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Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K/A
(Amendment No. 1)
(Mark One)
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-32559
 
Medical Properties Trust, Inc.
(Exact Name of Registrant as Specified in Its Charter)
     
Maryland   20-0191742
(State or Other Jurisdiction of Incorporation or Organization)   (IRS Employer Identification No.)
     
1000 Urban Center Drive, Suite 501
Birmingham, AL
  35242
(Address of Principal Executive Offices)   (Zip Code)
(205) 969-3755
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
     
Title of Each Class   Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share
  New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
 
     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
     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 þ No o
     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. o
     Indicate by check mark whether the registrant has submitted electronically and posted on its Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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 þ  Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
     As of June 30, 2009, the aggregate market value of the 80,164,801 shares of common stock, par value $0.001 per share (“Common Stock”), held by non-affiliates of the Registrant was $486,600,342 based upon the last reported sale price of $6.07 on the New York Stock Exchange. For purposes of the foregoing calculation only, all directors and executive officers of the Registrant have been deemed affiliates.
     As of February 10, 2010, 80,414,982 shares of the Registrant’s Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
     Portions of the Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 20, 2010 are incorporated by reference into Part III, Items 9 through 13 of this Annual Report on Form 10-K.
 
 

 


 

MEDICAL PROPERTIES TRUST, INC.
AMENDMENT NO. 1 TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
This Amendment No. 1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2009 of Medical Properties Trust, Inc. is filed for the sole purpose of adding the consolidated financial statements of Prime Healthcare Services, Inc. and Subsidiaries (“Prime”) as Exhibit 99.1 and of including consents from our independent registered public accounting firms and that of our significant lessee. At December 31, 2009, our properties leased to Prime were more than 20% of our assets. Since these properties are leased to Prime under long-term, triple-net leases that transfer substantially all operating costs to Prime, financial information about Prime may be relevant to investors. The audited financial statements of Prime for the years ended December 31, 2009 and 2008 are attached to this report as Exhibit 99.1. Refer to our 2008 Form 10-K/A filed on May 11, 2009 for the audited financial statements of Prime for the years ended December 31, 2008 and 2007. These financial statements were provided to us by Prime and Medical Properties Trust, Inc. did not participate in their preparation or review. Accordingly, Item 14 of Part IV has also been amended to reflect the filing of these exhibits.
Other than as expressly set forth above, this Amendment does not, and does not purport to, update or restate the information in any other Item of the originally filed annual report.
Table of Contents
PART IV
         
    3  
    7  
 
       
    7  
EX-23.1 CONSENT OF PRICEWATERHOUSECOOPERS LLP
       
EX-23.2 CONSENT OF KPMG LLP
       
EX-23.3 CONSENT OF MOSS ADAMS LLP
       
EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
       
EX-31.2 SECTION 302, CERTIFICATION OF THE CFO
       
EX-99.1 CONSOLIDATED FINANCIAL STATEMENTS
       
 EX-23.1
 EX-23.2
 EX-23.3
 EX-31.1
 EX-31.2
 EX-99.1

 


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Item 14. Exhibits and Financial Statement Schedules.
(a) Financial Statements and Financial Statement Schedules
The financial statements and financial statement schedules were previously filed with the Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed on February 12, 2010.
(b)   Exhibits
     
Exhibit    
Number   Exhibit Title
3.1(1)
  Registrant’s Second Articles of Amendment and Restatement
3.2(2)
  Registrant’s Second Amended and Restated Bylaws
3.3(3)
  Articles of Amendment of Registrant’s Second Articles of Amendment and Restatement
4.1(1)
  Form of Common Stock Certificate
4.2(4)
  Indenture, dated July 14, 2006, among Registrant, MPT Operating Partnership, L.P. and the Wilmington Trust Company, as trustee
4.3(5)
  Indenture, dated November 6, 2006, among Registrant, MPT Operating Partnership, L.P. and the Wilmington Trust Company, as trustee
4.4(5)
  Registration Rights Agreement among Registrant, MPT Operating Partnership, L.P. and UBS Securities LLC and J.P. Morgan Securities Inc., as representatives of the initial purchasers, dated as of November 6, 2006
4.5(13)
  Indenture, dated as of March 26, 2008, among MPT Operating Partnership, L.P., as Issuer, Medical Properties Trust, Inc., as Guarantor, and Wilmington Trust Company, as Trustee.
4.6(13)
  Registration Rights Agreement among MPT Operating Partnership, L.P., Medical Properties Trust, Inc. and UBS Securities LLC, as representative of the initial purchases of the notes, dated as of March 26, 2008
10.1(11)
  Second Amended and Restated Agreement of Limited Partnership of MPT Operating Partnership, L.P.
10.2(6)
  Amended and Restated 2004 Equity Incentive Plan
10.3(7)
  Form of Stock Option Award
10.4(7)
  Form of Restricted Stock Award
10.5(7)
  Form of Deferred Stock Unit Award
10.6(1)
  Employment Agreement between Registrant and Edward K. Aldag, Jr., dated September 10, 2003
10.7(1)
  First Amendment to Employment Agreement between Registrant and Edward K. Aldag, Jr., dated March 8, 2004
10.8(1)
  Employment Agreement between Registrant and R. Steven Hamner, dated September 10, 2003
10.9
  Not used
10.10(1)
  Employment Agreement between Registrant and Emmett E. McLean, dated September 10, 2003
10.11(1)
  Employment Agreement between Registrant and Michael G. Stewart, dated April 28, 2005
10.12(1)
  Form of Indemnification Agreement between Registrant and executive officers and directors
10.13(8)
  Credit Agreement dated October 27, 2005, among MPT Operating Partnership, L.P., as borrower, and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services, Inc., as Administrative Agent and Lender, and Additional Lenders from Time to Time a Party thereto
10.14(1)
  Third Amended and Restated Lease Agreement between 1300 Campbell Lane, LLC and 1300 Campbell Lane Operating Company, LLC, dated December 20, 2004
10.15(1)
  First Amendment to Third Amended and Restated Lease Agreement between 1300 Campbell Lane, LLC and 1300 Campbell Lane Operating Company, LLC, dated December 31, 2004
10.16(1)
  Second Amended and Restated Lease Agreement between 92 Brick Road, LLC and 92 Brick Road, Operating Company, LLC, dated December 20, 2004
10.17(1)
  First Amendment to Second Amended and Restated Lease Agreement between 92 Brick Road, LLC and 92 Brick Road, Operating Company, LLC, dated December 31, 2004
10.18(1)
  Ground Lease Agreement between West Jersey Health System and West Jersey/Mediplex Rehabilitation Limited Partnership, dated July 15, 1993
10.19(1)
  Third Amended and Restated Lease Agreement between San Joaquin Health Care Associates Limited Partnership and 7173 North Sharon Avenue Operating Company, LLC, dated December 20, 2004
10.20(1)
  First Amendment to Third Amended and Restated Lease Agreement between San Joaquin Health Care Associates Limited Partnership and 7173 North Sharon Avenue Operating Company, LLC, dated December 31, 2004

 


Table of Contents

     
Exhibit    
Number   Exhibit Title
10.21(1)
  Second Amended and Restated Lease Agreement between 8451 Pearl Street, LLC and 8451 Pearl Street Operating Company, LLC, dated December 20, 2004
10.22(1)
  First Amendment to Second Amended and Restated Lease Agreement between 8451 Pearl Street, LLC and 8451 Pearl Street Operating Company, LLC, dated December 31, 2004
10.23(1)
  Second Amended and Restated Lease Agreement between 4499 Acushnet Avenue, LLC and 4499 Acushnet Avenue Operating Company, LLC, dated December 20, 2004
10.24(1)
  First Amendment to Second Amended and Restated Lease Agreement between 4499 Acushnet Avenue, LLC and 4499 Acushnet Avenue Operating Company, LLC, dated December 31, 2004
10.25(1)
  Purchase and Sale Agreement among MPT Operating Partnership, L.P., MPT of Sherman Oaks, LLC, Prime A Investments, L.L.C., Prime Healthcare Services II, LLC, Prime Healthcare Services, Inc., Desert Valley Medical Group, Inc. and Desert Valley Hospital, Inc., dated December 30, 2005
10.26(11)
  Form of Medical Properties Trust, Inc. 2007 Multi-Year Incentive Plan Award Agreement (LTIP Units)
10.27(11)
  Form of Medical Properties Trust, Inc. 2007 Multi-Year Incentive Plan Award Agreement (Restricted Shares)
10.28(12)
  Term Loan Credit Agreement among Medical Properties Trust, Inc., MPT Operating Partnership, L.P., as Borrower, the Several Lenders from Time to Time Parties Thereto, KeyBank National Association, as Syndication Agent, and JP Morgan Chase Bank, N.A. as Administrative Agent, with J.P. Morgan Securities Inc. and KeyBank National Association, as Joint Lead Arrangers and Bookrunners
10.29(10)
  First Amendment to Term Loan Agreement
10.30(17)
  Revolving Credit and Term Loan Agreement, dated November 30, 2007, among Medical Properties Trust, Inc., MPT Operating Partnership, L.P., as Borrower, the Several Lenders from Time to Time Parties Thereto, KeyBank National Association, as Syndication Agent, and JPMorgan Chase Bank, N.A. as Administrative Agent, with J.P. Morgan Securities Inc. and KeyBank National Association, as Joint Lead Arrangers and Bookrunners
10.31(16)
  Second Amendment to Employment Agreement between Registrant and Edward K. Aldag, Jr., dated September 29, 2006
10.32(16)
  First Amendment to Employment Agreement between Registrant and R. Steven Hamner, dated September 29, 2006
10.33(16)
  First Amendment to Employment Agreement between Registrant and Emmett E. McLean, dated September 29, 2006
10.34(16)
  First Amendment to Employment Agreement between Registrant and Michael G. Stewart, dated September 29, 2006
10.35(8)
  Second Amended and Restated 2004 Equity Incentive Plan
10.36(14)
  First Amendment to Revolving Credit and Term Loan Agreement dated March 13, 2008
10.37(14)
  Purchase and Sale Agreement among MPT Operating Partnership, L.P., HCP Inc., FAEC Holdings(BC), LLC, HCPI Trust, HCP Das Petersburg VA, LP, and Texas HCP Holdings, L.P. dated as of March 13, 2008
10.38(14)
  First Amendment to Purchase and Sale Agreement among MPT Operating Partnership, L.P., HCP Inc., FAEC Holdings(BC), LLC, HCPI Trust, HCP Das Petersburg VA, LP, and Texas HCP Holdings, L.P. dated as of March 28, 2008
10.39(15)
  Second Amendment to Purchase and Sale Agreement among MPT Operating Partnership, L.P., HCP Inc., FAEC Holdings(BC), LLC, HCPI Trust, HCP Das Petersburg VA, LP, and Texas HCP Holdings, L.P. dated as of April 1, 2008
10.40(15)
  Third Amendment to Purchase and Sale Agreement among MPT Operating Partnership, L.P., HCP Inc., FAEC Holdings(BC), LLC, HCPI Trust, HCP Das Petersburg VA, LP, and Texas HCP Holdings, L.P. dated as of April 17, 2008
10.41(15)
  Fourth Amendment to Purchase and Sale Agreement among MPT Operating Partnership, L.P., HCP Inc., FAEC Holdings(BC), LLC, HCPI Trust, HCP Das Petersburg VA, LP, and Texas HCP Holdings, L.P. dated as of May 14, 2008

 


Table of Contents

     
Exhibit    
Number   Exhibit Title
10.42(15)
  Fifth Amendment to Purchase and Sale Agreement among MPT Operating Partnership, L.P., HCP Inc., FAEC Holdings(BC), LLC, HCPI Trust, HCP Das Petersburg VA, LP, and Texas HCP Holdings, L.P. dated as of June 18, 2008
10.43(15)
  Sixth Amendment to Purchase and Sale Agreement among MPT Operating Partnership, L.P., HCP Inc., FAEC Holdings(BC), LLC, HCPI Trust, HCP Das Petersburg VA, LP, and Texas HCP Holdings, L.P. dated as of June 30, 2008
10.44(18)
  Second Amendment to Employment Agreement between Registrant and William G. McKenzie, dated February 27, 2009
10.45(18)
  Second Amendment to Employment Agreement between Registrant and Michael G. Stewart, dated January 1, 2008
10.46(18)
  Third Amendment to Employment Agreement between Registrant and Michael G. Stewart, dated January 1, 2009
10.47(18)
  Second Amendment to Employment Agreement between Registrant and Emmett E. McLean, dated January 1, 2008
10.48(18)
  Third Amendment to Employment Agreement between Registrant and Emmett E. McLean, dated January 1, 2009
10.49(18)
  Second Amendment to Employment Agreement between Registrant and Richard S. Hamner, dated January 1, 2008
10.50(18)
  Third Amendment to Employment Agreement between Registrant and R. Steven Hamner, dated January 1, 2009
10.51(18)
  Third Amendment to Employment Agreement between Registrant and Edward K. Aldag, Jr., dated January 1, 2008
10.52(18)
  Fourth Amendment to Employment Agreement between Registrant and Edward K. Aldag, Jr., dated January 1, 2009
10.53(18)
  Third Amendment to Employment Agreement between Registrant and William G. McKenzie, dated January 1, 2008
10.54(18)
  Fourth Amendment to Employment Agreement between Registrant and William G. McKenzie, dated January 1, 2009
12.1(19)
  Statement re Computation of Ratios
21.1(19)
  Subsidiaries of Registrant
23.1(21)
  Consent of PricewaterhouseCoopers LLP
23.2(21)
  Consent of KPMG LLP
23.3(21)
  Consent of Moss Adams LLP
31.1(21)
  Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2(21)
  Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32 (19)
  Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350
99.1(20) (21)
  Consolidated Financial Statements of Prime Healthcare Services, Inc. as of December 31, 2009 and 2008
 
(1)   Incorporated by reference to Registrant’s Registration Statement on Form S-11 filed with the Commission on October 26, 2004, as amended (File No. 333-119957).
 
(2)   Incorporated by reference to Registrant’s current report on Form 8-K, filed with the Commission on November 24, 2009.
 
(3)   Incorporated by reference to Registrant’s quarterly report on Form 10-Q for the quarter ended September 30, 2005, filed with the Commission on November 10, 2005.
 
(4)   Incorporated by reference to Registrant’s current report on Form 8-K, filed with the Commission on July 20, 2006.

 


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(5)   Incorporated by reference to Registrant’s current report on Form 8-K, filed with the Commission on November 13, 2006.
 
(6)   Incorporated by reference to Registrant’s definitive proxy statement on Schedule 14A, filed with the Commission on September 13, 2005.
 
(7)   Incorporated by reference to Registrant’s current report on Form 8-K, filed with the Commission on October 18, 2005.
 
(8)   Incorporated by reference to Registrant’s definitive proxy statement on Schedule 14A, filed with the Commission on April 14, 2007.
 
(9)   Not used.
 
(10)   Incorporated by reference to Registrant’s quarterly report on Form 10-Q for the quarter ended September 30, 2007, filed with the Commission on November 9, 2007.
 
(11)   Incorporated by reference to Registrant’s current report on Form 8-K, filed with the Commission on August 6, 2007.
 
(12)   Incorporated by reference to Registrant’s current report on Form 8-K, filed with the Commission on August 15, 2007.
 
(13)   Incorporated by reference to Registrant’s current report on Form 8-K, filed with the Commission on March 26, 2008.
 
(14)   Incorporated by reference to Registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2008, filed with the Commission on May 9, 2008.
 
(15)   Incorporated by reference to Registrant’s quarterly report on Form 10-Q for the quarter ended June 30, 2008, filed with the Commission on August 8, 2008.
 
(16)   Incorporated by reference to Registrant’s annual report on Form 10-K/A for the period ended December 31, 2007, filed with the Commission on July 11, 2008.
 
(17)   Incorporated by reference to Registrant’s quarterly report on Form 10-Q for the period ended September 30, 2009, filed with the Commission on November 9, 2009.
 
(18)   Incorporated by reference to Registrant’s annual report on Form 10-K for the period ended December 31, 2008, filed with the Commission on March 13, 2009.
 
(19)   Previously filed as an exhibit to Registrant’s Annual Report on form 10-K, filed with the Commission on February 12, 2010.
 
(20)   Since affiliates of Prime Healthcare Services, Inc. lease more than 20% of our total assets under triple net leases, the financial status of Prime may be considered relevant to investors. Prime’s most recently available audited consolidated financial statements (as of and for the years ended December 31, 2009 and 2008) are attached as Exhibit 99.1 to this Amendment No. 1 to the Annual Report on Form 10-K. Refer to our 2008 Form 10-K/A filed on May 11, 2009 for the audited financial statements of Prime for the years ended December 31, 2008 and 2007. We have not participated in the preparation of Prime’s financial statements nor do we have the right to dictate the form of any financial statements provided to us by Prime.
 
(21)   Included in this Form 10-K/A.

 


Table of Contents

SIGNATURES
     Pursuant to the requirements of Section 13 or 15(d) 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.
         
  MEDICAL PROPERTIES TRUST, INC.
 
 
  By:   /s/ R. Steven Hamner    
    R. Steven Hamner   
    Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer) 
 
 
Date: April 9, 2010
INDEX TO EXHIBITS
     
Exhibit    
Number   Description
23.1
  Consent of PricewaterhouseCoopers LLP
 
   
23.2
  Consent of KPMG LLP
 
   
23.3
  Consent of Moss Adams LLP
 
   
31.1
  Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
 
   
31.2
  Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
 
   
99.1
  Consolidated Financial Statements of Prime Healthcare Services, Inc. as of December 31, 2009 and 2008

 

exv23w1
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-121883, 333-152301, 333-140433, 333-164889 and 333-141100) and Form S-8 (Nos. 333-126574, 333-130337 and 333-161409) of Medical Properties Trust, Inc. of our report dated February 12, 2010 relating to the consolidated financial statements, financial statement schedules, and the effectiveness of internal control over financial reporting, which appears in the Annual Report on Form 10-K filed February 12, 2010, which is incorporated by reference in this Amendment No. 1 to the Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Birmingham, Alabama
April 9, 2010

exv23w2
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Medical Properties Trust, Inc.
We consent to the incorporation by reference in the registration statements (Nos. 333-126574, 333-130337, and 333-161409) on Form S-8 and (Nos. 333-121883, 333-140433, 333-141100, 333-152301, and 333-164889) on Form S-3 of Medical Properties Trust, Inc. of our report dated March 13, 2008, except for Notes 2, 4, and 6, as to which the date is February 12, 2010 and Note 11, as to which the date is March 13, 2009, with respect to the consolidated statements of income, equity and cash flows of Medical Properties Trust, Inc. and subsidiaries for the year ended December 31, 2007, and the related financial statement schedules, which report appears in the December 31, 2009 Annual Report on Form 10-K of Medical Properties Trust, Inc. filed February 12, 2010, which is incorporated by reference in this Amendment No. 1 to the Annual Report on Form 10-K.
Our report refers to changes in accounting for the non-controlling interests in a subsidiary, debt discount related to the exchangeable notes, and participating securities in the calculation of earnings per share.
/s/  KPMG LLP
 
Birmingham, Alabama
April 9, 2010

exv23w3
Exhibit 23.3
Consent of Moss Adams LLP,
Independent Auditor
We consent to the incorporation by reference in the registration statements on Form S-3 (Nos. 333-121883, 333-152301, 333-140433, 333-164889 and 333-141100) and Form S-8 (Nos. 333-126574, 333-130337 and 333-161409) of Medical Properties Trust, Inc., of our report dated April 1, 2010, relating to the consolidated balance sheets of Prime Healthcare Services, Inc. and Subsidiaries as of December 31, 2009 and 2008 and the related consolidated statements of income, stockholders’ equity and cash flows for years then ended, which report is included in this Amendment No. 1 to the Annual Report on Form 10-K for the year ended December 31, 2009.
/s/  Moss Adams LLP
 
Irvine, California
April 9, 2010

exv31w1
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Edward K. Aldag, Jr., certify that:
1)   I have reviewed this annual report on Form 10-K/A of Medical Properties Trust, Inc.
 
2)   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3)   Based on my knowledge, the other financial information included in this report is fairly presented in all material respects as of, and for, the periods presented in this report.
Date: April 9, 2010
         
 
  /s/ Edward K. Aldag, Jr.
 
Edward K. Aldag, Jr.
   
 
  Chairman, President and Chief Executive Officer    

exv31w2
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, R. Steven Hamner, certify that:
1)   I have reviewed this annual report on Form 10-K/A of Medical Properties Trust, Inc.
 
2)   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3)   Based on my knowledge, the other financial information included in this report is fairly presented in all material respects as of, and for, the periods presented in this report.
Date: April 9, 2010
         
 
  /s/ R. Steven Hamner
 
R. Steven Hamner
   
 
  Executive Vice President and Chief Financial Officer    

exv99w1
Exhibit 99.1
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
     INDEPENDENT AUDITOR’S REPORT
AND
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008

 


 

CONTENTS
         
    PAGE
INDEPENDENT AUDITOR’S REPORT
    1  
 
CONSOLIDATED FINANCIAL STATEMENTS
       
Consolidated balance sheets
    2-3  
Consolidated statements of income
    4  
Consolidated statements of stockholders’ equity
    5  
Consolidated statements of cash flows
    6-7  
Notes to consolidated financial statements
    8-31  

 


 

MOSS-ADAMS LLP
CERTIFIED PUBLIC ACCOUNTANTS I BUSINESS CONSULTANTS
INDEPENDENT AUDITOR’S REPORT
Board of Directors
Prime Healthcare Services, Inc., and Subsidiaries
We have audited the accompanying consolidated balance sheets of Prime Healthcare Services, Inc., and Subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of Prime Healthcare Services, Inc., and Subsidiaries’ management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatements. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Prime Healthcare Services, Inc., and Subsidiaries, as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
-s- Moss Adams LLP
Irvine, California
April 1, 2010


 

PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
                 
    DECEMBER 31,  
    2009     2008  
CURRENT ASSETS
               
Cash and cash equivalents
  $ 46,003,201     $ 42,805,635  
Patient accounts receivable, net of allowance for doubtful accounts of $76,665,000 in 2009 and $65,440,000 in 2008
    190,063,206       176,834,552  
Related party receivables
    848,105       1,012,731  
Notes receivable
          1,050,000  
Estimated third-party payor settlements
    6,933,628        
Supplies inventory
    5,149,389       6,076,691  
Prepaid expenses and other current assets
    66,882,327       36,560,544  
Deposits
    2,607,902       3,418,066  
 
           
 
               
Total current assets
    318,487,758       267,758,219  
 
               
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization
    205,492,387       205,387,793  
 
               
INVESTMENTS IN JOINT VENTURES
    150,000       705,777  
 
               
GOODWILL
    13,707,803       13,707,803  
 
               
OTHER ASSETS
    5,214,170       3,921,293  
 
           
 
  $ 543,052,118     $ 491,480,885  
 
           

2


 

LIABILITIES AND STOCKHOLDERS’ EQUITY
                 
    DECEMBER 31,  
    2009     2008  
CURRENT LIABILITIES
               
Accounts payable
  $ 30,024,524     $ 34,942,071  
Accrued expenses
    67,914,649       74,379,591  
Medical claims payable
    5,394,327       4,337,241  
Related party payables
    50,000       638,060  
Estimated third-party payor settlements
          248,405  
Current portion of capital leases
    7,193,226       4,122,950  
Current portion of long-term debt
    40,388,724       51,024,562  
 
           
 
               
Total current liabilities
    150,965,450       169,692,880  
 
               
LONG-TERM LIABILITIES
               
Sale lease-back liability
    143,000,000       158,000,000  
Capital leases, net of current portion
    14,322,308       13,964,578  
Long-term debt, net of current portion
    72,207,803       65,549,351  
 
           
 
               
Total long-term liabilities
    229,530,111       237,513,929  
 
               
STOCKHOLDERS’ EQUITY
               
Common stock, $0.01 par value, 3,000 shares authorized, 30 shares issued and outstanding
    1       1  
Additional paid in capital
    2,999       2,999  
Note receivable from related party
          (3,110,975 )
Retained earnings
    49,980,544       10,840,152  
Non-controlling interest
    112,573,013       76,541,899  
 
           
 
               
Total stockholders’ equity
    162,556,557       84,274,076  
 
           
 
               
 
  $ 543,052,118     $ 491,480,885  
 
           
See accompanying notes.

3


 

PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
                 
    YEARS ENDED DECEMBER 31,  
    2009     2008  
REVENUE
               
Net patient service revenue
  $ 1,544,421,821     $ 1,161,588,573  
Premium revenue
    22,635,296       23,759,229  
Other revenue
    11,305,428       10,971,346  
 
           
 
               
 
    1,578,362,545       1,196,319,148  
 
           
OPERATING EXPENSES
               
Compensation and employee benefits
    538,823,926       486,986,726  
Provision for doubtful accounts
    383,393,440       254,060,627  
General and administrative
    66,189,480       64,512,652  
Supplies
    132,462,044       114,605,326  
Professional services
    124,666,861       110,188,666  
Rent and lease expense
    51,911,515       42,160,222  
Depreciation and amortization
    25,533,556       18,425,935  
Medical claims
    5,612,935       4,604,555  
 
           
 
               
 
    1,328,593,757       1,095,544,709  
 
           
 
               
INCOME FROM OPERATIONS
    249,768,788       100,774,439  
 
               
INTEREST EXPENSE, net
    (25,139,763 )     (19,417,215 )
 
               
LOSS FROM JOINT VENTURES
          (119,223 )
 
           
 
               
INCOME BEFORE PROVISION FOR INCOME TAXES
    224,629,025       81,238,001  
 
               
INCOME TAX PROVISION
    3,487,151       1,286,887  
 
           
 
               
INCOME BEFORE ALLOCATION TO NON-CONTROLLING INTEREST
    221,141,874       79,951,114  
 
               
ALLOCATION OF INCOME TO NON-CONTROLLING INTEREST
    (128,098,593 )     (57,138,689 )
 
           
 
               
CONTROLLING INTEREST IN NET INCOME
  $ 93,043,281     $ 22,812,425  
 
           
See accompanying notes.

4


 

PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
                                                         
            Common     Additional     Note Receivable     Retained     Non-controlling        
    Shares     Stock     Paid in Capital     from Related Party     Earnings     Interest     Total  
BALANCE, December 31, 2007
    30     $ 1     $ 2,999     $ (35,762,558 )   $ 49,089,475     $ 41,379,196     $ 54,709,113  
Distributions to stockholders
                            (61,061,748 )           (61,061,748 )
Notes receivable collected from related party
                      35,762,558                   35,762,558  
Notes receivable from Prime A
                      (3,110,975 )                 (3,110,975 )
Controlling interest in net income
                            22,812,425             22,812,425  
Distributions from non-controlling interest to its stockholders
                                  (21,975,986 )     (21,975,986 )
Non-controlling interest in net income
                                  57,138,689       57,138,689  
 
                                         
BALANCE, December 31, 2008
    30       1       2,999       (3,110,975 )     10,840,152       76,541,899       84,274,076  
Distributions to stockholders
                            (53,902,889 )           (53,902,889 )
Repayment of notes receivable from Prime A
                      3,110,975                   3,110,975  
Controlling interest in net income
                            93,043,281             93,043,281  
Distributions from non-controlling interest
                                  (92,067,479 )     (92,067,479 )
Non-controlling interest in net income
                                  128,098,593       128,098,593  
 
                                         
BALANCE, December 31, 2009
    30     $ 1     $ 2,999     $     $ 49,980,544     $ 112,573,013     $ 162,556,557  
 
                                         
See accompanying notes.

5


 

PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
                 
    YEARS ENDED DECEMBER 31,  
    2009     2008  
CASH FLOWS FROM OPERATING ACTIVITIES
               
Controlling interest in net income
  $ 93,043,281     $ 22,812,425  
Adjustments to reconcile controlling interest in net income to net cash provided by operating activities:
               
Depreciation and amortization
    25,533,556       18,294,556  
Loss (Gain) on sale of assets
    22,000       (1,500 )
Loss from joint venture
          119,223  
Provision for doubtful accounts
    383,393,440       254,060,627  
Non controlling interest in net income
    128,098,593       57,138,689  
Changes in assets and liabilities net of acquisitions:
               
Patient accounts receivable
    (408,779,166 )     (322,027,305 )
Supplies inventory
    587,579       (1,124,944 )
Prepaid expenses and other assets
    (32,653,674 )     3,768,744  
Deposits
    810,164       (2,209,810 )
Other assets
    (1,292,877 )     (3,526,073 )
Due to/ from related parties
    (423,434 )     (9,417,835 )
Accounts payable
    (4,917,547 )     7,045,368  
Accrued expenses
    (6,464,942 )     24,597,631  
Medical claims payable
    1,057,086       (1,491,078 )
Income taxes
          (941,565 )
Estimated third-party payor settlements
    (7,280,299 )     1,164,162  
Accrued professional liability reserve
          (45,429 )
 
           
Net cash provided by operating activities
    170,733,760       48,215,886  
 
           
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchase of property and equipment
    (24,268,158 )     (25,464,146 )
Investment in joint venture
          (825,000 )
Cash paid for acquisitions, net of cash acquired
          (54,225,425 )
Repayments (Advances) on notes receivable
    1,050,000       (1,050,000 )
 
           
Net cash used in investing activities
    (23,218,158 )     (81,564,571 )
 
           
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from long-term debt borrowing
          4,043,477  
(Repayments of) proceeds from sale lease-back borrowings
    (15,000,000 )     60,000,000  
Borrowings on lines of credit
    592,399,879       367,758,945  
Repayments on lines of credit
    (599,910,426 )     (334,192,195 )
Payments on long term debt
    (1,982,989 )     (2,820,930 )
Payments on capital lease obligations
    (5,901,697 )     (4,070,774 )
Repayments on related party notes receivable
          35,762,558  
(Repayments of) advances on related party notes receivable
    3,110,975       (3,110,975 )
Distribution to non-controlling interest
    (92,067,479 )     (21,975,986 )
Distribution to stockholder
    (24,966,299 )     (61,061,748 )
 
           
Net cash (used in) provided by financing activities
    (144,318,036 )     40,332,372  
 
           
NET INCREASE IN CASH AND CASH EQUIVALENTS
    3,197,566       6,983,687  
CASH AND CASH EQUIVALENTS, beginning of year
    42,805,635       35,821,948  
 
           
CASH AND CASH EQUIVALENTS, end of year
  $ 46,003,201     $ 42,805,635  
 
           

6


 

                 
    YEARS ENDED DECEMBER 31,  
    2009     2008  
 
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
               
Interest
  $ 43,350,446     $ 20,233,889  
 
           
Income taxes
  $ 2,490,000     $ 2,265,214  
 
           
 
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES
 
Capital lease obligations incurred for the acquisition of property and equipment
  $ 9,329,703     $ 6,979,109  
 
           
Note payable obligation incurred for the acquisition of property and equipment
  $ 5,516,150     $  
 
           
Non-cash distribution of Encino Hospital Medical Center assets (Note 4)
  $ 29,113,320     $  
 
           
See accompanying notes.

7


 

PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Nature of Business
Prime Healthcare Services, Inc. (the “Company” or “PHSI”) is a Delaware corporation incorporated on March 27, 2000.
The Company operates 13 acute care hospitals with 2,283 licensed beds located in various communities though out California. The Company’s operations also include four medical groups and other operations related to its hospital business. The Company operates the following acute care hospitals:
             
    Licensed    
Hospital   Beds   Location
 
           
Desert Valley Hospital (“DVH”)
    83     Victorville
Chino Valley Medical Center (“CVMC”)
    126     Chino
Sherman Oaks Hospital (“SOH”)
    153     Sherman Oaks
Montclair Hospital Medical Center (“MHMC”)
    102     Montclair
Huntington Beach Hospital (“HBH”)
    131     Huntington Beach
La Palma Intercommunity Hospital (“LPIH”)
    141     La Palma
West Anaheim Medical Center (“WAMC”)
    219     Anaheim
Paradise Valley Hospital (“PVH”)
    301     National City
Centinela Hospital Medical Center (“CHMC”)
    370     Inglewood
Garden Grove Hospital Medical Center (“GGHMC”)
    167     Garden Grove
San Dimas Community Hospital (“SDCH”)
    93     San Dimas
* Encino Hospital Medical Center (“EHMC”)
    151     Encino
Shasta Regional Medical Center (“SRMC”)
    246     Redding
 
*   As of December 31, 2009, Encino Hospital Medical Center was distributed by the Company, on behalf of the controlling stockholder, who contributed the operations of EHMC to Prime Healthcare Services Foundation, Inc. (“PHSF”) (Note 4).
Note 2 — Organization and Summary of Significant Accounting Policies
Basis of consolidation — The consolidated financial statements include the accounts of the Company, the hospitals as described in Note 1 and the following wholly owned subsidiaries:
Prime Healthcare Services, LLC (“PHS”)
Apple Valley Surgery Center Corporation (“AVSC”)
Bio-Med Services, Inc. (“BMI”)
Prime Healthcare Services Los Angeles, LLC (“PHS LA”)
As of and for the year ended December 31, 2009, AVSC currently does not have any operating activity.

8


 

Note 2 — Organization and Summary of Significant Accounting Policies (continued)
Basis of consolidation — The Company has a variable interest in the following entities as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (ASC) 810, for which PHSI is the primary beneficiary of these variable interest entities:
Medical groups:
Desert Valley Medical Group, Inc. (“DVMG”)
Sherman Oaks Medical Group Management, Inc. (“SOMGM”)
Paradise Valley Medical Group, Inc. (“PVMG”)
Shasta Regional Medical Group, Inc. (“SRMG”)
Other entities:
Prime Healthcare Management, Inc. (“PHMI”)
Prime Healthcare Management — Garden Grove, Inc. (“PHMGG’’)
Prime Healthcare Management — San Dimas, Inc. (“PHMSD”)
Prime Healthcare Management — Encino, Inc. (“PHME”)
Prime Healthcare Management — Shasta, Inc. (“PHMS”)
Hospital Business Service, Inc. (“HBS”)
Prime Healthcare Air Transport LLC (“PHAT”)
International Aircraft Investments LLC (“IAI”)
The equity of the variable interest entities have been reflected as a non-controlling interest as of December 31, 2009 and 2008. The consolidation of these entities does not change any legal ownership, and does not change the assets or the liabilities and equity of PHSI as a stand-alone entity. Total assets of these variable interest entities were $122,000,000 and $87,000,000 as of December 31, 2009 and 2008, respectively. These entities provide management services for the Company, as well as providing health care services through the medical groups for which total revenues were $20,000,000 and $22,000,000 for the years ended December 31, 2009 and 2008, respectively. All intercompany accounts and transactions have been eliminated upon consolidation.
Net patient service revenue — Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. In some cases, reimbursement is based on formulas which cannot be determined until cost reports are filed and audited or otherwise settled by the various programs. Normal estimation differences between actual payments received for patient services and net patient accounts receivable recorded in previous years resulted in an increase in net patient service revenue of approximately $4,155,000 and $7,588,000 in the years ended December 31, 2009 and 2008, respectively.

9


 

PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Organization and Summary of Significant Accounting Policies (continued)
Premium revenue and medical claims expense — The Company has agreements with various Health Maintenance Organizations (“HMO”) to provide medical services to enrollees. Under these agreements, the Company receives monthly capitation revenue based on the number of each HMO’s enrollees, regardless of services actually performed by the Company. Premium revenue under HMO contracts is recognized during the period in which the Company is obligated to provide services. Certain of the HMO contracts also contain shared-risk provisions whereby the Company can earn additional incentive revenue or incur penalties based upon the utilization of inpatient hospital services by assigned HMO enrollees. The Company records shared-risk revenue and expenses based upon inpatient utilization on an estimated basis. Differences between estimated shared-risk revenue or expenses and actual amounts are recorded upon final settlement with each HMO. Amounts due to unaffiliated health care providers for out of network claims are recognized as incurred. The amounts recorded are based upon projections of historical developments. Such projections are adjusted and estimates changed when developments of claims information warrant. There was no significant impact to the 2009 and 2008 operating results due to changes in this estimate.
Supplies inventory — Supplies inventory is stated at cost, determined by the average cost method, which is not in excess of market.
Property and equipment — Property and equipment is stated at cost, net of depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, which range from three to forty years. Amortization of leasehold improvements is computed over the lesser of the lease term and the estimated useful lives of the assets and is included in depreciation and amortization expense.
Asset retirement obligations — The Company recognizes the fair value of a liability for legal obligations associated with asset retirements in the period in which it is incurred if a reasonable estimate of the fair value of the obligation can be made. When the liability is initially recorded, the Company capitalizes the cost of the asset retirement obligation by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost associated with the retirement obligation is depreciated over the useful life of the related asset. Upon settlement of the obligation, any difference between the cost to settle the asset retirement obligation and the liability recorded is recognized as a gain or loss in the Consolidated Statements of Income.
Use of estimates — The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

10


 

Note 2 — Organization and Summary of Significant Accounting Policies (continued)
Income taxes — PHSI, DVH, AVSC, CVMC, and BMI are Sub chapter S Corporations. In addition, DVH, AVSC, CVMC and BMI are qualified Q subs of PHSI and are included in the PHSI S corporation income tax return for the years ended December 31, 2009 and 2008. In lieu of corporate income taxes, the stockholders of PHSI will be taxed on their proportionate share of PHSI’s net income as defined by the Internal Revenue Code. HBH, LPIH, WAMC, MHMC, PHS, SOH, PVH, CHMC, GGHMC, SDCH, EHMC, SRMC and PHS LA are single member LLCs. Their taxable income and loss is included in the PHSI S corporation income tax return for the years ended December 31, 2009 and 2008. PHSI is subject to state franchise taxes and limited liability company fees. PHSI disburses funds necessary to satisfy the stockholders’ income tax liabilities.
The following non-controlling entities, DVMG, PHMI, SOMGM, CVMG, PVMG, HBS, PHMGG, PHMSD, PHME, SRMG and PHMS have elected to be taxed under the provision of subchapter S of the Internal Revenue Code and state law. Under these provisions, the entities do not pay corporate income taxes on their taxable income. However, the entities are subject to California franchise taxes. In addition, the stockholders’ of the entities are liable for individual federal and state income taxes on taxable income. The Company disburses funds necessary to satisfy the stockholders’ tax liability.
Cash and cash equivalents — The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Goodwill — Management evaluates goodwill, at a minimum, on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair value of the reporting units are estimated using a combination of the income or discounted cash flow approach and market approach, which uses comparable data. If the carrying amount of the reporting unit exceeds fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any.
For the years ended December 31, 2009 and 2008, the management of the Company determined that an impairment did not exist. However, if estimates or the related assumptions change in the future, the Company may be required to record impairment charges to reduce the carrying amount of this asset.
Fair value of financial instruments — The Company’s consolidated balance sheets include the following financial instruments: cash and cash equivalents, patient accounts receivable, notes receivable, accounts payable and accrued liabilities, and long-term liabilities. The Company considers the carrying amounts of current assets and liabilities in the consolidated balance sheets to approximate the fair value of these financial instruments and their expected realization. The carrying amount of notes receivable and long-term debt approximated their fair value, based on current market rates of instruments of the same risks and maturities.

11


 

PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Organization and Summary of Significant Accounting Policies (continued)
Recently Issued Accounting Standards:
Fair value accounting — On January 1, 2008, the Company adopted changes issued by the FASB to fair value accounting and reporting as it relates to financial assets and financial liabilities that are recognized or disclosed at fair value in the financial statements on at least an annual basis. These changes defined fair value, established a framework for measuring fair value in generally accepted accounting principles and expanded disclosures about fair value measurements. Accordingly, these changes were not initially applied to goodwill and other intangible assets held by the Company and measured annually for impairment testing purposes only. On January 1, 2009, the Company adopted the remaining changes in this area as they relate to non — financial assets, such as goodwill, and non-financial liabilities. The adoption of these changes did not have a material effect on the Company’s consolidated financial statements or notes thereto.
FASB Codification — On September 30, 2009, the Company adopted changes issued by the FASB to the authoritative hierarchy of accounting principles generally accepted in the United States of America (“GAAP”). These changes establish the FASB Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification. These changes and the Codification itself do not change GAAP. Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on the Company’s financial statements.
Subsequent events — In 2009, the Company adopted changes issued by the FASB for subsequent events. These changes set forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occur after the balance sheet date. The adoption of these changes did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Uncertain tax positions — Effective January 1, 2009, the Company adopted FASB Accounting Standards Codification (ASC) 740-10, relating to accounting for uncertain tax positions. ASC 740-10 prescribes a recognition threshold and measurement process for accounting for uncertain tax positions and also provides guidance on various related matters such as de-recognition, interest, penalties and disclosures required. The Company does not have any uncertain tax positions. The Company files income tax returns in the U.S. federal and California jurisdictions. The Company is no longer subject to U.S. federal or California and local income tax examinations by tax authorities for years before 2005.

12


 

Note 2 — Organization and Summary of Significant Accounting Policies (continued)
Consolidation of variable interest entities — In June 2009, the FASB issued ASC 810 which contains literature intended to replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. The revised approach is expected to be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The literature also requires additional disclosures about a reporting entity’s involvement in variable interest entities, which will enhance the information provided to users of financial statements. This guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, or January 1, 2010 for the Company.
Reclassification — Certain prior year amounts were reclassified to conform to the current year presentation.
Subsequent events — Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are available to be issued. The Company recognizes in the consolidated financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the consolidated financial statements. The Company’s consolidated financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date and before consolidated financial statements are available to be issued. The Company has evaluated subsequent events through April 1, 2010, which is the date the consolidated financial statements were available to be issued.
Note 3 — Net Patient Service Revenue
The Company has arrangements with third-party payors that provide for payments to the Company at amounts different from its established rates. A summary of the payment arrangements with major third-party payors are as follows:
Medicare — Inpatient acute-care services rendered to Medicare program beneficiaries are paid at prospectively determined rates per discharge. These rates vary according to a patient classification system that is based on clinical, diagnostic, and other factors. Medicare reimburses the Company for covered outpatient services rendered to Medicare beneficiaries by way of an outpatient prospective payment system based on ambulatory payment classifications. The Company’s classification of patients under the Medicare program and the appropriateness of their admissions are subject to an independent review.

13


 

PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 — Net Patient Service Revenue (continued)
Inpatient non-acute services, certain outpatient services, medical education costs, and defined capital costs related to Medicare beneficiaries are paid based, in part, on a cost reimbursement methodology. The Company is reimbursed for cost reimbursable items at a tentative rate with final settlement determined after submission of annual cost reports and audits thereof by the Medicare fiscal intermediary. The estimated amounts due to or from the program are reviewed and adjusted annually based on the status of such audits and any subsequent appeals. Differences between final settlements and amounts accrued in previous years are reported as adjustments to net patient service revenue in the year examination is substantially completed. These differences increased net patient service revenue by approximately $4,155,000 and $7,142,000 for the years ended December 31, 2009 and 2008, respectively. The Company does not believe that there are significant credit risks associated with this government agency.
Medi-Cal - Inpatient services rendered to Medi-Cal program beneficiaries are reimbursed under both contracted and non-contracted payment arrangements. Contracted hospitals are reimbursed at a prospectively determined negotiated per diem rate. Non-contracted hospitals are reimbursed using a cost reimbursement methodology. Interim payments are based on a cost to charge ratio with final settlement determined after submission of annual cost reports and audits thereof by the Department of Health Care Services (“DHCS”). The estimated amounts due to or from DHCS are reviewed and adjusted annually based on the status of such audits and any subsequent appeals. Differences between final settlements and amounts accrued in previous years are reported as adjustments to net patient service revenue in the year examination is substantially complete.
Other - The Company has also entered into agreements with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations. The basis for payment to the Company under these agreements includes prospectively determined rates per discharge, discounts from established charges and prospectively determined daily rates.
Laws and regulations governing the third party payor arrangements are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term.
Note 4 — Acquisitions/Dispositions
During 2009 and 2008, the Company entered into the following acquisitions and dispositions. All acquisitions have been accounted for using the purchase method of accounting. Operating results for each of the acquisitions have been included in the accompanying consolidated financial statements since the dates of acquisition. Operating results for the disposition has been included in the accompanying consolidated financial statements through the date of disposition.

14


 

Note 4 — Acquisitions/Dispositions (continued)
Effective December 31, 2009, the Company distributed the operations and assets of EHMC to Prime Healthcare Services Foundation, Inc. on behalf of its controlling stockholder. The following table summarizes the components of assets distributed:
         
Cash and cash equivalents
  $ 3,205,015  
Patient accounts receivable, net of allowance
    12,157,072  
Supplies inventory
    339,723  
Prepaid expenses and other current assets
    2,331,891  
Property and equipment
    14,009,638  
Estimated third-party payor settlements
    274,996  
 
     
 
       
 
  $ 32,318,335  
 
     
In conjunction with the contribution of EHMC, all capital lease liabilities were assumed by PHSI.
On July 1, 2008, the Company entered into an asset purchase agreement with Tenet Health System Medical, Inc. (“Tenet”). Pursuant to the agreement the Company acquired the operating assets and assumed certain current liabilities of GGHMC and related equipment from Tenet. The purchase price of $29,052,227 consisted primarily of cash.
The following table presents the allocation of the aggregate purchase price:
         
    Allocation at  
    July 1, 2008  
 
       
Prepaids and other current assets
  $ 325,897  
Supplies inventory
    403,432  
Land
    6,406,010  
Building and land improvements
    17,838,745  
Equipment
    4,517,923  
Accrued liabilities
    (439,780 )
 
     
 
       
Net cash consideration
  $ 29,052,227  
 
     
On July 1, 2008, the Company entered into an asset purchase agreement with Tenet. Pursuant to the agreement the Company acquired the operating assets and assumed certain current liabilities of SDCH and related equipment from Tenet. The purchase price of $13,276,776 consisted primarily of cash.

15


 

PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 — Acquisitions/Dispositions (continued)
     The following table presents the allocation of the aggregate purchase price:
         
    Allocation at  
    July 1, 2008  
Prepaids and other current assets
  $ 70,142  
Supplies inventory
    375,743  
Land
    4,696,558  
Building and land improvements
    4,393,217  
Equipment
    4,471,668  
Accrued liabilities
    (730,552 )
 
     
 
       
Net cash consideration
  $ 13,276,776  
 
     
On June 1, 2008, the Company entered into an asset purchase agreement with Tenet Health System Medical, Inc. Pursuant to the agreement the Company acquired the operating assets and assumed certain current liabilities of EHMC and related equipment from Amisub. The purchase price of $11,896,422 consisted primarily of cash.
The following table presents the allocation of the aggregate purchase price:
         
    Allocation at  
    June 1, 2008  
Prepaids and other current assets
  $ 206,547  
Supplies inventory
    253,000  
Land
    3,769,354  
Building and land improvements
    6,069,069  
Equipment
    2,408,577  
Accrued liabilities
    (810,125 )
 
     
 
       
Net cash consideration
  $ 11,896,422  
 
     

16


 

Note 5 — New Operations
On November 1, 2008 the Company entered in a long-term operating lease with owners of a hospital and other related real estate located in Redding, CA (see Note 11). As part of this transaction, the Company began managing SRMC operations on November 1, 2008. In conjunction with its operation of SRMC, the Company entered into negotiations with the previous lessee/operator, and subsequently the bankruptcy trustee for the previous lessee/operator after an involuntary bankruptcy petition was filed against the previous lessee/operator to acquire certain operating assets. These assets consisted primarily of inventory and equipment necessary to ensure continued operations of the hospital. Amounts related to inventory acquired approximated $290,000. Negotiations for final settlement of the equipment was completed in May 2009 and was purchased for $625,000.
Note 6 — Concentration of Credit Risk
Financial instruments which potentially subject the Company to significant concentrations of credit risk consist primarily of cash. The Company maintains cash in bank deposit accounts at high credit quality financial institutions. The balances, at times, may exceed the $250,000 federally insured limit. Management monitors the financial condition of these institutions on an ongoing basis and does not believe any significant credit risk exists at the present time.
Patient accounts receivable at December 31, 2009 and 2008 are comprised of the following: government programs, primarily Medicare 26% and 27%, respectively, Medi-Cal 41% and 35%, respectively, healthcare maintenance and preferred provider organizations (managed care programs) 14% and 9%, respectively, and private pay and commercial insurance patients 19% and 29%, respectively. Management believes there is no credit risks associated with receivables from government programs. Receivables from managed care programs and others are from various payors who are subject to differing economic conditions and do not represent concentrated risks to the Company. Management continually monitors and adjusts the reserves associated with receivables, and does not require collateral. Losses due to bad debts have been within management’s estimates.

17


 

PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 — Property and Equipment
Property and equipment consist of the following at December 31:
                 
    2009     2008  
 
               
Land
  $ 38,412,568     $ 42,275,328  
Buildings
    61,101,680       71,830,543  
Building improvements
    18,523,416       11,075,807  
Equipment
    138,796,293       117,992,936  
Automobiles and aircraft
    9,134,900       3,524,198  
Construction in progress (estimated cost to complete at December 31, 2009 is approximately $1,974,000)
    8,755,354       3,776,686  
 
           
 
               
 
    274,724,211       250,475,498  
 
               
Accumulated depreciation and amortization
    (69,231,824 )     (45,087,705 )
 
           
 
               
 
  $ 205,492,387     $ 205,387,793  
 
           
Gross property and equipment includes approximately $37,610,000 and $29,258,000 of equipment under capital lease arrangements as of December 31, 2009 and 2008, respectively. Related accumulated amortization totaled approximately $17,591,000 and $10,070,000 as of December 31, 2009 and 2008, respectively.

18


 

Note 8 — Long-Term Debt
Long-term debt consists of the following as of December 31:
                 
    2009     2008  
Line of credit with City National Bank, secured by accounts receivable of DVH, interest payable monthly at an annual rate of prime (3.5% at December 31, 2009), due September 1, 2010.
  $ 4,000,000     $ 7,000,000  
Term loans with GE Commercial Finance, secured by various equipment of DVH, payable in monthly installments ranging from approximately $7,000 to $60,000 including interest at fixed interest rates ranging from 6.59% to 7.43% per annum, maturing in 2010.
    1,080,604       2,827,472  
Term loan with Siemens Financial Services, secured by certain equipment of PHAT, payable in monthly installments of approximately $75,000 including interest at a fixed rate of 6.77% per annum, maturing in 2017.
    5,385,038        
Term loan with City National Bank, secured by equipment of CVMC, interest payable monthly at an annual rate of prime (3.25% at December 31, 2009), principal payable in monthly payments of $116,667, maturing on August 1, 2011.
    2,293,442       3,287,663  
Bank note payable, secured by certain real estate of DVMG, bearing interest at 5.75% per annum, payable in monthly payments of $1,258, maturing in August 2024.
    142,541       148,913  
Note payable with City National Bank, secured by equipment of SOH, bearing interest at an annual rate of Prime (3.25% at December 31, 2009), principal payable in monthly payment of $63,837, maturing September 1, 2012.
    2,106,603       2,872,642  
Note payable with Medical Properties Trust secured by certain equipment and purchase options of SOH, bearing a fixed interest rate of 11.64% per annum as of December 31, 2009. Interest only payments due monthly, principal balance due at maturity on December 30, 2020.
    5,000,000       5,000,000  

19


 

PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 — Long-Term Debt (continued)
                 
    2009     2008  
Note payable with Medical Properties Trust secured by certain equipment of MHMC and bearing a fixed interest rate of 10.53% per annum. Interest only payments due monthly, principal balance due at maturity on August 9, 2021.
  $ 5,000,000     $ 5,000,000  
Note payable with Medical Properties Trust secured by certain equipment and purchase options of HBH, LPIH, and WAMC, bearing a fixed interest rate of 10.27% per annum as of December 31, 2009. Interest only payments due monthly, principal balance due at maturity on November 8, 2021.
    10,000,000       10,000,000  
Line of credit with Medical Properties Trust secured by certain equipment and purchase options of SRMC, interest payable monthly at an annual rate of 9.25% as of December 31, 2009, maturing on November 1, 2018.
    20,000,000       15,000,000  
Note payable with Medical Properties Trust secured by certain property and equipment and lease deposits of PVH, bearing a fixed interest rate of 9.59% per annum as of December 31, 2009. Interest only payments due monthly, principal balance due at matuity on May 6, 2022.
    25,000,000       25,000,000  
Line of credit with Healthcare Finance Group (“HFG”), secured by accounts receivable of HBH, LPIH and WAMC, interest payable monthly at an annual rate of the greater of 2.75% or LIBOR + 3.50% (5.5% at December 31, 2009), maturing in November 2012. Under the terms of the agreements, the respective hospitals are required to maintain financial and non-financial covenants. At December 31, 2009, approximately $4,665,000, $3,663,000, $6,366,000, respectively, and was available under this line.
    12,145,429       8,249,884  

20


 

Note 8 — Long-Term Debt (continued)
                 
    2009     2008  
Line of credit with HFG, secured by accounts receivable and inventory of SOH, interest payable monthly at an annual rate of the greater for 2.75% or LIBOR + 3.00% (5.75% at December 31, 2009), maturing in February 2013. SOH is required to maintain certain financial and non-financial covenants at year end. At December 31, 2009, approximately $6,204,000 was available under this line.
  $ 5,087,016     $ 4,015,691  
Line of credit with HFG, secured by accounts receivable and inventory of CHMC, interest payable monthly at an annual rate of the greater of 2.75% or LIBOR + 3.00% (5.75% at December 31, 2009), maturing in December 2011. CHMC is required to maintain certain financial and non-financial covenants at year end. At December 31, 2009, approximately $20,465,000 was available under this line.
    4,580,801       15,231,033  
Line of credit with HFG, secured by accounts receivable and inventory of CVMC, interest payable monthly at an annual rate of the greater of 2.75% or LIBOR + 2.50% (5.25% at December 31, 2009), maturing in September 2011. CVMC is required to maintain certain financial and non-financial covenants at year end. At December 31, 2009, approximately $6,617,000 was available under this line.
    2,243,899       6,263,196  
Line of credit with HFG, secured by accounts receivable and inventory of PVH, interest payable monthly at an annual rate of the greater of 2.75% or LIBOR + 2.50% (5.25% at December 31, 2009), maturing in December 2010. PVH is required to maintain certain financial and non-financial covenants at year end. At December 31, 2009, approximately $6,671,000 was available under this line.
    8,531,154       6,677,419  
 
           
 
               
 
    112,596,527       116,573,913  
 
               
Less current portion
    (40,388,724 )     (51,024,562 )
 
           
 
               
 
  $ 72,207,803     $ 65,549,351  
 
           

21


 

PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 — Long-Term Debt (continued)
Aggregate annual principal maturities of long-term debt for the five years subsequent to December 31, 2009 and thereafter, are as follows:
         
Years ending December 31,        
 
       
2009
  $ 40,388,724  
2010
    2,249,853  
2011
    1,208,191  
2012
    677,828  
2013
    725,072  
Thereafter
    67,346,859  
 
     
 
       
 
  $ 112,596,527  
 
     
The revolving loan agreements contain lockbox requirements and subjective acceleration clauses, therefore all amounts have been classified as current within the liabilities section of the balance sheet. The Company has other financial covenants with its other lenders.
Note 9 — Sales Lease-Back Liability
In May 2007, in connection with the acquisition of certain assets of Adventist, PVH sold the real estate and related hospital building acquired from Adventist to a health care real estate investment trust (“the REIT”). As part of the sale, PVH leased back the real estate and hospital building (“leased property”) in a lease agreement which expires in May 2022. PVH has an option to extend the term of the lease for three additional five year periods. After ten years or at the end of the lease term PVH has the option to purchase the leased property for $23,000,000. If at the end of the lease term, including renewal terms, PVH does not exercise its option to purchase the leased property, PVH must pay the lessor a lease make up payment equal to the difference between the then fair market value of the leased property and $23,000,000. Due to the guarantee included in the lease, this transaction was recognized as a finance obligation. The proceeds of $23,000,000 were recorded as a sales lease-back liability on the consolidated balance sheets. The lease provides for a monthly base rent of $173,000 for the leased property, which is adjusted annually based on the change in the consumer price index.

22


 

Note 9 — Sales Lease-Back Liability (continued)
In November 2007, in connection with the acquisition of certain assets of CFHS, CHMC sold the real estate and related hospital building acquired from CFHS to the REIT. As part of the sale, CHMC leased back the real estate and hospital building (“leased property”) in a lease agreement which expires in November 2022. CHMC has an option to extend the term of the lease for three additional five year periods. After ten years or at the end of the lease term CHMC has the option to purchase the leased property for $75,000,000. If at the end of the lease term, including renewal terms, CHMC does not exercise its option to purchase the leased property, CHMC must pay the lessor a lease make up payment equal to the difference between the then fair market value of the leased property and $75,000,000. Due to the guarantee included in the lease, this transaction was recognized as a finance obligation. The proceeds of $75,000,000 were recorded as a sales lease-back liability on the consolidated balance sheet. The lease provides for a monthly base rent of $563,000 for the leased property, which is adjusted annually based on the change in the consumer price index.
In July 2008, in connection with the acquisition of certain assets of Tenet (see Note 4), EHMC sold the real estate and related hospital and medical office buildings acquired from Amisub to the REIT. As part of the sale, EHMC leased back the real estate and hospital building (“leased property”) in a lease agreement which expires in July 2018. EHMC has an option to extend the term of the lease for three additional five year periods. After ten years or at the end of the lease term EHMC has the option to purchase the leased property for $15,000,000. If at the end of the lease term, including renewal terms, EHMC does not exercise its option to purchase the leased property, EHMC must pay to the lessor a lease make up payment equal to the difference between the then fair market value of the leased property and $15,000,000. Due to the guarantee included in the lease, this transaction was recognized as a finance obligation. The proceeds of $15,000,000 were recorded as a sales lease-back liability on the consolidated balance sheet. The lease provides for a monthly base rent of $131,000 for the leased property, which is adjusted annually based on the change in the consumer price index. This sales lease-back liability was paid in 2009, and effective December 31, 2009 EHMC was contributed to Prime Healthcare Services Foundation, Inc. (Note 4).

23


 

PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 — Sales Lease-Back Liability (continued)
In November 2008, in connection with the acquisition of certain assets of Tenet (see Note 4), SDCH sold the real estate and related hospital and medical office buildings acquired from Tenet to the REIT. As part of the sale, SDCH leased back the hospital and related land as well as the medical office buildings and the related land (“leased property”) which expires in November 2018. SDCH has options to extend the terms of the leases for three additional five year periods. After ten years or at the end of the lease term SDCH has the option to purchase the leased property for $13,000,000 for the hospital and related land and $7,000,000 for the medical office buildings and related land. If at the end of the lease term, including renewal terms, SDCH does not exercise its option to purchase the leased property, SDCH must pay to the lessor a lease make up payment equal to the difference between the then fair market value of the leased property and $13,000,000 and $7,000,000, for the hospital and medical office buildings, respectively. Due to the guarantee included in the lease, this transaction was recognized as a finance obligation. The proceeds of $13,000,000 and $7,000,000 were recorded as sale leaseback liabilities on the consolidated balance sheet. The lease provides for a monthly base rent of $114,000 and $61,000 for the hospital and related land and the medical office buildings and the related land, respectively, which is adjusted annually based on the change in the consumer price index.
In November 2008 in connection with the acquisition of certain assets of Tenet (see Note 4) GGHMC sold the real estate and related hospital and medical office buildings acquired from Tenet to the REIT. As part of the sale, GGHMC leased back the hospital and related land as well as the medical office building and the related land (“leased property”) in a lease agreement which expires in November 2018. GGHMC has options to extend the terms of the leases for three additional five year periods. After ten years or at the end of the lease term GGHMC has the option to purchase the leased property for $16,250,000 for the hospital and related land and $8,750,000 for the medical office buildings and related land. If at the end of the lease term, including renewal terms, GGHMC does not exercise its option to purchase the leased property, GGHMC must pay to the lessor a lease make up payment equal to the difference between the then fair market value of the leased property and $16,250,000 and $8,750,000, respectively. Due to the guarantee included in the lease, this transaction was recognized as a finance obligation. The proceeds of $16,250,000 and $8,750,000 were recorded as sale lease-back liabilities on the consolidated balance sheet. The lease provides for a monthly base rent of $142,000 and $77,000 for the hospital and related land and the medical office building and the related land, respectively, which is adjusted annually based on the change in the consumer price index.

24


 

Note 9 — Sales Lease-Back Liability (continued)
The Company’s sales lease back liabilities consist of the following:
                 
    December 31,  
Hospital   2009     2008  
 
               
Paradise Valley Hospital (PVH)
  $ 23,000,000     $ 23,000,000  
Centinela Hospital Medical Center (CHMC)
    75,000,000       75,000,000  
Encino Hospital Medical Center (EHMC)
          15,000,000  
San Dimas Community Hospital (SDCH)
    13,000,000       13,000,000  
San Dimas Medical Office Building (SDCH)
    7,000,000       7,000,000  
Garden Grove Hospital Medical Center (GGHMC)
    16,250,000       16,250,000  
Garden Grove Medical Office Building (GGHMC)
    8,750,000       8,750,000  
 
           
 
               
 
  $ 143,000,000     $ 158,000,000  
 
           
Note 10 —   Professional Liability, Workers’ Compensation, Healthcare and Earthquake Insurance
The Company through Desert Valley Insurance, LTD. (“DVIL”) and the Hartford Insurance Company provides professional liability, workers’ compensation, healthcare and earthquake insurance coverage. DVIL is affiliated with the Company through common ownership. Under the terms of the agreement DVIL is obligated to insure each workers’ compensation claim up to a maximum of $1,000,000 per claim. Losses in excess of $1,000,000 per claim are insured by the Hartford Insurance Company.
The Company also entered into an agreement with DVIL to provide medical malpractice liability insurance on a claims-made basis. Under this policy, insurance premiums cover only those claims actually reported during the policy term. Should the claims made policy not be renewed or replaced with equivalent insurance, claims related to occurrences during the policy term but reported subsequent to the policy’s termination may be uninsured. Under the current policy the Company is covered up to a $1,000,000 per claim and $3,000,000 general aggregate limit with no amount deductible. Excess losses up to an additional $7,000,000 will be insured by AIG Insurance Company. The Company renewed its claims made policy with DVIL for the next policy year ending December 31, 2010, under which the Company will be covered up to a $3,000,000 per claim and $10,000,000 general aggregate limit with no amount deductible.

25


 

PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 — Professional Liability, and Workers’ Compensation, Healthcare and Earthquake Insurance (continued)
The Company also entered into an agreement with DVIL to provide earthquake and flood insurance. Under this policy insurance premiums cover only those claims which occurred during the policy term. Should the claims made policy not be renewed, or replaced with equivalent insurance, claims related to occurrences during the policy term but reported subsequent to the policy’s termination may be uninsured under the current policy. The company is covered up to $30,000,000 per occurrence and in the aggregate. The company renewed its policy through June 2010.
The Company also entered into a self-insured medical insurance policy with DVIL for healthcare coverage for employees. The policy term is through December 2010.
Accounting principles generally accepted in the United States of America require that a health care facility recognize the estimated costs of malpractice claims in the period of the incident of malpractice, if it is reasonably possible that liabilities may be incurred and losses can be reasonably estimated. The Company recognized an estimated liability based upon its claims experience to cover the Company’s potential exposure to incurred but unreported claims. The claim reserve is based on the best data available to the Company; however, the estimate is subject to a significant degree of inherent variability. The estimate is continually monitored and reviewed, and as the reserve is adjusted, the difference is reflected in current operations. While the ultimate amount of professional liability is dependent on future developments, management is of the opinion that the associated liabilities recognized in the accompanying consolidated financial statements is adequate to cover such claims. Management is aware of no potential professional liability claims whose settlement, if any, would have a material adverse effect on the Company’s consolidated financial position.
The company has evaluated whether they are required to consolidate DVIL in accordance with ASC 810 as of December 31, 2009 and has determined that DVIL is a variable interest entity. The Company has also determined that it is not the primary beneficiary of DVIL. The Company is not exposed to the risk that it may be required to subsidize the losses, if any of DVIL. DVIL provides workers compensation, hospital/medical professional and general liability insurance. DVIL had total assets of approximately $95,000,000 and $92,000,000 as of December 31, 2009 and 2008, respectively.
Note 11 — Leases
The Company leases certain equipment under various non-cancelable operating and capital lease arrangements. Capital leases bear interest at rates ranging from 4.0% - 8.2%.
On February 12, 2007, the Company entered into a lease agreement with Prime A Investment LLC (“Prime A”), a related party under common ownership, to lease the DVH hospital building and land. The initial lease term is 180 months (15 years). The lease provides for a monthly base rent of $525,000, which is adjusted annually based on the greater of 2% or the consumer price index.

26


 

Note 11 — Leases (continued)
On March 1, 2007, the Company entered into a lease agreement with Prime A to lease the CVMC hospital building and land. The initial lease term is 180 months (15 years). The lease provided for a initial monthly base rent of $375,000, which is adjusted annually based on the greater of 2% or the consumer price index. On January 1, 2009, the lease was amended to include an additional $300,000 per month in base rent.
In addition to the hospitals owned through the sales leaseback transactions described in Note 9, and the related party leases for the DVH and CVMC hospital buildings, the Company also leases the hospital properties and related other medical office buildings for MHMC, HBH, LPIH, WAMC, SRMC from the REIT. The significant terms of the leases are as follows:
The MHMC facility lease expires in July 2021. The lease provides for monthly rent payments of approximately $163,000 at inception, which is adjusted annually based on the consumer price index.
The HBH facility lease expires in November 2021. The lease provides for monthly rent payments of approximately $99,000 at inception, which is adjusted annually based on the consumer price index.
The LPIH facility lease expires in November 2021. The lease provides for monthly rent payments of approximately $99,000 at inception, which is adjusted annually based on the consumer price index.
The WAMC facility lease expires in November 2021. The lease provides for monthly rent payments of approximately $198,000 at inception, which is adjusted annually based on the consumer price index.
The SRMC facilities lease expires in November 2017. The lease provides for no rent for the first six months of the lease and monthly rent payments thereafter of approximately $486,000, which is adjusted annually based on the consumer price index. In addition, the lease requires additional rent of $12,000,000 to be paid in quarterly installments based on SRMC quarterly operating cash flow as defined in the lease. Any unpaid amounts relating to the additional rent are due and payable at the lease termination date.
Lease expense, consisting primarily of building rent and equipment leases, amounted to approximately $52,456,000 and $39,361,000 for the years ended December 31, 2009 and 2008 respectively.

27


 

PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 — Leases (continued)
Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) and future minimum capital lease payments as of December 31, 2009 are:
                 
            Operating  
    Capital     Lease  
Years ending December 31,   Leases     Commitments  
 
               
2010
  $ 8,502,725     $ 41,585,506  
2011
    8,422,261       40,158,503  
2012
    6,119,865       39,939,666  
2013
    719,456       37,459,321  
2014
          37,715,468  
Thereafter
          223,405,794  
 
           
 
               
Total minimum lease payments
    23,764,307     $ 420,264,258  
 
           
 
               
Less amounts representing interest
    (2,248,773 )        
 
             
 
               
 
    21,515,534          
 
               
Less current portion
    (7,193,226 )        
 
             
 
               
 
  $ 14,322,308          
 
             

28


 

Note 12 — Related Party Transactions
Notes receivable from related parties as of December 31:
                 
    2009     2008  
 
               
Short term unsecured advances to employees, non interest bearing, due on demand.
  $ 129,042     $ 99,147  
Receivable from DVIL, related to expenses incurred in excess of deductibles.
    719,063       900,248  
Notes receivable from Prime A, unsecured, non interest bearing, due on demand.
          3,110,975  
Various
          13,336  
Less: notes receivable from Prime A classified as contra-equity.
          (3,110,975 )
 
           
 
               
 
  $ 848,105     $ 1,012,731  
 
           
 
               
Notes payable to related parties as of December 31:
               
Notes payable to DVIL, unsecured, non interest bearing, payable on demand.
  $     $ 628,393  
Various
    50,000       9,667  
 
           
 
               
 
  $ 50,000     $ 638,060  
 
           
During 2008, the Company discontinued using the services of Action Collection, a related party collection agency to collect delinquent patient accounts receivable. For the year ended December 31, 2008, agency fees paid to the related party totaled $512,752.

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PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 — Related Party Transactions (continued)
The Company entered into agreements with DVIL to provide workers’ compensation and earthquake insurance coverage and commercial malpractice liability insurance on a claims-made basis (see Note 10). Effective January 1, 2010 the Company entered into an agreement with DVIL to provide healthcare insurance for employees. Insurance premiums paid to DVIL totaled $53,998,000 and $35,105,000 for the years ended December 31, 2009 and 2008, respectively. The Company gets reimbursed from DVIL for workers’ compensation insurance deductibles paid on behalf of DVIL. As of December 31, 2009, the Company has recorded a prepaid insurance expense of approximately $18,556,000 related to workers’ compensation and malpractice, and approximately $35,538,000 for healthcare coverage being provided by DVIL in future years.
The Company leases certain office buildings and parking facilities from Prime A (Note 11). The leases are for five year terms. Rent expense incurred under these leases was $5,463,990 and $4,228,832 for the years ended December 31, 2009 and 2008, respectively.
During 2007, the Company entered into agreements with Prime A to lease the hospital buildings and land at DVH and CVMC. The leases are for 15 year terms (Note 11). Rent payments made under these leases totaled approximately $9,874,000 for the years ended December 31, 2009 and 2008.
During 2007, the Company advanced $35,762,558 to Prime A. The advances were unsecured, due on demand and bear no interest. For financial reporting purposes the advances were being reflected as a reduction in stockholders’ equity. These advances were paid back to the Company as of December 31, 2008.
Note 13 — Retirement Savings Plan
The Company has a defined contribution pension plan covering substantially all of its employees. The Company’s contribution to the plan is at the Company’s discretion but limited to the maximum amount deductible for federal income tax purposes under the applicable Internal Revenue Code. During the years ended December 31, 2009 and 2008, the Company made contributions of $3,918,323 and $2,985,245, respectively, to the plan.

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Note 14 — Contingencies
The Company is aware of certain asserted and unasserted legal claims arising in the normal course of business. While the outcome cannot be determined at this time, it is management’s opinion that the liability, if any, from these actions will not have a material adverse effect on the Company’s financial position.
The health care industry is subject to numerous laws and regulations of federal, state, and local governments. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time. These laws and regulations include, but are not limited to, accreditation, licensure, and government health care program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Recently, government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by health care providers. Violations of these laws and regulations could result in exclusion from government health care program participation, together with the imposition of significant fines and penalties, as well as significant repayment for past reimbursement for patient services received. While the Company is subject to similar regulatory review, there are no reviews currently underway and management believes that the outcome of any potential regulatory review will not have a material adverse effect on the Company’s financial position.
Management believes that the Company is in compliance with government laws and regulations related to fraud and abuse and other applicable areas. While no material regulatory inquiries have been made, compliance with such laws and regulations can be subject to future governmental review and interpretation, as well as regulatory actions unknown or unasserted at this time.
Note 15 — Legislation
The Health Insurance Portability and Accountability Act (HIPAA) was enacted on August 21, 1996, to assure health insurance portability, reduce health care fraud and abuse, guarantee security and privacy of health information and enforce standards for health information. Organizations were required to be in compliance with certain HIPAA privacy provisions beginning April 2003. Organizations are subject to significant fines and penalties if found not to be compliant with the provisions outlined in the regulations. Management believes that the Company is in compliance with HIPAA.

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