expense
|
|
0.7
|
%
|
0.8
|
%
|
0.9
|
%
|
0.8
|
%
|
Total Hospital operating expenses
|
|
60.2
|
%
|
64.8
|
%
|
61.5
|
%
|
65.3
|
%
|
General and administrative expenses
|
|
8.0
|
%
|
9.0
|
%
|
8.5
|
%
|
9.3
|
%
|
Depreciation and amortization expense
|
|
2.5
|
%
|
3.2
|
%
|
2.5
|
%
|
3.5
|
%
|
Total non-medical expenses
|
|
10.5
|
%
|
12.2
|
%
|
11.1
|
%
|
12.8
|
%
|
Operating income
|
|
29.3
|
%
|
23.0
|
%
|
27.4
|
%
|
21.9
|
%
|
43
Table of Contents
The following table shows
certain selected historical operating statistics for our hospitals for the
three-month and six-month periods ended March 31, 2009 and 2008:
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
2009
|
|
2008
|
|
Increase
(Decrease)
|
|
2009
|
|
2008
|
|
Increase
(Decrease)
|
|
Net inpatient
revenues(1)
|
|
$
|
35,560,711
|
|
$
|
30,159,537
|
|
17.9
|
%
|
$
|
68,800,172
|
|
$
|
55,250,624
|
|
24.5
|
%
|
Net outpatient
revenues(1)
|
|
$
|
1,941,093
|
|
$
|
1,860,356
|
|
4.3
|
%
|
$
|
3,663,137
|
|
$
|
3,581,715
|
|
2.3
|
%
|
Number of
hospitals at end of period
|
|
4
|
|
4
|
|
0.0
|
%
|
4
|
|
4
|
|
0.0
|
%
|
Licensed beds at
end of the period
|
|
339
|
|
339
|
|
0.0
|
%
|
339
|
|
339
|
|
0.0
|
%
|
Average licensed
beds
|
|
339
|
|
339
|
|
0.0
|
%
|
339
|
|
339
|
|
0.0
|
%
|
Utilization of
licensed beds(2)
|
|
77.2
|
%
|
72.8
|
%
|
6.0
|
%
|
76.2
|
%
|
66.7
|
%
|
14.2
|
%
|
Average available
beds
|
|
330
|
|
330
|
|
0.0
|
%
|
330
|
|
330
|
|
0.0
|
%
|
Admissions(3)
|
|
3,639
|
|
3,742
|
|
(2.8
|
)%
|
7,224
|
|
7,031
|
|
2.7
|
%
|
Adjusted patient
admissions(4)
|
|
3,899
|
|
3,974
|
|
(1.9
|
)%
|
7,607
|
|
7,488
|
|
1.6
|
%
|
Net inpatient
revenue per admission
|
|
$
|
9,772
|
|
$
|
8,060
|
|
21.2
|
%
|
$
|
9,524
|
|
7,830
|
|
21.6
|
%
|
Emergency
room visits
|
|
3,687
|
|
3,696
|
|
(0.2
|
)%
|
6,927
|
|
6,954
|
|
(0.4
|
)%
|
Surgeries
|
|
697
|
|
722
|
|
(3.5
|
)%
|
1,414
|
|
1,425
|
|
(0.8
|
)%
|
Patient days
|
|
24,062
|
|
22,700
|
|
6.0
|
%
|
47,529
|
|
41,620
|
|
14.2
|
%
|
Adjusted patient
days
|
|
25,600
|
|
24,520
|
|
4.4
|
%
|
50,553
|
|
45,202
|
|
11.8
|
%
|
Average length of
patients stay (days)
|
|
6.0
|
|
5.5
|
|
9.1
|
%
|
5.9
|
|
5.3
|
|
11.3
|
%
|
Net inpatient
revenue per patient day
|
|
$
|
1,478
|
|
$
|
1,329
|
|
11.2
|
%
|
$
|
1,448
|
|
$
|
1,328
|
|
9.0
|
%
|
Outpatient visits
|
|
5,223
|
|
5,389
|
|
(3.1
|
)%
|
10,179
|
|
10,253
|
|
(0.7
|
)%
|
Net outpatient
revenue per visit
|
|
$
|
372
|
|
$
|
345
|
|
7.8
|
%
|
$
|
360
|
|
$
|
349
|
|
3.2
|
%
|
Occupancy rate
for licensed beds(5)
|
|
78.9
|
%
|
73.4
|
%
|
7.2
|
%
|
77.0
|
%
|
67.1
|
%
|
14.8
|
%
|
Occupancy rate
for available beds(5)
|
|
81.0
|
%
|
75.4
|
%
|
7.5
|
%
|
79.1
|
%
|
68.9
|
%
|
14.8
|
%
|
(1)
|
Net inpatient revenues and net outpatient revenues are components of
net patient revenues. Net inpatient revenues include self-pay revenues of $593,864
and $479,537, for the three months ended March 31, 2009 and 2008,
respectively, and 1,075,464 and $878,485, for the six months ended
March 31, 2009 and 2008, respectively. Net outpatient revenues include
self-pay revenues of $32,416 and $29,580 for the three months ended
March 31, 2009 and 2008, respectively, and $57,367 and $56,949, for the
six months ended March 31, 2009 and 2008, respectively.
|
|
|
(2)
|
Utilization of licensed beds represents patient days divided by
average licensed beds divided by number of days in the period.
|
|
|
(3)
|
Self-pay admissions represent 1.8% and 1.4% of total admissions for
the three months ended March 31, 2009 and 2008, respectively, and
represent 1.8% and 1.6% of total admissions for the six months ended
March 31, 2009 and 2008, respectively. Charity care admissions represent
0.5% and 0.3% of total admissions for the three months ended March 31,
2009 and 2008, respectively, and represent 0.6% and 0.3% of total admissions
for the six months ended March 31, 2009 and 2008, respectively.
|
|
|
(4)
|
Adjusted patient admissions are total admissions adjusted for
outpatient volume. Adjusted admissions are computed by multiplying admissions
(inpatient volume) by the sum of gross inpatient charges and gross outpatient
charges and then dividing the resulting amount by gross inpatient charges.
|
|
|
(5)
|
Occupancy rates are affected by many factors, including the
population size and general economic conditions within particular market
service areas, the degrees of variation in medical and surgical products,
outpatient use of hospital services, quality and treatment availability at
competing hospitals and seasonality.
|
44
Table of Contents
Three Months Ended March 31, 2009 Compared to
Three Months Ended March 31, 2008
Net Hospital Services Revenues
Our same-hospital net
inpatient revenues for the three months ended March 31, 2009 were
approximately $35,561,000, representing an increase of approximately $5,401,000
or 17.9% from net inpatient revenues for the three months ended March 31,
2008, of approximately $30,160,000.
The net increase was
comprised of the following main factors: (i) increases in both Medicare
and Medi-Cal reimbursement rates, (ii) an increase a total patient days offset
by (iii) decreases in total admissions and in disproportionate share revenues
under Medi-Cal programs.
Same-hospital admissions for
the three months ended March 31, 2009 decreased by 2.8% compared to the
three months ended March 31, 2008 primarily due to increased patient days,
resulting in patients hitting facility maximum.
While outpatient visits
decreased 3.1% in the fiscal 2009 period, same-hospital net outpatient revenues
increased by 4.3% to approximately $1,941,000 during the three months ended March 31,
2009 as compared to $1,860,000 during the three months ended March 31,
2008. Outpatient visits decreased due to the elimination of certain
unprofitable outpatient services.
Salaries, Wages and Benefits
Salaries, wages and benefits
expense as a percentage of net Hospital Services revenues for the three months
ended March 31, 2009 was 42.0%, representing a decrease of 9.7% compared
to 46.5% for the three months ended March 31, 2008. Salaries, wages and
benefits per adjusted patient day for the three months ended March 31,
2009 was approximately $622, representing a decrease of 1.3% compared to $614
for the three months ended March 31, 2008. The decrease is primarily due
to productivity gained through efficiencies, partially offset by merit increases
for our employees.
As of March 31, 2009,
less than 5% of the total employees at our Hospital Services operation were
represented by labor unions. Labor relations at our hospital facilities
generally have been satisfactory. In May 2008, we entered into a new
collective bargaining agreement between Service Employees International Union (SEIU)
and Hollywood Community Hospital, which is one of the hospitals under the
consolidated group of Alta Hospitals System, LLC. The agreement, which
expires on May 9, 2011, covers a small group of Hollywood Community
Hospitals employees. We do not anticipate that the agreement we reached in
2008 will have a material adverse effect on results of our Hospital Services
operations in fiscal 2009.
Supplies
Supplies expense as a
percentage of net Hospital Services revenue for the three months ended March 31,
2009 was 5.8%, representing a decrease of 17.7%, compared to 7.0% for the three
months ended March 31, 2008. Supplies expense per adjusted patient day for
the three months ended March 31, 2009 was approximately $85, representing
a decrease of 7.8%, compared to approximately $93 for the three months ended March 31,
2008. This decrease in supplies expense per adjusted patient day reflects
improved efficiencies gained through continued focus on supply management. We
strive to control supplies expense through product standardization, bulk
purchases, contract compliance, improved utilization and operational
improvements.
45
Table
of Contents
Provision for Doubtful Accounts
The provision for doubtful
accounts as a percentage of net Hospital services revenues was 5.8% for the
three months ended March 31, 2009 compared to 4.7% for three months ended March 31,
2008.
The table below shows the
net accounts receivable and allowance for doubtful accounts by payor at March 31,
2009 and September 30, 2008:
|
|
March 31, 2009
|
|
September 30, 2008
|
|
|
|
Accounts
Receivable
Before
Allowance
For Doubtful
Accounts
|
|
Allowance
For Doubtful
Accounts
|
|
Net
|
|
Accounts
Receivable
Before
Allowance
For Doubtful
Accounts
|
|
Allowance
For Doubtful
Accounts
|
|
Net
|
|
Medicare
|
|
$
|
7,421,617
|
|
$
|
982,570
|
|
$
|
6,439,047
|
|
$
|
5,939,172
|
|
$
|
913,790
|
|
$
|
5,025,382
|
|
Medi-Cal
|
|
12,411,206
|
|
809,427
|
|
11,601,779
|
|
10,214,125
|
|
345,426
|
|
9,868,699
|
|
Commercial managed care
|
|
554,280
|
|
78,806
|
|
475,474
|
|
1,556,520
|
|
206,492
|
|
1,350,028
|
|
Governmental managed care
|
|
3,041,173
|
|
581,667
|
|
2,459,506
|
|
2,085,295
|
|
336,565
|
|
1,748,730
|
|
Self-pay uninsured
|
|
1,946,416
|
|
1,622,572
|
|
323,844
|
|
2,106,889
|
|
1,828,267
|
|
278,622
|
|
Self-pay
|
|
360,252
|
|
306,612
|
|
53,640
|
|
260,647
|
|
243,498
|
|
17,149
|
|
Other
|
|
1,452,842
|
|
235,323
|
|
1,217,519
|
|
42,609
|
|
16,724
|
|
25,885
|
|
Total
|
|
$
|
27,187,786
|
|
$
|
4,616,977
|
|
$
|
22,570,809
|
|
$
|
22,205,257
|
|
$
|
3,890,762
|
|
$
|
18,314,495
|
|
Collection of accounts
receivable has been a key area of focus. Our current estimated collection rate
on self-pay accounts is approximately 15.4%, including collections from
point-of-service through collections by our in-house collection department or
external collection vendors. This self-pay collection rate includes payments
made by patients, including co-payments and deductibles paid by patients with
insurance, prior to an account being classified and assigned to our in-house
self-pay collection group. The comparable self-pay collection percentage as of September 30,
2008 was approximately 11.5%.
We continue working with
managed care payers to obtain adequate and timely reimbursement for our
services. Our current estimated collection rate on managed care accounts is
approximately 54.4%, which includes collections from point-of-service through
collections by our in-house collection department or external collection
vendors. The comparable managed care collection percentage as of September 30,
2008 was approximately 48.5%.
We manage our provision for
doubtful accounts using hospital-specific goals and benchmarks such as (1) total
cash collections, (2) point-of-service cash collections, (3) accounts
receivable days outstanding (AR Days), and (4) accounts receivable
aging. The following tables present the approximate aging by payer of our
Hospital Services operations net accounts receivable of $22.6 million and
$18.3 million, excluding cost report settlements payable and valuation
allowances of zero and zero, at March 31, 2009 and September 30,
2008, respectively:
|
|
March 31,
2009
|
|
September 30,
2008
|
|
|
|
Medicare
|
|
Medi-Cal
|
|
Managed
Care
|
|
Indemnity,
Self-Pay
and Other
|
|
Total
|
|
Medicare
|
|
Medi-Cal
|
|
Managed
Care
|
|
Indemnity,
Self-Pay
and Other
|
|
Total
|
|
0 60 days
|
|
74.0
|
%
|
72.3
|
%
|
41.5
|
%
|
41.3
|
%
|
69.9
|
%
|
84.0
|
%
|
76.1
|
%
|
49.6
|
%
|
38.5
|
%
|
75.7
|
%
|
61
120 days
|
|
12.8
|
%
|
14.4
|
%
|
26.6
|
%
|
29.1
|
%
|
15.2
|
%
|
8.5
|
%
|
13.2
|
%
|
24.6
|
%
|
37.0
|
%
|
13.1
|
%
|
121
180 days
|
|
8.7
|
%
|
6.4
|
%
|
24.1
|
%
|
18.2
|
%
|
8.5
|
%
|
3.7
|
%
|
7.3
|
%
|
16.1
|
%
|
14.0
|
%
|
7.0
|
%
|
Over
180 days
|
|
4.5
|
%
|
6.9
|
%
|
7.8
|
%
|
11.4
|
%
|
6.4
|
%
|
3.8
|
%
|
3.4
|
%
|
9.7
|
%
|
10.5
|
%
|
4.2
|
%
|
Total
|
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
Our AR Days from Hospital
Services operations were 53.4 days at March 31, 2009 compared to 53.0 days
at September 30, 2008. AR Days at March 31, 2009 and September 30,
2008 are within our target of less than 75 days. AR Days are calculated as
our accounts receivable from Hospital Services operations on the last date in
the relevant quarter divided by our net patient revenues for the quarter ended
on that date divided by the number of days in the quarter.
46
Table of
Contents
Other
Operating Expenses
Other operating expenses as
a percentage of net Hospital Services revenues for the three months ended March 31,
2009 were 5.9%, representing an increase of 2.9%, compared to 5.8% for the
three months ended March 31, 2008. Other operating expenses per adjusted
patient day increased approximately 15.3% to approximately $88 in the three
months ended March 31, 2009 compared to approximately $76 for the same
period in fiscal 2008 primarily due to higher registry expense resulting from
increased patient days, offset by a decrease in malpractice expense that is
primarily attributable to improved claims experience.
Lease and Rental
Lease and rental expenses as
a percentage of net Hospital Services revenues for the three months ended March 31,
2009 were 0.7%, compared to 0.8% for the three months ended March 31,
2008. We own, through our subsidiary, Alta Hospitals Systems, LLC, all of
our hospital facilities. Included in lease and rental expenses were operating
lease arrangements for our administrative offices with terms expiring at
various dates through 2015. The office space is shared with Prospect Medical
Holdings, Inc.
General and Administrative
General and administrative
expenses as a percentage of net Hospital Services revenues for the three months
ended March 31, 2009 were 8.0%, representing a decrease of 10.5%, compared
to 9.0% for the three months ended March 31, 2008. Included in General and
Administrative expenses was consulting and outside services, supplies,
insurance, utilities, taxes and licenses, and maintenance which accounted for
approximately 11.4% of the total expenses in the three months ended March 31,
2009, as compared to 11.7% for the three months ended March 31, 2008.
Depreciation and Amortization
Depreciation and
Amortization expenses as a percentage of net Hospital Services revenues for the
three months ended March 31, 2009 were 2.5%, representing a decrease of 21.9%,
compared to 3.2% for the three months ended March 31, 2008. Included in
depreciation and amortization expense was amortization of identifiable
intangibles of approximately $317,000 and $317,000, in the three months ended March 31,
2009 and 2008, respectively. During the three months ended March 31, 2009
and 2008, total capital expenditures incurred of approximately $194,000 and
$387,000 respectively, were within our budgeted expectations.
Operating Income
Our Hospital Services
segment reported an operating income of approximately $11,065,000 and
$7,494,000 for the three months ended March 31, 2009 and 2008,
respectively, which increase was the result of the changes discussed above. The
pre-tax operating results from the Hospital Services segment include certain
corporate expense allocations for insurance, professional fees, and
amortization of identifiable intangibles.
Six Months Ended March 31, 2009 Compared to Six
Months Ended March 31, 2008
Net Hospital Services Revenues
Our same-hospital net
inpatient revenues for the six months ended March 31, 2009 were
approximately $68,800,000, representing an increase of approximately
$13,550,000 or 24.5% from net inpatient revenues for the six months ended March 31,
2008, of approximately $55,251,000.
The increase was comprised
of three main factors: (i) an increase in disproportionate share revenues
under Medi-Cal programs to approximately $6,164,000 in the fiscal 2009 period
from $5,674,000 in the fiscal 2008 period, (ii) increases in both Medicare
and Medi-Cal reimbursement rates, and (iii) an increase in total
admissions.
Same-hospital admissions for
the six months ended March 31, 2009 increased by 2.4% compared to the six
months ended March 31, 2008 primarily due to net volume increases in many
of the service lines emphasized by our targeted growth initiative.
47
Table of Contents
While outpatient visits
decreased 0.7% in the fiscal 2009 period, same-hospital net outpatient revenues
increased by 2.3% to approximately $3,663,000 during the six months ended March 31,
2009 as compared to $3,582,000 during the six months ended March 31, 2008.
Outpatient visits decreased due to the elimination of certain unprofitable
outpatient services.
Salaries, Wages and Benefits
Salaries, wages and benefits
expense as a percentage of net Hospital Services revenues for the six months
ended March 31, 2009 was 43.4%, representing a decrease of 10.4% compared
to 48.5% for the six months ended March 31, 2008. Salaries, wages and
benefits per adjusted patient day for the six months ended March 31, 2009
was approximately $629, representing a decrease of 1.7% compared to $640 for
the six months ended March 31, 2008. The decrease is primarily due to
productivity gained through efficiencies, partially offset by merit increases
for our employees.
As of March 31, 2009,
less than 5% of the total employees at our Hospital Services operation were
represented by labor unions. Labor relations at our hospital facilities
generally have been satisfactory. In May 2008, we entered into a new
collective bargaining agreement between Service Employees International Union (SEIU)
and Hollywood Community Hospital, which is one of the hospitals under the
consolidated group of Alta Hospitals System, LLC. The agreement, which
expires on May 9, 2011, covers a small group of Hollywood Community
Hospitals employees. We do not anticipate that the agreement we reached in
2008 will have a material adverse effect on results of our Hospital Services
operations in fiscal 2009.
Supplies
Supplies expense as a
percentage of net Hospital Services revenue for the six months ended March 31,
2009 was 6.0%, representing a decrease of 14.6%., compared to 7.0% for the six
months ended March 31, 2008. Supplies expense per adjusted patient day for
the six months ended March 31, 2009 was approximately $87, representing a
decrease of 6.3%, compared to approximately $92 for the six months ended March 31,
2008. This decrease in supplies expense per adjusted patient day reflects
improved efficiencies gained through continued focus on supply management. We
strive to control supplies expense through product standardization, bulk
purchases, contract compliance, improved utilization and operational
improvements.
Provision for Doubtful Accounts
The provision for doubtful
accounts as a percentage of net Hospital Services revenues was 5.1% for the six
months ended March 31, 2009 compared to 3.1% for six months ended March 31,
2008.
Other Operating Expenses
Other operating expenses as
a percentage of net Hospital Services revenues for the six months ended March 31,
2009 were 6.1%, representing an increase of 2.3%, compared to 5.9% for the six
months ended March 31, 2008. Other operating expenses per adjusted patient
day increased approximately 12.2% to $88 in the six months ended March 31,
2009 compared to $78 for the same period in fiscal 2008 primarily due to higher
registry expense resulting from increased patient days, offset by a decrease in
malpractice expense that is primarily attributable to improved claims
experience.
Lease and Rental
Lease and rental expenses as
a percentage of net Hospital Services revenues for the six months ended March 31,
2009 were 0.9%, representing an increase of 19.8%, compared to 0.8% for the six
months ended March 31, 2008. We own, through our subsidiary, Alta
Hospitals Systems, LLC, all of our hospital facilities. Included in lease
and rental expenses were operating lease arrangements for our administrative
offices with terms expiring at various dates through 2015. The office space is
shared with Prospect Medical Holdings, Inc.
48
Table
of Contents
General and Administrative
General and administrative
expenses as a percentage of net Hospital Services revenues for the six months
ended March 31, 2009 were 8.5%, representing a decrease of 8.5%, compared
to 9.3% for the six months ended March 31, 2008. Included in General and
Administrative expenses was consulting and outside services, supplies,
insurance, utilities, taxes and licenses, and maintenance which accounted for
approximately 11.7% of the total expenses in the six months ended March 31,
2009, as compared to 11.9% for the six months ended March 31, 2008.
Depreciation and Amortization
Depreciation and
Amortization expenses as a percentage of net Hospital Services revenues for the
six months ended March 31, 2009 were 2.5%, representing a decrease of 27.9%,
compared to 3.5% for the six months ended March 31, 2008. Included in
depreciation and amortization expense was amortization of identifiable
intangibles of approximately $634,000 and $634,000, in the six months ended March 31,
2009 and 2008, respectively. During the six months ended March 31, 2009
and 2008, total capital expenditures incurred of approximately $375,000 and $720,000
respectively, were within our budgeted expectations.
Operating Income
Our Hospital Services
segment reported an operating income of approximately $20,183,000 and
$13,113,000 for the six months ended March 31, 2009 and 2008,
respectively, which increase was the result of the changes discussed above. The
pre-tax operating results from the Hospital Services segment include certain
corporate expense allocations for insurance, professional fees, and
amortization of identifiable intangibles.
49
Table
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Corporate
The following table
summarizes our corporate expense for Prospect Medical Holdings, Inc., our
parent entity, and is used in the discussion below for the three-month and
six-month periods ended March 31, 2009 and 2008.
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
2009
|
|
2008
|
|
Increase
(Decrease)
|
|
%
|
|
2009
|
|
2008
|
|
Increase
(Decrease)
|
|
%
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and
administrative
|
|
$
|
2,850,537
|
|
$
|
3,872,901
|
|
$
|
(1,022,364
|
)
|
(26.4
|
)%
|
$
|
4,872,846
|
|
$
|
6,392,896
|
|
$
|
(1,520,050
|
)
|
(23.8
|
)%
|
Depreciation and
amortization
|
|
3,203
|
|
6,747
|
|
(3,545
|
)
|
(52.5
|
)%
|
6,404
|
|
12,946
|
|
(6,542
|
)
|
(50.5
|
)%
|
Total
Operating Expenses
|
|
2,853,740
|
|
3,879,648
|
|
(1,025,908
|
)
|
(26.4
|
)%
|
4,879,250
|
|
6,405,842
|
|
(1,526,592
|
)
|
(23.8
|
)%
|
Other
(Income) Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
(14,427
|
)
|
(68,021
|
)
|
(53,594
|
)
|
(78.8
|
)%
|
(37,102
|
)
|
(302,450
|
)
|
(265,348
|
)
|
(87.7
|
)%
|
Interest expense
and amortization of deferred financing Costs
|
|
6,524,776
|
|
5,252,571
|
|
1,272,205
|
|
24.2
|
%
|
12,621,006
|
|
9,413,481
|
|
3,207,525
|
|
34.1
|
%
|
(Gain) loss on
value of interest rate swap arrangements
|
|
(955,201
|
)
|
|
|
955,201
|
|
100
|
%
|
8,712,824
|
|
876,680
|
|
7,836,144
|
|
893.8
|
%
|
Total
Other Expense
|
|
5,555,148
|
|
5,184,550
|
|
370,598
|
|
7.1
|
%
|
21,296,728
|
|
9,987,711
|
|
11,309,017
|
|
113.2
|
%
|
Total
Corporate Expenses
|
|
$
|
8,408,888
|
|
$
|
9,064,198
|
|
$
|
(655,310
|
)
|
(7.2
|
)%
|
$
|
26,175,978
|
|
$
|
16,393,553
|
|
$
|
9,782,425
|
|
59.7
|
%
|
The following table sets
forth selected operating items, expressed as a percentage of total consolidated
revenues from continuing operations:
|
|
Three Months Ended
March 31,
|
|
Six Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
3.3
|
%
|
4.7
|
%
|
2.9
|
%
|
4.0
|
%
|
Depreciation and amortization
|
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
Total Operating Expenses
|
|
3.3
|
%
|
4.7
|
%
|
2.9
|
%
|
4.0
|
%
|
Other (Income) Expense:
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
0.0
|
%
|
(0.1
|
)%
|
0.0
|
%
|
(0.2
|
)%
|
Interest expense and amortization of deferred financing Costs
|
|
7.6
|
%
|
6.3
|
%
|
7.4
|
%
|
5.8
|
%
|
(Gain) loss on value of interest rate swap arrangements
|
|
(1.1
|
)%
|
0.0
|
%
|
5.2
|
%
|
0.5
|
%
|
Total Other Expense
|
|
6.5
|
%
|
6.2
|
%
|
12.6
|
%
|
6.1
|
%
|
Total Corporate Expenses
|
|
9.8
|
%
|
10.9
|
%
|
15.5
|
%
|
10.1
|
%
|
Three Months Ended March 31, 2009 Compared to
Three Months Ended March 31, 2008
General and Administrative
General and administrative expenses for the three months ended March 31,
2009 were approximately $2,851,000, representing approximately 3.3% of total
revenues from continuing operations, compared to approximately $3,873,000, or
approximately 4.7% of total revenues, for the three months ended March 31,
2008, a decrease of approximately 29.8%. The decrease in general and
administrative expenses during the fiscal 2009 period primarily related to
reduction in audit, legal, insurance and
Sarbanes-Oxley (SOX) compliance consulting expenditures, offset by additional
accrued bonus and an increase in employee stock option grant and issue costs.
Depreciation and Amortization
Depreciation and
amortization expense for the three months ended March 31, 2009 was
approximately $3,000, compared to approximately $7,000, for the three months
ended March 31, 2008, a decrease of approximately 52.5%. The decrease was primarily due to retirement
of certain capital equipment.
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Table
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Investment Income
Investment income for the
three months ended March 31, 2009 was approximately $14,000, compared to
approximately $68,000 for the three months ended March 31, 2008, a
decrease of approximately 78.8%. Following the amendment of our senior credit
facility agreement on May 15, 2008, we were required by Bank of America to
maintain substantially all of our cash in non-interest bearing accounts.
Interest Expense and Amortization of Deferred
Financing Costs
Interest expense and
amortization of deferred financing costs for the three months ended March 31,
2009 was approximately $6,525,000, representing approximately 7.6% of total
revenues from continuing operations, compared to $5,253,000 or approximately
6.3% of total revenues from continuing operations for the three months ended March 31,
2008, an increase of approximately 24.2%. As discussed in Note 7 to the
accompanying unaudited interim condensed consolidated financial statements, we
were in default under our credit facilities and under the April 2008
forbearance agreements, the applicable margins on the first and second lien
term loans were permanently increased to 750 and 1,175 basis points,
respectively, and the range of applicable margins on the revolving line of
credit was increased from 500 to 750 basis points effective April 10,
2008. The agreements also provide that the LIBOR rate shall not be less than
3.50% for the term of the credit facility. In May 2008, the debt
agreements were further modified to add a 1% payment-in-kind (PIK) interest
to the outstanding balance of the debt plus an additional 4% PIK interest to
the interest rate applicable to the second lien debt. The 4% accrues and is
added to the principal balance on a monthly basis. The 4% PIK could potentially
be reduced in the future to the extent that the company reduces its
consolidated leverage ratio.
Additionally, as discussed in Note 7 to the accompanying unaudited
interim condensed consolidated financial statements, effective with the first
asserted default on March 19, 2009, our lenders have instituted default
rates of 13.0% with respect to the first lien term loan, 17.25% with respect to
the second lien term loan, and 13.25% with respect to the revolving line of
credit.
(Gain) Loss in Value of Interest Rate Swap
Arrangements
As discussed in Note 7
to the accompanying unaudited interim condensed consolidated financial
statements, currently we have two interest rate swaps in place for initial
notional principal amounts of $48.0 million and $97.75 million,
respectively. The interest rate swaps were designated as cash flow hedges of
our floating rate term debts, with the effective date of the $48.0 million
swap being December 31, 2007 and the effective date of the
$97.75 million swap being September 6, 2007. As of April 1,
2008, in anticipation of modifications to the terms of our credit agreements,
the swaps were determined to no longer be effective in offsetting the hedged
items. As a result, cash flow hedge accounting treatment was discontinued and
all further changes in fair value of the swaps are included in earnings. These
amounts are unpredictable and likely to be significant. In the three months
ended March 31, 2009, gain on interest rate swaps totaled approximately
$955,000.
In the three months ended March 31,
2008, all changes in fair value of the interest rate swaps were recorded in
other comprehensive loss as the swaps were deemed effective.
Six Months Ended March 31, 2009 Compared to Six
Months Ended March 31, 2008
General and Administrative
General and administrative expenses for the six months ended March 31,
2009 were approximately $4,873,000, representing approximately 2.9% of total
revenues from continuing operations, compared to approximately $6,393,000, or
approximately 4.0% of total revenues from continuing operations, for the six
months ended March 31, 2008, a decrease of approximately 23.8%. The
decrease in general and administrative expenses during the fiscal 2009 period
primarily related to
related
to reduction in audit, legal, insurance and Sarbanes-Oxley (SOX) compliance
consulting expenditures, offset by additional accrued bonus and an increase in
employee stock option grant and issue costs.
Depreciation and Amortization
Depreciation and
amortization expense for the six months ended March 31, 2009 was
approximately $6,000, compared to approximately $13,000 for the six months
ended March 31, 2008, a decrease of approximately 50.5%. The decrease was primarily due to retirement
of certain capital equipment.
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Table
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Investment Income
Investment income for the
six months ended March 31, 2009 was approximately $37,000, compared to
approximately $302,000, for the six months ended March 31, 2008, a
decrease of approximately 87.7%. Following the amendment of our senior credit
facility agreement on May 15, 2008, we were required by Bank of America to
maintain substantially all of our cash in non-interest bearing accounts.
Interest Expense and Amortization of Deferred
Financing Costs
Interest expense and
amortization of deferred financing costs for the six months ended March 31,
2009 was approximately $12,621,000, representing approximately 7.4% of total
revenues from continuing operations, compared to $9,414,000 or approximately
5.8% of total revenues from continuing operations for the six months ended March 31,
2008, an increase of approximately 34.1%. As discussed in Note 7 to the
accompanying unaudited interim condensed consolidated financial statements, we
were in default under our credit facilities and under the April 2008
forbearance agreements, the applicable margins on the first and second lien
term loans were permanently increased to 750 and 1,175 basis points,
respectively, and the range of applicable margins on the revolving line of
credit was increased from 500 to 750 basis points effective April 10,
2008. The agreements also provide that the LIBOR rate shall not be less than
3.50% for the term of the credit facility. In May 2008, the debt
agreements were further modified to add a 1% payment-in-kind (PIK) interest
to the outstanding balance of the debt plus an additional 4% PIK interest to
the interest rate applicable to the second lien debt. The 4% accrues and is
added to the principal balance on a monthly basis. The 4% PIK could potentially
be reduced in the future to the extent that the company reduces its
consolidated leverage ratio.
Additionally, effective with the first asserted default on March 19,
2009, our lenders have instituted default rates of 13.0% with respect to the
first lien term loans, 17.25% with respect to the second lien term loan, and
13.25% with respect to the revolving line of credit.
Loss in Value of Interest Rate Swap Arrangements
As discussed in Note 7
to the accompanying unaudited interim condensed consolidated financial
statements, currently we have two interest rate swaps in place for initial
notional principal amounts of $48.0 million and $97.75 million,
respectively. The interest rate swaps were designated as cash flow hedges of
our floating rate term debts, with the effective date of the $48.0 million
swap being December 31, 2007 and the effective date of the
$97.75 million swap being September 6, 2007. As of April 1,
2008, in anticipation of modifications to the terms of our credit agreements,
the swaps were determined to no longer be effective in offsetting the hedged
items. As a result, cash flow hedge accounting treatment was discontinued and
all further changes in fair value of the swaps are included in earnings. These
amounts are unpredictable and likely to be significant. In the six months ended
March 31, 2009, loss on interest rate swaps totaled approximately
$8.7 million.
In the six months ended March 31,
2008, loss on interest rate swaps of approximately $877,000 represented the
change in fair value of the $48.0 million swap that was not yet subject to
hedge accounting, which amount was charged to earnings.
Consolidated
Three Months Ended March 31, 2009 Compared to
Three Months Ended March 31, 2008
Provision for Income Taxes
Income tax provision for the
three months ended March 31, 2009 was approximately $2,496,000 compared to
approximately $456,000 in the three months ended March 31, 2008. The
effective tax rate was higher at 41.0% in the three months ended March 31,
2009 compared to 36.0% in the three months ended March 31, 2008. The
higher effective tax rate in the fiscal 2009 period was primarily due to state
income tax and permanent differences.
Net Income (Loss) from Continuing Operations
Net income from continuing
operations attributable to common stockholders for the three months ended March 31,
2009 was approximately $3,548,000, or $0.17 per diluted share, as compared to a
net loss of $1,179,000, or $0.10 per diluted share, for the three months ended March 31,
2008, which increase is the result of the changes discussed above.
52
Table
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Net Loss from Discontinued Operations
Net loss from discontinued
operations for the three months ended March 31, 2008 was approximately
$76,000 or $0.01 per diluted share, as compared to none for the three months
ended March 31, 2009. As discussed in Note 4 to the unaudited interim
condensed consolidated financial statements, we sold the AV Entities effective
August 1, 2008.
Six Months Ended March 31, 2009 Compared to Six
Months Ended March 31, 2008
Provision for Income Taxes
Income tax provision for the
six months ended March 31, 2009 was approximately $76,000 compared to approximately
$355,000 in the six months ended March 31, 2008. The effective tax rate
was higher at 41.0% in the six months ended March 31, 2009 compared to
36.0% in the six months ended March 31, 2008. The higher effective tax
rate in the fiscal 2009 period was primarily due to state income tax and
permanent differences.
Net Income (Loss) from Continuing Operations
Net income from continuing
operations attributable to common stockholders for the six months ended March 31,
2009 was approximately $104,000, or $0.01 per diluted share, as compared to a
net loss of $3,242,000, or $0.28 per diluted share, for the six months ended March 31,
2008, which increase is the result of the changes discussed above.
Net Loss from Discontinued Operations
Net loss from discontinued
operations for the six months ended March 31, 2008 was approximately
$392,000 or $0.03 per diluted share, as compared to none for the six months
ended March 31, 2009. As discussed in Note 4 to the unaudited interim
condensed consolidated financial statements, we sold the AV Entities effective
August 1, 2008.
Liquidity and Capital Resources
Our primary sources of cash
have been funds provided by borrowings under our credit facilities, by the
issuance of equity securities, by cash flow from operations and by proceeds
from sales of assets related to discontinued operations. Prior to the August 8,
2007 acquisition of Alta, our primary sources of cash from operations were
healthcare capitation revenues, fee-for-service revenues, risk pool payments
and pay-for-performance incentives earned by our affiliated physician
organizations. With the acquisition of Alta, our sources of cash from
operations now include payments for hospital services rendered under
reimbursement arrangements with third-party payers, which include the federal
government under the Medicare program, the state government under the Medi-Cal
program, private insurers, health maintenance organizations (HMOs), preferred
provider organizations (PPOs), and self-pay patients.
Our primary uses of cash
include healthcare capitation and claims payments by our affiliated physician
organizations, administrative expenses, debt service, acquisitions, costs
associated with the integration of acquired businesses, information systems
development costs and, with the acquisition of Alta, operating, capital
improvement and administrative expenses related to our hospital operations. Our
affiliated physician organizations generally receive capitation revenue in
advance of having to make capitation and claims payments to their providers.
However, our hospitals receive payments for services rendered generally 30 to
90 days after the medical care is rendered. For some accounts and payer
programs, the time lag between service and reimbursement can exceed one year.
Our investment strategies
are designed to provide safety and preservation of capital, sufficient
liquidity to meet cash-flow needs, the integration of investment strategy with
our business operations and objectives, and attainment of a competitive return.
At March 31, 2009, we invested a portion of our cash in interest bearing
money market accounts and, following the amendment of our senior credit
facility agreement on May 15, 2008, we were also required to maintain
substantially all of our cash in non-interest bearing accounts with Bank of
America. All of these amounts are classified as current assets and included in
cash and cash equivalents in the accompanying Condensed Consolidated Balance
Sheets.
53
Table
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Cash Flow from Continuing Operations
Net cash provided by
continuing operations was approximately $5,048,000 for the six months ended March 31,
2009 compared to net cash provided by continuing operations of approximately
$1,415,000 for the six months ended March 31, 2008. The increase in net
cash provided by continuing operations for the six months ended March 31,
2009 as compared to the six months ended March 31, 2008 was due to various
factors, including the following:
·
earnings,
excluding non-cash charges and credits were approximately $14,177,000 in the
fiscal 2009 period compared to approximately $6,835,000 in the fiscal 2008
period;
·
changes in
patient, government program and other receivables, a use of approximately
$7,524,000 in the fiscal 2009 period compared to a use of approximately
$4,267,000 in the fiscal 2008 period. The increase in fiscal 2009 was primarily
related to our Hospital Services segment;
·
changes in
prepaid expenses and other, a use of approximately $438,000 in the fiscal 2009
period compared to a use of approximately $1,196,000 in the fiscal 2008 period;
·
changes in
refundable income tax and taxes payable a source of approximately $3,923,000 in
the fiscal 2009 period compared to a source of $1,527,000 in the fiscal 2008
period;
·
changes in
medical claims and related liabilities, a use of approximately $1,106,000 in
the fiscal 2009 period compared to a source of approximately $398,000 in the
fiscal 2008 period; and
·
changes in
accounts payable and other accrued liabilities, a use of approximately
$2,790,000 in the fiscal 2009 period compared to a use of approximately
$1,151,000 in the fiscal 2008 period due to a reduction in general and
administrative expenses in the fiscal 2009 period relating to legal, insurance
and SOX compliance consulting expenditures.
Net cash used in investing
activities totaled approximately $438,000 for the six months ended March 31,
2009, compared to a use of approximately $936,000 for the six months ended March 31,
2008, the largest component of which was purchases of property, improvements
and equipment, a use of approximately $437,000 in the fiscal 2009 period
compared to a use of approximately $952,000 in the fiscal 2008 period.
Net cash used by financing
activities totaled approximately $6,660,000 for the six months ended March 31,
2009, compared to a source of approximately $1,279,000 for the six months ended
March 31, 2008. Net cash used in financing activities for the six months
ended March 31, 2009 was comprised primarily of the principal repayment of
the first-lien term debt of approximately $6,465,000. Net cash provided by
financing activities during the six months ended March 31, 2008 included a
$10,750,000 borrowing on our line of credit and $1,200,000 received from
exercise of stock options, net of payment of $2,500,000 on our long-term debt
and payment of $8,000,000 on our line of credit.
Cash Flow from Discontinued Operations
During the six months ended March 31,
2008, net cash used in operating activities in our discontinued operations was
approximately $573,000, compared to none for the six months ended March 31,
2009, and net cash used in investing activities, was approximately $3,000
compared to none for the six months ended March 31, 2009. As discussed in
Note 4 to the unaudited interim condensed consolidated financial
statements, we sold the AV Entities effective August 1, 2008. We do not
believe that the eventual exclusion of such amounts from our consolidated cash
flows in future periods will have a material effect on our liquidity or
financial position.
At March 31, 2009, we
had negative working capital of approximately $126,199,000 as compared to
positive working capital of $12,373,000 at September 30, 2008, primarily
resulting from the reclassification of approximately $125.7 million of
long-term debt and $14.7 million for the swap liability as current due to our
default on the amended credit facility agreements for failure to meet certain
technical requirements, including the sale of certain assets by a specified
date and the acquisition of Brotman.
At March 31, 2009 and September 30,
2008, cash, cash equivalents and investments were approximately $32,198,000 and
$34,220,000, respectively.
54
Table
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Recent Operating Results and Credit
Facility
On June 1, 2007, we
entered into a new three-year senior secured credit facility with Bank of
America, in connection with the purchase of the ProMed Entities (see
Note 7 to the accompanying unaudited interim condensed consolidated
financial statements). The Bank of America facility totaled $53,000,000, and
comprised a $48,000,000 variable-rate term loan, and a $5,000,000 revolver
(which was not drawn). $8,051,000 of the term loan proceeds were used to repay
existing debt and the balance was used to finance the ProMed acquisition. The
$48,000,000 term loan was repaid on August 8, 2007, with proceeds from a
new $155,000,000 syndicated senior secured credit facility arranged by Bank of
America in connection with the acquisition of Alta, comprised of a $95,000,000
seven-year first-lien term loan at LIBOR plus 400 basis points, with quarterly
payments of $1,250,000 and an annual principal payment of 50% of excess cash
flow, as defined in the loan agreement; a $50,000,000 seven and one-half year
second-lien term loan at LIBOR plus 825 basis points, with all principal due at
maturity and a revolving credit facility of $10,000,000 bearing interest at
prime plus a margin that ranges from 275 to 300 basis points based on the
consolidated leverage ratio. We could borrow, make repayments and re-borrow
under the revolver until August 8, 2012, at which time all outstanding
amounts must be repaid.
We recorded an interest
charge of $895,914 to write off deferred financing costs upon the
extinguishment of the $53 million credit facility and capitalized
approximately $6.9 million in deferred financing costs on the
$155 million credit facility in August 2007, which was being
amortized over the term of the related debt using the effective interest
method.
We are subject to certain
financial and administrative covenants, cross default provisions and other
conditions required by the loan agreements with the lenders, including a
maximum senior debt/EBITDA ratio, a minimum fixed-charge coverage ratio and,
effective May 15, 2008, a minimum EBITDA level, each computed quarterly
(monthly, for the test periods April 30, 2008 through June 30, 2009)
based on consolidated trailing twelve-month operating results, including the
pre-acquisition operating results of acquired entities. There are also various
administrative covenants and other restrictions with which we must comply,
including, among others, restrictions on additional indebtedness, incurrence of
liens, engaging in business other than our primary business, paying dividends,
acquisitions and asset sales. The credit facilities provide that an event of
default will occur if there is a change in control.
While we have met all debt
service requirements timely, we did not comply with certain financial and
administrative covenants as of September 30, 2007, December 31, 2007
and March 31, 2008, as further discussed in Note 7 of the
accompanying unaudited interim condensed consolidated financial statements.
Additionally, we did not make timely filings of our Form 10-K for the year
ended September 30, 2007 and of our Forms 10-Q for the quarters ended
December 31, 2007 and March 31, 2008; and as a result, trading of our
shares was suspended for the period from January 16, 2008 to June 18,
2008.
On February 13, 2008, April 10,
2008 and May 14, 2008, we and our lenders entered into forbearance
agreements, whereby our lenders agreed not to exercise their rights under the
credit facilities through May 15, 2008, subject to satisfaction of
specified conditions. On May 15, 2008, we and our lenders entered into
agreements to waive past covenant violations and to amend the financial
covenant provisions prospectively. Effective May 15, 2008, the maximum
senior debt/EBITDA ratios were increased to levels ranging from 3.90 to 7.15
for monthly reporting periods from April 30, 2008 through June 30,
2009 and were increased to levels ranging from 3.30 to 3.75 beginning with the September 30,
2009 quarterly reporting period through maturity of the term loan. The minimum
fixed charge coverage ratios were reduced to levels ranging from 0.475 to 0.925
for monthly reporting periods from April 30, 2008 through June 30,
2009 and were reduced to levels ranging from 0.85 to 0.90 beginning with the September 30,
2009 quarterly reporting period through maturity of the term loans. We are also
required to meet a minimum EBITDA for future monthly reporting periods from April 30,
2008 through June 30, 2009 and the remaining quarterly periods through
maturity of the term loan. In addition, we were required to, among other
conditions, file our Form 10-K for the year ended September 30, 2007
and our Forms 10-Q for the quarters ended December 31, 2007 and March 31,
2008 by June 16, 2008, which filing deadlines were met. Failure to perform
any obligation under the waivers and the amended credit facility agreements
constitutes an additional event of default.
Under the April 2008
forbearance agreements and the May 2008 credit facility amendments, the
applicable margin on the first and second lien term loans and the revolver were
permanently increased. During the forbearance periods, we had limited or no
access to the line of credit. We also agreed to pay certain fees and expenses
to the lenders.
55
Table of Contents
As discussed in Note 7
to the accompanying unaudited interim condensed consolidated financial
statements, in fiscal 2008, we recorded an $8.3 million non-cash loss on
debt extinguishment, which was partially offset by a $3.1 million non-cash
gain on interest rate swaps and in the fourth quarter of fiscal 2007, we recorded
a non-cash impairment charge of approximately $27.5 million (exclusive of
$11.3 million of impairment charges related to discontinued operations) to
write off goodwill and intangibles within the IPA Management segment, which
resulted in overall losses in our IPA operations. Any future improvement in our
IPA operations and the successful integration of our newly acquired
subsidiaries will require significant investment and management attention. We
continue to review the companys operations to improve profitability and
efficiency and to reduce costs, which may include the divestiture of
non-strategic assets.
During fiscal 2008 and 2007,
we reported operating losses in our legacy IPA Management segment. We are
attempting to improve the operating results of the legacy IPA Management
operation, including measures to retain enrollment, increase health plan
reimbursements and reduce medical costs. Additionally, we may divest
non-strategic assets (such as the August 1, 2008 divestiture of the AV
Entities), the proceeds from which will be used to reduce the first lien loan.
We were in compliance with the amended financial covenant provisions for the April 2008 through March 2009 monthly reporting periods. While we continue to meet all debt service requirements on a timely basis, on March 19, 2009, we received written notices from our lenders who have elected to begin charging interest based on the default interest rates (additional 2.0% per annum) set forth in the amended loan agreements because our lenders have deemed the Company in default of a credit facility requirement regarding the sale of certain of the Companys assets by a specified date. Additionally, on April 17, 2009, the Company received notices from its lenders asserting that the Companys April 14, 2009 increase in ownership of Brotman Medical Center, Inc. violated certain provisions of the amended credit agreements. The Company has contested both assertions. Based on such notices, we have classified all scheduled payments due after twelve months as current at March 31, 2009. We have strongly disputed our lenders characterization of the matters, and we are currently in discussions with our lenders to seek resolution of the matters. While the discussions are continuing, there can be no assurance that this matter will be resolved on a basis favorable to us. Our lenders may not grant waivers and could require full repayment of the loans, which would negatively impact our liquidity, our ability to operate and our ability to continue as a going concern.
Contractual Obligations
In our annual report on Form 10-K
filed on December 29, 2008, we reported on our contractual obligations as
of that date. There have been no material changes to our contractual
obligations since that report.
Critical Accounting Policies
In Part II, Item 7
of our Form 10-K filed on December 29, 2008, under the heading Critical
Accounting Policies, we have provided a discussion of the critical accounting
policies that management believes affect its more significant judgments and
estimates used in the preparation of our consolidated financial statements.
When we prepare our
consolidated financial statements, we use estimates and assumptions that may
affect reported amounts and disclosures. The determination of our liability for
medical claims and other healthcare costs payable is particularly important to
the determination of our financial position and results of operations and
requires the application of significant judgment by our management and, as a
result, is subject to an inherent degree of uncertainty.
Our medical care costs
include actual historical claims experience and estimates for medical care
costs incurred but not reported to us (IBNR). We, together with our
independent actuaries, estimate medical claims liabilities using actuarial
methods based upon historical data adjusted for payment patterns, cost trends,
product mix, utilization of healthcare services and other relevant factors. The
estimation methods and the resulting reserves are frequently reviewed and updated,
and adjustments, if necessary, are reflected in the period known. While we
believe our estimates are adequate, it is possible that future events could
require us to make significant adjustments or revisions to these estimates. In
assessing the adequacy of accruals for medical claims liabilities, we consider
our historical experience, the terms of existing contracts, our knowledge of
trends in the industry, information provided by our customers and information
available from other sources as appropriate.
The most significant
estimates involved in determining our claims liability concern the
determination of claims payment completion factors and trended per member per
month cost estimates.
We consider historical
activity for the current month, plus the prior 24 months, in our IBNR
calculation. For the five months of service prior to the reporting date and
earlier, we estimate our outstanding claims liability based upon actual claims paid,
adjusted for estimated completion factors. Completion factors seek to measure
the cumulative percentage of claims expense that will have been paid for a
given month of service as of a date subsequent to that month of service.
Completion factors are based upon historical payment patterns. For the four
months of service immediately prior to the reporting date, actual claims paid
are not a reliable measure of our ultimate liability, given the delay inherent
between the patient/physician encounter and the actual submission of a claim
for payment. For these months of service we estimate our claims liability based
upon trended per member per month (PMPM) cost estimates. These estimates
reflect recent trends in payments and expense, utilization patterns, authorized
services and other relevant factors. The following tables reflect (i) the
change in our estimate of claims liability as of March 31, 2009 that would
have resulted had we changed our completion factors for all applicable months
of service included in our IBNR calculation (i.e., the preceding 5
th
through 25
th
months) by the
percentages indicated; and (ii) the change in our estimate of claims
liability as of March 31, 2009 that would have resulted had we changed
trended PMPM factors for all applicable months of service included in our IBNR
calculation (i.e., the preceding 1st through 4th months) by the
percentages indicated. Changes in estimate of the magnitude indicated in the
ranges presented are considered reasonably likely.
56
Table of Contents
Increase (Decrease) in
Estimated Completion Factors
|
|
Increase (Decrease) in
Accrued Medical Claims
Payable
|
|
(3)%
|
|
$
|
4,047,000
|
|
(2)%
|
|
$
|
2,698,000
|
|
(1)%
|
|
$
|
1,349,000
|
|
1%
|
|
$
|
(1,349,000
|
)
|
2%
|
|
$
|
(2,698,000
|
)
|
3%
|
|
$
|
(4,047,000
|
)
|
Increase (Decrease) in
Trended PMPM Factors
|
|
Increase (Decrease) in
Accrued Medical Claims
Payable
|
|
(3)%
|
|
$
|
(782,000
|
)
|
(2)%
|
|
$
|
(521,000
|
)
|
(1)%
|
|
$
|
(261,000
|
)
|
1%
|
|
$
|
261,000
|
|
2%
|
|
$
|
521,000
|
|
3%
|
|
$
|
782,000
|
|
Additionally, for each 1%
(hypothetical) difference between our March 31, 2009 estimated claims
liability of $19,374,177 and the actual claims incurred run-out, pre-tax loss
for the six months ended March 31, 2009 would increase or decrease by
approximately $194,000 or approximately $0.01 per diluted share.
The following table shows
the components of the change in medical claims and benefits payable for the six
months ended March 31, 2009 and 2008:
|
|
Six Months Ended
March 31,
|
|
|
|
2009
|
|
2008(1)
|
|
IBNR as of beginning of period
|
|
$
|
20,480,380
|
|
$
|
21,405,960
|
|
Healthcare claims expense incurred during the period
|
|
|
|
|
|
Related to current year
|
|
37,054,197
|
|
42,914,646
|
|
Related to prior years
|
|
(1,891,465
|
)
|
(2,127,866
|
)
|
Total incurred
|
|
35,162,732
|
|
40,786,780
|
|
Healthcare claims paid during the period
|
|
|
|
|
|
Related to current year
|
|
(20,074,687
|
)
|
(23,189,927
|
)
|
Related to prior years
|
|
(16,194,247
|
)
|
(17,198,434
|
)
|
Total paid
|
|
(36,268,934
|
)
|
(40,388,361
|
)
|
IBNR as of end or period
|
|
$
|
19,374,178
|
|
$
|
21,804,379
|
|
(1)
Amounts exclude changes in
medical claims and benefits payable related to the AV Entities which are
reported in discontinued operations.
57
Table of Contents
A negative amount reported
for healthcare claims expense incurred related to prior years, results from
claims being ultimately settled for amounts less than originally estimated (a
favorable development). A positive amount results from claims ultimately being
settled for amounts greater than originally estimated (an unfavorable
development).
Through March 31, 2009,
the $1,891,465 change in estimate related to IBNR as of September 30, 2008
represented approximately 9.2% of the IBNR balance as of September 30,
2008, approximately 2.5% of fiscal 2008 claims expense, and after consideration
of tax effect, approximately 45% of net loss from continuing operation for the
year then ended.
Through March 31, 2008,
the $2,127,866 change in estimate related to IBNR as of September 30, 2007
represented approximately 9.9% of the IBNR balance as of September 30,
2007, approximately 3.4% of claims expense and after consideration of tax
effect, approximately 9.1% of net loss from continuing operation for the year
then ended.
Past fluctuations in the
IBNR estimates might also be a useful indicator of the potential magnitude of
future changes in these estimates. Quarterly IBNR estimates include provisions
for adverse development based on historical volatility. We maintain similar
provisions at each quarter end.
Inflation
According to U.S. Bureau of
Labor Statistics Data, the national healthcare cost inflation rate has exceeded
the general inflation rate for the last four years. We use various strategies
to mitigate the negative effects of healthcare cost inflation. Specifically, we
try to control medical and hospital costs through contracts with independent
providers of healthcare services. Through these contracted providers, we
emphasize preventive healthcare and appropriate use of specialty and hospital
services.
While we currently believe
our strategies to mitigate healthcare cost inflation will continue to be
successful, competitive pressures, new healthcare and pharmaceutical product
introductions, demands from healthcare providers and customers, applicable
regulations or other factors may affect our ability to control healthcare
costs.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
Not applicable
Item 4T.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation
as of March 31, 2009, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of that date in ensuring that
information required to be disclosed in the reports that we file with, or
submit to, the Securities and Exchange Commission (the SEC) under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms. In
addition, based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of March 31, 2009 in ensuring that information required to be
disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934 is accumulated and communicated to our management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There were no changes in our
internal control over financial reporting that occurred during the three months
ended March 31, 2009 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
58
Table of Contents
PART IIOTHER INFORMATION
Item 1.
Legal Proceedings.
We
and our affiliated physician organizations are parties to legal actions arising
in the ordinary course of business. We believe that liability, if any, under
these claims will not have a material adverse effect on our consolidated
financial position or results of operations.
Item 1A.
Risk Factors.
Not
applicable.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3.
Defaults Upon Senior Securities.
The
Company is subject to certain financial and administrative covenants, cross
default provisions and other conditions required by the loan agreements with
its lenders, including a maximum senior debt/EBITDA ratio, a minimum
fixed-charge coverage ratio and, effective May 15, 2008, a minimum EBITDA
level, each computed quarterly (monthly, for test periods from April 30,
2008 through June 30, 2009) based on consolidated trailing twelve-month
results, including the pre-acquisition results of any acquired entities. The
administrative covenants and other restrictions with which the Company must
comply include, among others, restrictions on additional indebtedness,
incurrence of liens, engaging in business other than the Companys primary
business, paying certain dividends, acquisitions and asset sales. The credit
facilities provide that an event of default will occur if there is a change in
control of the Company. The payment of principal and interest under the credit
facilities is fully and unconditionally guaranteed, jointly and severally by
the Company and most of its existing wholly-owned subsidiaries. Substantially
all of the Companys assets are pledged to secure the credit facilities. The
Company exceeded the maximum senior debt/EBITDA ratio of 3.75 as of September 30,
2007. The Company also exceeded the maximum senior debt/EBITDA ratio of 3.75
and failed to meet the minimum fixed charge coverage ratio of 1.25 as of and
for the rolling twelve-month periods ended December 31, 2007 and March 31,
2008. In addition, the Company did not comply with certain administrative
covenants including timely filing of its Form 10-K for the year ended September 30,
2007 and its Forms 10-Q for the quarters ended December 31, 2007 and March 31,
2008.
On
February 13, 2008, April 10, 2008 and May 14, 2008, the Company
and its lenders entered into forbearance agreements, whereby the lenders agreed
not to exercise their rights under the credit facility through May 15,
2008, subject to satisfaction of specified conditions. For the period January 28,
2008 through April 10, 2008, interest was assessed at default rates of
11.4% with respect to the first lien term loan and 15.4% with respect to the
second-lien term loan. Under the April 2008 forbearance agreements, the
applicable margin on the first and second lien term loans were permanently
increased to 750 and 1,175 basis points, respectively, and the range of
applicable margins on the revolving line of credit was increased to 500 to 750
basis points. The agreements also provide that the LIBOR rate shall not be less
than 3.5% over the term of the credit facilities. During the forbearance
periods, the Company had limited or no access to the line of credit. The
Company also agreed to pay certain fees and expenses to the lenders and their
advisors as described below.
On
May 15, 2008, the Company and its lenders entered into agreements to waive past
covenant violations and amended the financial covenant provisions prospectively
starting in April 2008 to modify the required ratios and to increase the
frequency of compliance reporting from quarterly to monthly for a specified
period. Effective May 15, 2008, the maximum senior debt/EBITDA ratios were
increased to levels ranging from 3.90 to 7.15 for monthly reporting periods
from April 30, 2008 through June 30, 2009 and were increased to levels ranging
from 3.30 to 3.75 beginning with the September 30, 2009 quarterly reporting
period through maturity of the term loan. The minimum fixed charge coverage
ratios were reduced to levels ranging from 0.475 to 0.925 for monthly reporting
periods from April 30, 2008 through June 30, 2009 and were reduced to levels
ranging from 0.85 to 0.90 beginning with the September 30, 2009 quarterly
reporting periods through maturity of the term loan. The Company is also
required to meet a new minimum EBITDA requirement for future monthly reporting
periods from April 30, 2008 through June 30, 2009 and the remaining quarterly
reporting periods through maturity of the term loan. In addition, the Company
was required to, among other conditions, file its Form 10-K for the year ended September
30, 2007 and the Forms 10-Q for the quarters ended December 31, 2007 and June 30,
2008 by June 16, 2008. Failure to perform any obligations under the wavier and
the amended credit facility agreement constitutes additional events of default.
The Company filed its Form 10-K on June 2, 2008 and its Forms 10-Q for the
quarters ended December 31, 2007 and March 31, 2008 on June 9, 2008 and June 16,
2008, respectively and has met all debt service requirements on a timely basis.
59
Table of Contents
In
connection with obtaining the forbearance and waivers, during the second and
third quarters of 2008, the Company paid $450,000 in fees to Bank of America,
which was included in general and administrative expenses and $1,525,000 in
forbearance fees to the lenders, which was included in interest expense. In
addition, the Company incurred $860,000 in legal and consulting fees to the
lenders advisors related to the forbearance activities, which was included in
general and administrative expenses. Pursuant to the amended senior credit
facility agreement, the Company was required to pay an amendment fee of
$758,000 in cash and add 1% to the principal balance of the first and
second-lien debt and the revolving line of credit totaling $1,514,000. The Company
was also required to incur an additional 4% payment-in-kind interest expense
on the second lien debt, which accrues and is added to the principal balance on
a monthly basis. The 4% may be reduced on a quarterly basis by 0.50% for each
0.25% reduction in the Companys consolidated leverage ratio. In connection
with the modifications of the first and second-lien term debt and the revolving
line of credit, the Company wrote off the remaining unamortized discount and
debt issuance costs relating to the early extinguishment of the Companys
existing debt totaling of $6,036,000, and expensed as debt extinguishment costs
the amendment fees of $758,000 paid to lenders and the $1,514,000 payment-in-kind
interest added to the new debt, resulting in a total charge of $8,308,000 in
connection with this debt extinguishment. Additionally, the Company capitalized
$327,000 of legal and consulting fees to the lenders advisors related to the
new credit agreements.
The Company was in compliance with the amended financial covenant provisions for the April 2008 through March 2009 monthly reporting periods. While the Company continues to meet all debt service requirements on a timely basis, on March 19, 2009, it received written notices from the lenders who have elected to begin charging interest based on the default interest rates set forth in the amended loan agreements because the lenders have deemed the Company in default of a credit facility requirement regarding the sale of certain of the Companys assets by a specified date. Additionally, on April 17, 2009, the Company received notices from its lenders asserting that the Companys April 14, 2009 increase in ownership of Brotman Medical Center, Inc. violated certain provisions of the amended credit agreements. The Company has contested both assertions. Based on such notices, the Company has classified all scheduled payments due after twelve months as current at March 31, 2009. Also, due to cross default provisions, the swap liability was classified as current as of March 31, 2009. The Company has strongly disputed the lenders characterization of the matters and is currently in discussions with the lenders to seek resolution of these matters. While the parties discussions are continuing, there can be no assurance that the matters will be resolved on a basis favorable to the Company. The lenders may not grant waivers and could require full repayment of the loans, which would negatively impact the Companys liquidity, ability to operate and raises substantial doubt about its ability to continue as a going concern.
Item 4.
Submission of Matters to a Vote of Security Holders
None
Item 5.
Other Information
Effective
May 12, 2009, the Company and Samuel S. Lee (our Chief Executive Officer and
Chairman of our Board of Directors) entered into an Amended and Restated
Executive Employment Agreement (Agreement).
The Agreement amends and restates the Original Agreement (as amended by
the First, Second, and Third Amendments) in its entirety, and provides for an
increased annual base salary for Mr. Lee during fiscal year 2009 in the amount
of $950,000 (retroactive to April 1, 2009).
It also provides that Mr. Lee will be eligible for an annual bonus tied
to the Companys attainment of certain EBITDA targets. Lastly, the Agreement allows the Compensation
Committee of the Companys Board of Directors to grant discretionary bonuses as
it determines appropriate.
60
Table of Contents
Item 6.
Exhibits.
The
following documents are being filed as exhibits to this report:
Exhibit No.
|
|
Title
|
10.1*
|
|
Letter
agreement dated April 10, 2008, pertaining to the Amended and Restated
Forbearance Agreement dated April 10, 2008, among Prospect Medical
Holdings, Inc., Prospect Medical Group, Inc., and Bank of America,
N.A., as Administrative Agent on behalf of itself and the lenders named in
the First Lien Credit Agreement.
|
10.2*
|
|
Letter
agreement dated April 10, 2008, pertaining to the Amended and Restated
Forbearance Agreement dated April 10, 2008, among Prospect Medical
Holdings, Inc., Prospect Medical Group, Inc., and Bank of America,
N.A., as Administrative Agent on behalf of itself and the lenders named in
the Second Lien Credit Agreement.
|
10.3*
|
|
Letter
agreement dated May 15, 2008, pertaining to the First Lien Credit
Agreement, among Prospect Medical Holdings, Inc., Prospect Medical Group, Inc.,
and Bank of America, N.A., as Administrative Agent on behalf of itself and
the lenders named in the First Lien Credit Agreement.
|
10.4*
|
|
Letter
agreement dated May 15, 2008, pertaining to the Second Lien Credit
Agreement, among Prospect Medical Holdings, Inc., Prospect Medical Group, Inc.,
and Bank of America, N.A., as Administrative Agent on behalf of itself and
the lenders named in the Second Lien Credit Agreement.
|
10.5*
|
|
Letter
agreement dated December 31, 2008, pertaining to the First Lien Credit
Agreement, among Prospect Medical Holdings, Inc., Prospect Medical Group, Inc.,
Bank of America, N.A., as Administrative Agent on behalf of itself and the
lenders named in the First Lien Credit Agreement, and the other parties whose
signatures are set forth on the signature pages to the letter agreement
dated December 31, 2008. (Certain portions of this exhibit have been
omitted pursuant to an application for confidential treatment filed with the
Commission pursuant to Rule 24b-2 under the Securities Exchange Act of
1934.)
|
10.6*
|
|
Letter
agreement dated December 31, 2008, pertaining to the Second Lien Credit
Agreement, among Prospect Medical Holdings, Inc., Prospect Medical Group, Inc.,
Bank of America, N.A., as Administrative Agent on behalf of itself and the
lenders named in the Second Lien Credit Agreement, and the other parties
whose signatures are set forth on the signature pages to the letter
agreement dated December 31, 2008. (Certain portions of this exhibit
have been omitted pursuant to an application for confidential treatment filed
with the Commission pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934.)
|
10.7*
|
|
Letter
agreement dated January 30, 2009, pertaining to the First Lien Credit
Agreement, among Prospect Medical Holdings, Inc., Prospect Medical Group, Inc.,
Bank of America, N.A., as Administrative Agent on behalf of itself and the
lenders named in the First Lien Credit Agreement, and the other parties whose
signatures are set forth on the signature pages to the letter agreement
dated January 30, 2009. (Certain portions of this exhibit have been omitted
pursuant to an application for confidential treatment filed with the
Commission pursuant to Rule 24b-2 under the Securities Exchange Act of
1934.)
|
10.8*
|
|
Letter
agreement dated January 30, 2009, pertaining to the Second Lien Credit
Agreement, among Prospect Medical Holdings, Inc., Prospect Medical Group, Inc.,
Bank of America, N.A., as Administrative Agent on behalf of itself and the
lenders named in the Second Lien Credit Agreement, and the other parties
whose signatures are set forth on the signature pages to the letter
agreement dated January 30, 2009. (Certain portions of this exhibit have
been omitted pursuant to an application for confidential treatment filed with
the Commission pursuant to Rule 24b-2 under the Securities Exchange Act
of 1934.)
|
10.9*
|
|
Letter
agreement dated February 27, 2009, pertaining to the First Lien Credit
Agreement, among Prospect Medical Holdings, Inc., Prospect Medical Group, Inc.,
Bank of America, N.A., as Administrative Agent on behalf of itself and the
lenders named in the First Lien Credit Agreement, and the other parties whose
signatures are set forth on the signature pages to the letter agreement
dated February 27, 2009. (Certain portions of this exhibit have been
omitted pursuant to an application for confidential treatment filed with the
Commission pursuant to Rule 24b-2 under the Securities Exchange Act of
1934.)
|
10.10*
|
|
Letter
agreement dated February 27, 2009, pertaining to the Second Lien Credit
Agreement, among Prospect Medical Holdings, Inc., Prospect Medical Group, Inc.,
Bank of America, N.A., as Administrative Agent on behalf of itself and the
lenders named in the Second Lien Credit Agreement, and the other parties
whose signatures are set forth on the signature pages to the letter
agreement dated February 27, 2009. (Certain portions of this exhibit
have been omitted pursuant to an application for confidential treatment filed
with the Commission pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934.)
|
61
Table of Contents
Exhibit No.
|
|
Title
|
10.11*
|
|
Letter
agreement dated March 6, 2009, pertaining to the First Lien Credit
Agreement, among Prospect Medical Holdings, Inc., Prospect Medical Group, Inc.,
Bank of America, N.A., as Administrative Agent on behalf of itself and the
lenders named in the First Lien Credit Agreement, and the other parties whose
signatures are set forth on the signature pages to the letter agreement
dated March 6, 2009. (Certain portions of this exhibit have been omitted
pursuant to an application for confidential treatment filed with the
Commission pursuant to Rule 24b-2 under the Securities Exchange Act of
1934.)
|
10.12*
|
|
Letter
agreement dated March 6, 2009, pertaining to the Second Lien Credit
Agreement, among Prospect Medical Holdings, Inc., Prospect Medical Group, Inc.,
Bank of America, N.A., as Administrative Agent on behalf of itself and the
lenders named in the Second Lien Credit Agreement, and the other parties
whose signatures are set forth on the signature pages to the letter
agreement dated March 6, 2009. (Certain portions of this exhibit have
been omitted pursuant to an application for confidential treatment filed with
the Commission pursuant to Rule 24b-2 under the Securities Exchange Act
of 1934.)
|
10.13*
|
|
Letter
agreement dated March 12, 2009, pertaining to the First Lien Credit
Agreement, among Prospect Medical Holdings, Inc., Prospect Medical Group, Inc.,
Bank of America, N.A., as Administrative Agent on behalf of itself and the
lenders named in the First Lien Credit Agreement, and the other parties whose
signatures are set forth on the signature pages to the letter agreement
dated March 12, 2009. (Certain portions of this exhibit have been
omitted pursuant to an application for confidential treatment filed with the
Commission pursuant to Rule 24b-2 under the Securities Exchange Act of
1934.)
|
10.14*
|
|
Letter
agreement dated March 12, 2009, pertaining to the Second Lien Credit
Agreement, among Prospect Medical Holdings, Inc., Prospect Medical Group, Inc.,
Bank of America, N.A., as Administrative Agent on behalf of itself and the
lenders named in the Second Lien Credit Agreement, and the other parties
whose signatures are set forth on the signature pages to the letter
agreement dated March 12, 2009. (Certain portions of this exhibit have
been omitted pursuant to an application for confidential treatment filed with
the Commission pursuant to Rule 24b-2 under the Securities Exchange Act
of 1934.)
|
10.15**
|
|
Amended and Restated Employment Agreement dated as of May 12,
2009 between Prospect Medical Holdings, Inc. and Samuel S. Lee.
|
31.1**
|
|
Certification of Chief Executive Officer pursuant to Rules 13a-14(a)/15d-14(a) under
the Securities Exchange Act of 1934, as amended.
|
31.2**
|
|
Certification of Chief Financial Officer pursuant to Rules 13a-14(a)/15d-14(a) under
the Securities Exchange Act of 1934, as amended.
|
32.1**
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
32.2**
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
*
Filed by the
Company with the Securities and Exchange Commission on April 3, 2009 as an
exhibit to the Companys Current Report on Form 8-K/A and incorporated herein
by reference.
**
Filed with this
Quarterly Report on Form 10-Q.
62
Table of Contents
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
PROSPECT MEDICAL
HOLDINGS, INC.
|
|
(Registrant)
|
|
|
May 15, 2009
|
/
s
/
SAMUEL S. LEE
|
|
Samuel S.
Lee
|
|
Chief
Executive Officer
|
|
(Principal
Executive Officer)
|
|
|
May 15, 2009
|
/
s
/
MIKE HEATHER
|
|
Mike
Heather
|
|
Chief Financial
Officer
|
|
(Principal
Financial Officer)
|
63
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