e10vkza
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
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þ |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
or
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o |
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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)
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Maryland
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20-0191742 |
(State or Other Jurisdiction of Incorporation or Organization)
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(IRS Employer Identification No.) |
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1000 Urban Center Drive, Suite 501 |
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Birmingham, AL
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35242 |
(Address of Principal Executive Offices)
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(Zip Code) |
(205) 969-3755
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class |
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Name of Each Exchange on Which Registered |
Common Stock, par value $0.001 per share
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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 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 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 the registrants 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 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 þ |
Accelerated filer o |
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, 2010, the aggregate market value of the 111,269,171 shares of common stock, par
value $0.001 per share (Common Stock), held by non-affiliates of the registrant was
$1,050,380,974 based upon the last reported sale price of $9.44 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 24, 2011, 111,634,874 shares of the registrants Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement for the Annual Meeting of Stockholders
to be held on May 19, 2011 are incorporated by reference into Items 10 through 14 of Part III, 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, 2010
This Amendment No. 1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2010
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 firm and that of our
significant lessee. At December 31, 2010, 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, 2010 and 2009
are attached to this report as Exhibit 99.1. Refer to our 2009 Form 10-K/A filed on April 9, 2010
for the audited financial statements of Prime for the years ended December 31, 2009 and 2008. 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
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, 2010, filed on February 28, 2011.
(b) Exhibits
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Exhibit |
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Number |
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Exhibit Title |
3.1(1)
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Registrants Second Articles of Amendment and Restatement |
3.2(2)
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Registrants Second Amended and Restated Bylaws |
3.3(3)
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Articles of Amendment of Registrants Second Articles of Amendment and Restatement |
4.1(1)
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Form of Common Stock Certificate |
4.2(4)
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Indenture, dated July 14, 2006, among Registrant, MPT Operating Partnership, L.P. and the Wilmington Trust
Company, as trustee |
4.3(5)
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Indenture, dated November 6, 2006, among Registrant, MPT Operating Partnership, L.P. and the Wilmington
Trust Company, as trustee |
4.4(5)
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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)
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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)
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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)
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Second Amended and Restated Agreement of Limited Partnership of MPT Operating Partnership, L.P. |
10.2(6)
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Amended and Restated 2004 Equity Incentive Plan |
10.3(7)
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Form of Stock Option Award |
10.4(7)
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Form of Restricted Stock Award |
10.5(7)
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Form of Deferred Stock Unit Award |
10.6(1)
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Employment Agreement between Registrant and Edward K. Aldag, Jr., dated September 10, 2003 |
10.7(1)
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First Amendment to Employment Agreement between Registrant and Edward K. Aldag, Jr., dated March 8, 2004 |
10.8(1)
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Employment Agreement between Registrant and R. Steven Hamner, dated September 10, 2003 |
10.9
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Not used |
10.10(1)
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Employment Agreement between Registrant and Emmett E. McLean, dated September 10, 2003 |
10.11(1)
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Employment Agreement between Registrant and Michael G. Stewart, dated April 28, 2005 |
10.12(1)
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Form of Indemnification Agreement between Registrant and executive officers and directors |
10.13(11)
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Form of Medical Properties Trust, Inc. 2007 Multi-Year Incentive Plan Award Agreement (LTIP Units) |
10.14(11)
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Form of Medical Properties Trust, Inc. 2007 Multi-Year Incentive Plan Award Agreement (Restricted Shares) |
10.15(12)
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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 |
10.16(10)
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First Amendment to Term Loan Agreement |
10.17(16)
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Second Amendment to Employment Agreement between Registrant and Edward K. Aldag, Jr., dated September 29,
2006 |
10.18(16)
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First Amendment to Employment Agreement between Registrant and R. Steven Hamner, dated September 29, 2006 |
10.19(16)
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First Amendment to Employment Agreement between Registrant and Emmett E. McLean, dated September 29, 2006 |
10.20(16)
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First Amendment to Employment Agreement between Registrant and Michael G. Stewart, dated September 29, 2006 |
10.21(8)
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Second Amended and Restated 2004 Equity Incentive Plan |
10.22(17)
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Second Amendment to Employment Agreement between Registrant and William G. McKenzie, dated February 27, 2009 |
10.23(17)
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Second Amendment to Employment Agreement between Registrant and Michael G. Stewart, dated January 1, 2008 |
10.24(17)
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Third Amendment to Employment Agreement between Registrant and Michael G. Stewart, dated January 1, 2009 |
10.25(17)
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Second Amendment to Employment Agreement between Registrant and Emmett E. McLean, dated January 1, 2008 |
10.26(17)
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Third Amendment to Employment Agreement between Registrant and Emmett E. McLean, dated January 1, 2009 |
10.27(17)
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Second Amendment to Employment Agreement between Registrant and Richard S. Hamner, dated January 1, 2008 |
10.28(17)
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Third Amendment to Employment Agreement between Registrant and R. Steven Hamner, dated January 1, 2009 |
10.29(17)
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Third Amendment to Employment Agreement between Registrant and Edward K. Aldag, Jr., dated January 1, 2008 |
10.30(17)
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Fourth Amendment to Employment Agreement between Registrant and Edward K. Aldag, Jr., dated January 1, 2009 |
10.31(17)
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Third Amendment to Employment Agreement between Registrant and William G. McKenzie, dated January 1, 2008 |
10.32(17)
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Fourth Amendment to Employment Agreement between Registrant and William G. McKenzie, dated January 1, 2009 |
10.33(18)
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Separation Agreement and General Release, dated June 11, 2010, between Medical Properties Trust, Inc. and
Michael G. Stewart |
10.34(9)
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Revolving Credit and Term Loan Agreement, dated as of May 17, 2010, among Medical Properties Trust, Inc.,
MPT Operating Partnership, L.P., KeyBank National Association and Royal Bank of Canada, as syndication
agents, and JPMorgan Chase Bank, N.A., as administrative agent |
12.1(19)
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Statement re Computation of Ratios |
21.1(19)
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Subsidiaries of Registrant |
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Exhibit |
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Number |
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Exhibit Title |
23.1(21)
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Consent of PricewaterhouseCoopers LLP |
23.2(21)
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Consent of Moss Adams LLP |
31.1(21)
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 |
31.2(21)
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 |
32(19)
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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)
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Consolidated Financial Statements of Prime Healthcare Services, Inc. as of December 31, 2010 and 2009 |
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(1) |
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Incorporated by reference to Registrants Registration Statement on
Form S-11 filed with the Commission on October 26, 2004, as amended
(File No. 333-119957). |
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(2) |
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Incorporated by reference to Registrants current report on Form 8-K,
filed with the Commission on November 24, 2009. |
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(3) |
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Incorporated by reference to Registrants quarterly report on Form
10-Q for the quarter ended September 30, 2005, filed with the
Commission on November 10, 2005. |
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(4) |
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Incorporated by reference to Registrants current report on Form 8-K,
filed with the Commission on July 20, 2006. |
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(5) |
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Incorporated by reference to Registrants current report on Form 8-K,
filed with the Commission on November 13, 2006. |
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(6) |
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Incorporated by reference to Registrants definitive proxy statement
on Schedule 14A, filed with the Commission on September 13, 2005. |
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(7) |
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Incorporated by reference to Registrants current report on Form 8-K,
filed with the Commission on October 18, 2005. |
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(8) |
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Incorporated by reference to Registrants definitive proxy statement
on Schedule 14A, filed with the Commission on April 14, 2007. |
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(9) |
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Incorporated by reference to Registrants current report on Form 8-K,
filed with the Commission on May 20, 2010. |
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(10) |
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Incorporated by reference to Registrants quarterly report on Form
10-Q for the quarter ended September 30, 2007, filed with the
Commission on November 9, 2007. |
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(11) |
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Incorporated by reference to Registrants current report on Form 8-K,
filed with the Commission on August 6, 2007. |
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(12) |
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Incorporated by reference to Registrants current report on Form 8-K,
filed with the Commission on August 15, 2007. |
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(13) |
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Incorporated by reference to Registrants current report on Form 8-K,
filed with the Commission on March 26, 2008. |
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(14) |
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Incorporated by reference to Registrants quarterly report on Form
10-Q for the quarter ended March 31, 2008, filed with the Commission
on May 9, 2008. |
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(15) |
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Incorporated by reference to Registrants quarterly report on Form
10-Q for the quarter ended June 30, 2008, filed with the Commission
on August 8, 2008. |
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(16) |
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Incorporated by reference to Registrants annual report on Form
10-K/A for the period ended December 31, 2007, filed with the
Commission on July 11, 2008. |
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(17) |
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Incorporated by reference to Registrants annual report on Form 10-K
for the period ended December 31, |
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2008, filed with the Commission on
March 13, 2009. |
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(18) |
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Incorporated by reference to Registrants current report on Form 8-K,
filed with the Commission on June 11, 2010. |
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(19) |
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Previously filed as an exhibit to Registrants Annual Report on form
10-K, filed with the Commission on February 28, 2011. |
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(20) |
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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. Primes most
recently available audited consolidated financial statements (as of
and for the years ended December 31, 2010 and 2009) are attached as
Exhibit 99.1 to this Amendment No. 1 to the Annual Report on Form
10-K. Refer to our 2009 Form 10-K/A filed on April 9, 2010 for the
audited financial statements of Prime for the years ended December
31, 2009 and 2008. We have not participated in the preparation of
Primes financial statements nor do we have the right to dictate the
form of any financial statements provided to us by Prime. |
(21) |
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Included in this Form 10-K/A. |
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.
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MEDICAL PROPERTIES TRUST, INC.
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By: |
/s/ R. Steven Hamner
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R. Steven Hamner |
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Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer) |
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Date: April 11, 2011
INDEX TO EXHIBITS
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Exhibit |
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Number |
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Description |
23.1
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Consent of PricewaterhouseCoopers LLP |
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23.2
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Consent of Moss Adams LLP |
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31.1
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Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934 |
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31.2
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Certification of Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934 |
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99.1
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Consolidated Financial Statements of Prime Healthcare
Services, Inc. as of December 31, 2010 and 2009 |
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, 333-164889 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 25, 2011 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 28, 2011, which is incorporated by reference in this Amendment No. 1 to the Annual Report
on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Birmingham, Alabama
April 11, 2011
exv23w2
Exhibit 23.2
CONSENT
OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration Statements (Nos.
333-121883, 333-152301, 333-164889, and 333-141100) on Form S-3 and (Nos. 333-126574, 333-130337
and 333-161409) on Form S-8 of Medical Properties Trust, Inc. of our report dated April 8, 2011,
relating to the consolidated balance sheets of Prime Healthcare Services, Inc. and Subsidiaries as
of December 31, 2010 and 2009 and the related consolidated statements of income, stockholders
equity and cash flows for the years then ended, which report is included in this Annual Report of
Medical Properties Trust, Inc. (Form 10-K/A) for the year ended December 31, 2010.
/s/ Moss Adams LLP
Irvine, California
April 11, 2011
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) |
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I have reviewed this annual report on Form 10-K/A of Medical Properties Trust, Inc. |
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2) |
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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; |
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3) |
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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 11, 2011
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/s/ Edward K. Aldag, Jr.
Edward K. Aldag, Jr.
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Chairman, President and Chief Executive Officer |
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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) |
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I have reviewed this annual report on Form 10-K/A of Medical Properties Trust, Inc. |
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2) |
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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; |
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3) |
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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 11, 2011
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/s/ R. Steven Hamner
R. Steven Hamner
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Executive Vice President and Chief Financial Officer |
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exv99w1
Exhibit 99.1
Independent Auditors Report |
and Consolidated Financial Statements for |
Prime Healthcare Services, Inc. |
December 31, 2010 and 2009 |
Certified Public Accountants | Business Consultants |
Acumen, Agility, Answers. |
CONTENTS
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PAGE |
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INDEPENDENT AUDITORS REPORT |
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1 |
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CONSOLIDATED FINANCIAL STATEMENTS |
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Consolidated balance sheets |
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2-3 |
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Consolidated statements of income |
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4 |
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Consolidated statements of stockholders equity |
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5 |
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Consolidated statements of cash flows |
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6-7 |
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Notes to consolidated financial statements |
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8-34 |
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INDEPENDENT AUDITORS 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, 2010 and 2009, 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 Companys 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, 2010 and 2009, 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.
Irvine, California
April 8, 2011
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1
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PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
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DECEMBER 31, |
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2010 |
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2009 |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
77,159,641 |
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$ |
46,003,201 |
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Patient accounts receivable, net of
allowance for doubtful accounts of
$75,513,000 in 2010
and $76,665,000 in 2009 |
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211,696,750 |
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190,063,206 |
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Related party receivables |
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3,609,270 |
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848,105 |
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Notes receivable |
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2,000,000 |
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Estimated third-party payor settlements |
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64,975,818 |
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6,933,628 |
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Supplies inventory |
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6,032,664 |
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5,149,389 |
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Prepaid expenses and other current assets |
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67,482,488 |
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66,882,327 |
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Deposits |
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1,102,966 |
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2,607,902 |
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Total current assets |
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434,059,597 |
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318,487,758 |
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PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization |
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262,620,741 |
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205,492,387 |
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INSURANCE CLAIMS AND RESERVES RECOVERABLE |
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64,164,484 |
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46,318,954 |
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INVESTMENTS IN JOINT VENTURES |
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150,000 |
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150,000 |
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GOODWILL |
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13,707,803 |
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13,707,803 |
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OTHER ASSETS |
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21,550,654 |
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5,214,170 |
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$ |
796,253,279 |
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$ |
589,371,072 |
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2
LIABILITIES AND STOCKHOLDERS EQUITY
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DECEMBER 31, |
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2010 |
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2009 |
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CURRENT LIABILITIES |
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Accounts payable |
|
$ |
36,942,224 |
|
|
$ |
30,024,524 |
|
Accrued expenses |
|
|
76,158,133 |
|
|
|
67,914,649 |
|
Medical claims payable |
|
|
5,135,213 |
|
|
|
5,394,327 |
|
Related party payables |
|
|
|
|
|
|
50,000 |
|
Current portion of capital leases |
|
|
6,161,122 |
|
|
|
7,193,226 |
|
Current portion of long-term debt |
|
|
11,014,600 |
|
|
|
40,388,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
135,411,292 |
|
|
|
150,965,450 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
|
Sale lease-back liability |
|
|
68,000,000 |
|
|
|
143,000,000 |
|
Insurance claims liabilities and reserves |
|
|
64,164,484 |
|
|
|
46,318,954 |
|
Interest rate swap |
|
|
6,439,555 |
|
|
|
|
|
Capital leases, net of current portion |
|
|
7,328,405 |
|
|
|
14,322,308 |
|
Long-term debt, net of current portion |
|
|
250,986,875 |
|
|
|
72,207,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
396,919,319 |
|
|
|
275,849,065 |
|
|
|
|
|
|
|
|
|
|
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 |
|
Retained earnings |
|
|
114,674,021 |
|
|
|
49,980,544 |
|
Non-controlling interest |
|
|
149,245,647 |
|
|
|
112,573,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
263,922,668 |
|
|
|
162,556,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
796,253,279 |
|
|
$ |
589,371,072 |
|
|
|
|
|
|
|
|
3
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31, |
|
|
|
2010 |
|
|
2009 |
|
REVENUE |
|
|
|
|
|
|
|
|
Net patient service revenue |
|
$ |
1,556,162,877 |
|
|
$ |
1,544,421,821 |
|
Premium revenue |
|
|
24,322,191 |
|
|
|
22,635,296 |
|
Other revenue |
|
|
8,596,841 |
|
|
|
11,305,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
1,589,081,909 |
|
|
|
1,578,362,545 |
|
|
|
|
|
|
|
|
Compensation and employee benefits |
|
|
540,599,662 |
|
|
|
538,823,926 |
|
Provision for doubtful accounts |
|
|
264,700,509 |
|
|
|
383,393,440 |
|
General and administrative |
|
|
202,281,814 |
|
|
|
71,802,415 |
|
Supplies |
|
|
131,686,278 |
|
|
|
132,462,044 |
|
Professional services |
|
|
98,035,329 |
|
|
|
124,666,861 |
|
Rent and lease expense |
|
|
52,878,612 |
|
|
|
51,911,515 |
|
Depreciation and amortization |
|
|
29,418,170 |
|
|
|
25,533,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,319,600,374 |
|
|
|
1,328,593,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAIN FROM ACQUISITION |
|
|
13,272,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS |
|
|
282,754,411 |
|
|
|
249,768,788 |
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE, net |
|
|
(32,261,258 |
) |
|
|
(25,139,763 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE PROVISION FOR INCOME TAXES |
|
|
250,493,153 |
|
|
|
224,629,025 |
|
|
|
|
|
|
|
|
|
|
INCOME TAX PROVISION |
|
|
2,671,612 |
|
|
|
3,487,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE ALLOCATION TO NON-CONTROLLING INTEREST |
|
|
247,821,541 |
|
|
|
221,141,874 |
|
|
|
|
|
|
|
|
|
|
ALLOCATION OF INCOME TO NON-CONTROLLING INTEREST |
|
|
(141,244,753 |
) |
|
|
(128,098,593 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTROLLING INTEREST IN NET INCOME |
|
$ |
106,576,788 |
|
|
$ |
93,043,281 |
|
|
|
|
|
|
|
|
4
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Additional Paid in |
|
|
Note Receivable |
|
|
Retained |
|
|
Non-controlling |
|
|
|
|
|
|
Shares |
|
|
Stock |
|
|
Capital |
|
|
from Related Party |
|
|
Earnings |
|
|
Interest |
|
|
Total |
|
BALANCE, December 31, 2008 |
|
|
30 |
|
|
$ |
1 |
|
|
$ |
2,999 |
|
|
$ |
(3,110,975 |
) |
|
$ |
16,118,029 |
|
|
$ |
71,264,022 |
|
|
$ |
84,274,076 |
|
Repayment of notes receivable from Prime A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,110,975 |
|
|
|
|
|
|
|
|
|
|
|
3,110,975 |
|
Distribution of Encino Hospital Medical Center (note 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,318,335 |
) |
|
|
|
|
|
|
(32,318,335 |
) |
Cash distributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,584,554 |
) |
|
|
(92,067,479 |
) |
|
|
(113,652,033 |
) |
Controlling interest in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93,043,281 |
|
|
|
|
|
|
|
93,043,281 |
|
Non-controlling interest in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,098,593 |
|
|
|
128,098,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2009 |
|
|
30 |
|
|
|
1 |
|
|
|
2,999 |
|
|
|
|
|
|
|
55,258,421 |
|
|
|
107,295,136 |
|
|
|
162,556,557 |
|
Contributions from stockholder |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,410,000 |
|
|
|
2,410,000 |
|
Distribution of Montclair Hospital Medical Center (note 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,161,188 |
) |
|
|
|
|
|
|
(47,161,188 |
) |
Cash distributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101,704,242 |
) |
|
|
(101,704,242 |
) |
Controlling interest in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,576,788 |
|
|
|
|
|
|
|
106,576,788 |
|
Non-controlling interest in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,244,753 |
|
|
|
141,244,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2010 |
|
|
30 |
|
|
$ |
1 |
|
|
$ |
2,999 |
|
|
$ |
|
|
|
$ |
114,674,021 |
|
|
$ |
149,245,647 |
|
|
$ |
263,922,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31, |
|
|
|
2010 |
|
|
2009 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Income before allocation to non controlling interest |
|
$ |
247,821,541 |
|
|
$ |
221,141,874 |
|
Adjustments to reconcile controlling interest in net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
29,418,170 |
|
|
|
25,533,556 |
|
Loss (gain) on sale of assets |
|
|
(134,165 |
) |
|
|
22,000 |
|
Provision for doubtful accounts |
|
|
264,700,509 |
|
|
|
383,393,440 |
|
Gain on acquisition |
|
|
(13,272,876 |
) |
|
|
|
|
Change in interest rate swap |
|
|
2,138,505 |
|
|
|
|
|
Changes in assets and liabilities net of acquisitions/dispositions: |
|
|
|
|
|
|
|
|
Patient accounts receivable |
|
|
(277,399,333 |
) |
|
|
(408,779,166 |
) |
Supplies inventory |
|
|
(94,785 |
) |
|
|
587,579 |
|
Prepaid expenses and other assets |
|
|
(4,070,723 |
) |
|
|
(32,653,674 |
) |
Deposits |
|
|
1,504,936 |
|
|
|
810,164 |
|
Other assets |
|
|
(2,730,039 |
) |
|
|
(1,292,877 |
) |
Due to/ from related parties |
|
|
(2,811,165 |
) |
|
|
(423,434 |
) |
Accounts payable |
|
|
(1,805,096 |
) |
|
|
(4,917,547 |
) |
Accrued expenses |
|
|
(5,580,082 |
) |
|
|
(6,464,942 |
) |
Medical claims payable |
|
|
(259,114 |
) |
|
|
1,057,086 |
|
Estimated third-party payor settlements |
|
|
(62,157,789 |
) |
|
|
(7,280,299 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
175,268,494 |
|
|
|
170,733,760 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(21,811,864 |
) |
|
|
(24,268,158 |
) |
Proceeds from sale of property and equipment |
|
|
939,353 |
|
|
|
|
|
Cash paid for acquisitions, net of cash acquired |
|
|
(51,893,403 |
) |
|
|
|
|
Repayments (advances) on notes receivable |
|
|
(2,000,000 |
) |
|
|
1,050,000 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(74,765,914 |
) |
|
|
(23,218,158 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Payments of loan issuance costs |
|
|
(9,305,395 |
) |
|
|
|
|
Proceeds from long-term debt borrowing |
|
|
232,066,959 |
|
|
|
|
|
Lease buyout of Montclair Hospital Medical Center facility |
|
|
(20,041,610 |
) |
|
|
|
|
Repayments of sale lease-back borrowings |
|
|
(75,000,000 |
) |
|
|
(15,000,000 |
) |
Borrowings on lines of credit |
|
|
320,831,871 |
|
|
|
592,223,149 |
|
Repayments on lines of credit |
|
|
(373,554,707 |
) |
|
|
(599,910,426 |
) |
Payments on long term debt |
|
|
(29,939,175 |
) |
|
|
(1,982,989 |
) |
Payments on capital lease obligations |
|
|
(11,502,536 |
) |
|
|
(5,901,697 |
) |
Repayments on related party notes receivable |
|
|
|
|
|
|
3,110,975 |
|
Contributions from shareholder |
|
|
2,410,000 |
|
|
|
|
|
Cash distributions |
|
|
(101,704,242 |
) |
|
|
(113,652,033 |
) |
Distribution of Encino Hospital Medical Center |
|
|
|
|
|
|
(3,205,015 |
) |
Distribution of Montclair Hospital Medical Center |
|
|
(3,607,305 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(69,346,140 |
) |
|
|
(144,318,036 |
) |
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
31,156,440 |
|
|
|
3,197,566 |
|
CASH AND CASH EQUIVALENTS, beginning of year |
|
|
46,003,201 |
|
|
|
42,805,635 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of year |
|
$ |
77,159,641 |
|
|
$ |
46,003,201 |
|
|
|
|
|
|
|
|
6
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31, |
|
|
|
2010 |
|
|
2009 |
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
38,396,419 |
|
|
$ |
43,350,446 |
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
1,713,000 |
|
|
$ |
2,490,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Capital lease obligations incurred for the acquisition of property and equipment of property |
|
$ |
3,476,529 |
|
|
$ |
9,329,703 |
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
Non-cash distribution of Montclair Hospital Medical Center assets (Note 4) |
|
$ |
43,553,883 |
|
|
$ |
|
|
|
|
|
|
|
|
|
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 2,438 licensed beds located in various
communities throughout California. The Companys 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
|
|
|
83 |
|
|
Victorville |
Chino Valley Medical Center
|
|
|
126 |
|
|
Chino |
Sherman Oaks Hospital
|
|
|
153 |
|
|
Sherman Oaks |
* Montclair Hospital Medical Center
|
|
|
102 |
|
|
Montclair |
Huntington Beach Hospital
|
|
|
131 |
|
|
Huntington Beach |
La Palma Intercommunity Hospital
|
|
|
141 |
|
|
La Palma |
West Anaheim Medical Center
|
|
|
219 |
|
|
Anaheim |
Paradise Valley Hospital
|
|
|
301 |
|
|
National City |
Centinela Hospital Medical Center
|
|
|
370 |
|
|
Inglewood |
Garden Grove Hospital Medical Center
|
|
|
167 |
|
|
Garden Grove |
San Dimas Community Hospital
|
|
|
93 |
|
|
San Dimas |
Shasta Regional Medical Center
|
|
|
246 |
|
|
Redding |
Alvarado Hospital
|
|
|
306 |
|
|
San Diego |
|
|
|
* |
|
As of December 31, 2010, Montclair Hospital Medical Center was distributed by
the Company, on behalf of the controlling stockholder, who contributed Montclair
Hospital Medical Center to Prime Healthcare Services Foundation, Inc. (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 wholly owned hospital subsidiaries as described in Note 1 and the
following other wholly owned subsidiaries:
Prime Healthcare Services Alvarado Hospital, LLC
Bio-Med Services, Inc.
Prime Healthcare Services Los Angeles, LLC
8
Note 2 Organization and Summary of Significant Accounting Policies (Continued)
Basis of consolidation (continued) 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.
Sherman Oaks Medical Group Management, Inc.
Paradise Valley Medical Group, Inc.
Shasta Regional Medical Group, Inc.
Other entities:
Prime Healthcare Management, Inc.
Prime Healthcare Management Garden Grove, Inc.
Prime Healthcare Management San Dimas, Inc.
Prime Healthcare Management Encino, Inc.
Prime Healthcare Management Shasta, Inc.
Hospital Business Service, Inc.
Prime Healthcare Air Transport LLC
International Aircraft Investments LLC
The Company has determined that the medical groups are variable interest entities due to the
equity interest holders lack of ability to exercise control. The Company has determined
that the other entities are variable interest entities due to a lack of sufficient equity at
risk. The Company has also determined it is the primary beneficiary of the medical groups
and other entities because the Company has the power to direct activities that most
significantly impact the economic performance of these entities. Accordingly, the Company
has consolidated these entities into PHSI.
The equity of the variable interest entities have been reflected as a non-controlling
interest as of December 31, 2010 and 2009. 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
approximately $166,619,000 and $122,000,000 as of December 31, 2010 and 2009, respectively.
Total liabilities of these variable interest entities were approximately $13,844,000 and
$11,708,000 as of December 31, 2010 and 2009, 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 $33,379,000 and $20,000,000 for the years ended
December 31, 2010 and 2009, respectively. All intercompany accounts and transactions have
been eliminated upon consolidation.
9
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 Organization and Summary of Significant Accounting Policies (Continued)
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.
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
HMOs 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 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 are warranted. There was no significant impact to the
2010 and 2009 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.
10
Note 2 Organization and Summary of Significant Accounting Policies (Continued)
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.
Income taxes PHSI, Desert Valley Hospital, Chino Valley Medical Center, and Bio-Med
Services, Inc. are Sub chapter S Corporations. In addition, Desert Valley Hospital, Chino
Valley Medical Center and Bio-Med Services, Inc. are qualified Q subs of PHSI and are
included in the PHSI S corporation income tax return for the years ended December 31, 2010
and 2009. In lieu of corporate income taxes, the stockholders of PHSI will be taxed on
their proportionate share of PHSIs net income as defined by the Internal Revenue Code.
Alvarado Hospital, Prime Healthcare Services Alvarado Hospital, LLC, Huntington Beach
Hospital, La Palma Intercommunity Hospital, West Anaheim Medical Center, Montclair Hospital
Medical Center, Sherman Oaks Hospital, Paradise Valley Hospital, Centinela Hospital Medical
Center, Garden Grove Hospital Medical Center, San Dimas Community Hospital, Shasta Regional
Medical Center, and Prime Healthcare Services Los Angeles, LLC, 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, 2010 and 2009. 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, Desert Valley Medical Group, Inc., Prime Healthcare
Management, Inc., Sherman Oaks Medical Group Management, Inc., Paradise Valley Medical
Group, Inc., Hospital Business Service, Inc., Prime Healthcare Management Garden Grove,
Inc., Prime Healthcare Management San Dimas, Inc., Prime Healthcare Management Encino,
Inc., Shasta Regional Medical Group, Inc., and Prime Healthcare Management Shasta, Inc.,
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.
11
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 Organization and Summary of Significant Accounting Policies (Continued)
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 units 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, 2010 and 2009, 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 Companys 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.
Deferred loan issuance costs Deferred loan issuance costs are amortized over the term of
the loan (Note 7).
Recently Issued Accounting Standards Insurance Claims In August 2010, Accounting
Standards Update (ASU) 2010-24 Presentation of Insurance Claims and Related Insurance
Recoveries was released which provides further guidance on accounting by health care
entities for medical malpractice claims and similar liabilities and their related
anticipated insurance recoveries. The ASU specifies that a health care entity should not
net insurance recoveries against a related claim liability. ASU 2010-24 becomes effective
for all periods beginning after December 15, 2010, and can be early adopted. Management has
elected to early adopt ASU 2010-24 retroactively to January 1, 2009. The adoption increased
total assets and liabilities at December 31, 2010 and 2009 by $64,164,000 and $46,319,000,
respectively. The early adoption had no impact on PHSIs operating results for the years
ended December 31, 2010 and 2009.
Reclassification Certain prior year amounts were reclassified to conform to the current
year presentation.
12
Note 2 Organization and Summary of Significant Accounting Policies (Continued)
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 Companys 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 8, 2011, 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 Companys classification of patients under the Medicare program and the appropriateness
of their admissions are subject to an independent review.
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 $23,016,000 and $4,155,000 for the years ended December 31, 2010 and 2009,
respectively. The Company does not believe that there are significant credit risks
associated with this government agency.
13
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 Net Patient Service Revenue (Continued)
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 and Dispositions
During 2010 and 2009, 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 from the date of acquisition. Operating
results for the dispositions have been included in the accompanying consolidated financial
statements through the date of disposition.
14
Note 4 Acquisitions and Dispositions (Continued)
Effective December 31, 2009, the Company distributed the ownership interest of Encino
Hospital Medical Center 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 distribution of Encino Hospital Medical Center, all of Encino
Hospital Medical Centers liabilities were assumed by PHSI.
Effective December 31, 2010, the Company distributed the ownership interest of Montclair
Hospital Medical Center 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 |
|
$ |
3,607,305 |
|
Patient accounts receivable, net of allowance |
|
|
7,736,639 |
|
Supplies inventory |
|
|
194,487 |
|
Prepaid expenses and other current assets |
|
|
5,871,314 |
|
Property and equipment |
|
|
25,635,844 |
|
Estimated third-party payor settlements |
|
|
4,115,599 |
|
|
|
|
|
|
|
$ |
47,161,188 |
|
|
|
|
|
In conjunction with the distribution of Montclair Hospital Medical Center, all of
Montclair Hospital Medical Centers liabilities were assumed by PHSI.
15
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 Acquisitions and Dispositions (Continued)
On November 17, 2010, the Company entered into an asset purchase agreement with
Plymouth Health Investments LLC and a stock purchase agreement with Plymouth Health LLC.
The business acquired is a provider of general acute care services, consistent with the
Companys strategic growth plan. Pursuant to the agreements, the Company acquired all of
the outstanding equity interests and certain real estate from Plymouth Health Investments,
LLC, collectively Alvarado Hospital. The Company paid $55,000,000 in cash up front and an
additional $1,200,000 subsequent to closing to reimburse the prior owners for their portion
of the California Hospital Fee Program for a total of $56,200,000.
The following table presents the allocation of the aggregate purchase price:
|
|
|
|
|
|
|
Allocation at |
|
|
|
November 17, 2010 |
|
Cash and equivalents |
|
$ |
4,335,774 |
|
Accounts receivable |
|
|
16,671,359 |
|
Prepaids and other current assets |
|
|
2,400,752 |
|
Supplies inventory |
|
|
982,977 |
|
Land |
|
|
4,200,000 |
|
Building and land improvements |
|
|
50,153,593 |
|
Equipment and software |
|
|
13,303,960 |
|
Liabilities |
|
|
(22,546,362 |
) |
Gain on purchase |
|
|
(13,272,876 |
) |
|
|
|
|
Net cash consideration |
|
$ |
56,229,177 |
|
|
|
|
|
Note 5 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, 2010 and 2009 are comprised of the following:
government programs, primarily Medicare 31% and 26%, respectively, Medi-Cal 29% and 41%,
respectively, healthcare maintenance and preferred provider organizations (managed care
programs) 15% and 14%, respectively, and private pay and commercial insurance patients 25%
and 19%, 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 managements estimates.
16
Note 6 Property and Equipment
Property and equipment consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Land |
|
$ |
42,612,568 |
|
|
$ |
38,412,568 |
|
Buildings |
|
|
111,255,273 |
|
|
|
61,101,680 |
|
Building improvements |
|
|
21,992,507 |
|
|
|
18,523,416 |
|
Equipment |
|
|
167,086,257 |
|
|
|
138,796,293 |
|
Automobiles and aircraft |
|
|
9,134,900 |
|
|
|
9,134,900 |
|
Construction in progress (estimated cost to complete
at December 31, 2010 is approximately $15,812,000) |
|
|
7,557,968 |
|
|
|
8,755,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
359,639,473 |
|
|
|
274,724,211 |
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation and amortization |
|
|
(97,018,732 |
) |
|
|
(69,231,824 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
262,620,741 |
|
|
$ |
205,492,387 |
|
|
|
|
|
|
|
|
Gross property and equipment includes approximately $35,160,000 and $37,610,000 of
equipment under capital lease arrangements as of December 31, 2010 and 2009, respectively.
Related accumulated amortization totaled approximately $23,811,000 and $17,591,000 as of
December 31, 2010 and 2009, respectively.
Note 7 Long-Term Debt
During 2010, the Company entered into a credit agreement including Term Loan A and
Term Loan B with Royal Bank of Canada (RBC). A portion of the total proceeds of
$232,000,000 from Term Loan A and Term Loan B was used to pay off existing bank debt for
various amounts totaling $130,400,000. Approximately $9,500,000 of deferred loan issuance
costs were incurred relating to this credit agreement and are amortized over the term of the
loans. The balance is included within other assets.
The Companys Term Loan A and Term Loan B are subject to certain financial covenants
including 1) interest expense coverage ratio of not less than 3.00 to 1.00; 2) total
leverage ratio not to exceed 2.75 to 1.00 through September 30, 2012, 2.50 to 1.00 through
September 30, 2014, and 2.25 to 1.00 thereafter; 3) minimum liquidity of at least
$30,000,000; and 4) capital expenditures not exceeding the amount of $25,000,000 per fiscal
year.
17
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 Long-Term Debt (Continued)
Long-term debt consists of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Term A Loan with Royal Bank of Canada, secured by all assets
of the Company, payable in quarterly installments ranging from
$900,000 to $3,600,000 with final payment on maturity of $45
million, plus interest at LIBOR (greater of 2% or average British
Bankers Association Interest Settlement Rate) plus 4.25% on
Eurodollar Loans or 3.25% on Alternate Base Rate Loans
(6.25% at December 31, 2010) per annum, maturing in 2014.
PHSI is required to maintain certain financial and non financial
covenants relating to this loan. |
|
$ |
69,300,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Term B Loan with Royal Bank of Canada, secured by all assets
of the Company, payable in quarterly installments of $400,000
plus interest at interest at LIBOR (greater of 2% or average
British Bankers Association Interest Settlement Rate) plus
5.25% on Eurodollar Loans or 4.25% on Alternate Base Rate
Loans (7.25% at December 31, 2010) per annum, maturing in
2015. PHSI is required to maintain certain financial and non
financial covenants relating to this loan. |
|
|
158,800,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit with City National Bank, secured by accounts
receivable of Desert Valley Hospital, interest payable monthly
at an annual rate of prime of City National Bank. This line of
credit was paid off and closed on April 28, 2010, in connection
with the RBC Term A and B Loans. |
|
|
|
|
|
|
4,000,000 |
|
|
|
|
|
|
|
|
|
|
Term loans with GE Commercial Finance, secured by various
equipment of Desert Valley Hospital, 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. These term loans were
paid off and closed on April 28, 2010 in connection with the
RBC Term A and B Loans. |
|
|
|
|
|
|
1,080,604 |
|
18
Note 7 Long-Term Debt (Continued)
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Term loan with Siemens Financial Services, secured by certain
equipment of Prime Healthcare Air Transport LLC, payable in
monthly installments of approximately $75,000 including
interest at a fixed rate of 6.77% per annum, maturing in 2017. |
|
$ |
4,837,895 |
|
|
$ |
5,385,038 |
|
|
|
|
|
|
|
|
|
|
Term loan with City National Bank, secured by equipment of
Chino Valley Medical Center, interest payable monthly at an
annual rate of prime (3.25% at December 31, 2009) of City
National Bank. This term loan was paid off and closed on April
28, 2010. |
|
|
|
|
|
|
2,293,442 |
|
|
|
|
|
|
|
|
|
|
Bank note payable, secured by certain real estate of Desert
Valley Medical Group, bearing interest at 5.75% per annum,
payable in monthly payments of $1,258, maturing in August
2024. |
|
|
135,853 |
|
|
|
142,541 |
|
|
|
|
|
|
|
|
|
|
Note payable, secured by a vehicle, bearing interest at 3.90%
per annum, payable in monthly payments of $1,131, maturing
in July 2015. |
|
|
62,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable with City National Bank, secured by business
assets, bearing interest at an annual rate of prime (3.25% at
December 31, 2009) of City National Bank, principal payable in
monthly payment of $63,837, maturing September 1, 2012.
This note payable was paid off and closed on April 28, 2010 . |
|
|
|
|
|
|
2,106,603 |
|
|
|
|
|
|
|
|
|
|
Note payable with Medical Properties Trust secured by certain
equipment of Sherman Oaks Hospital, bearing a fixed interest
rate of 10.64% per annum as of December 31, 2009. Interest
only payment due monthly, principal balance due at maturity
on December 30, 2020. This note payable was paid off and
closed on April 28, 2010. |
|
|
|
|
|
|
5,000,000 |
|
|
|
|
|
|
|
|
|
|
Note payable with Medical Properties Trust secured by certain
equipment of Montclair Hospital Medical Center 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. This note payable was paid off and closed on
April 28, 2010. |
|
|
|
|
|
|
5,000,000 |
|
19
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 Long-Term Debt (Continued)
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Note payable with Medical Properties Trust secured by certain
equipment and purchase options of Huntington Beach Hospital,
La Palma Intercommunity Hospital, and West Anaheim Medical
Center bearing a fixed interest rate of 10.27% per annum as of
December 31, 2009. This note payable was paid off and closed
on April 28, 2010. |
|
$ |
|
|
|
$ |
10,000,000 |
|
|
|
|
|
|
|
|
|
|
Line of credit with Medical Properties Trust, interest payable
monthly at an annual rate of 9.25% as of December 31, 2009,
maturing in November 2018. Shasta Regional Medical Center is
required to maintain certain financial and non-financial
covenants at year end. At December 31, 2009, there were no
available borrowings under this line of credit. This line of
credit was paid off and closed on April 28, 2010. |
|
|
|
|
|
|
20,000,000 |
|
|
|
|
|
|
|
|
|
|
Note payable with Medical Properties Trust secured by certain
property and equipment and lease deposits of Paradise Valley
Hospital, bearing a fixed interest rate of 9.59% per annum as of
December 31, 2010. Interest only payments due monthly,
principal balance due at maturity on May 6, 2022. |
|
|
25,000,000 |
|
|
|
25,000,000 |
|
|
|
|
|
|
|
|
|
|
Lines of credit with Healthcare Finance Group (HFG), secured
by accounts receivable of Huntington Beach Hospital, La Palma
Intercommunity Hospital and West Anaheim Medical Center,
interest payable monthly at an annual rate of the greater of
2.75% or LIBOR + 3.50% (5.5% at December 31, 2010),
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, 2010,
approximately $3,000,000, $3,723,000, and $5,907,000,
respectively, were available under these lines. |
|
|
2,073,629 |
|
|
|
12,145,429 |
|
|
|
|
|
|
|
|
|
|
Line of credit with HFG, secured by accounts receivable and
inventory of Sherman Oaks Hospital, interest payable monthly
at an annual rate of the greater for 2.75% or LIBOR + 3.00%
(5.50% at December 31, 2010), maturing in February 2013.
SOH is required to maintain certain financial and non-financial
covenants at year end. At December 31, 2010, approximately
$6,484,000 was available under this line. |
|
|
516,231 |
|
|
|
5,087,016 |
|
20
Note 7 Long-Term Debt (Continued)
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Line of credit with HFG, secured by accounts receivable and
inventory of Centinela Hospital Medical Center, 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. Centinela Hospital Medical Center is required to
maintain certain financial and non-financial covenants at year
end. This line of credit was paid off and closed on April 28,
2010 in connection with the RBC Term A and B Loans. |
|
$ |
|
|
|
$ |
4,580,801 |
|
|
|
|
|
|
|
|
|
|
Line of credit with HFG, secured by accounts receivable and
inventory of Chino Valley Medical Center, interest payable
monthly at an annual rate of the greater of 2.75% or LIBOR +
2.50% (5.25% at December 31, 2010), maturing in September
2011. Chino Valley Medical Center is required to maintain
certain financial and non-financial covenants at year end. At
December 31, 2010, approximately $7,487,000 was available
under this line. |
|
|
500,000 |
|
|
|
2,243,899 |
|
|
|
|
|
|
|
|
|
|
Line of credit with HFG, secured by accounts receivable and
inventory of Paradise Valley Hospital, interest payable monthly
at an annual rate of the greater for 2.75% or Libor + 2.50%
(5.25% at December 31, 2010), maturing in December 2011.
Paradise Valley Hospital is required to maintain certain
financial & non-financial covenants at year end. At December
31, 2010, approximately $9,224,000 was available under this
line. |
|
|
775,603 |
|
|
|
8,531,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
262,001,475 |
|
|
|
112,596,527 |
|
|
|
|
|
|
|
|
|
|
Less current portion |
|
|
(11,014,600 |
) |
|
|
(40,388,724 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
250,986,875 |
|
|
$ |
72,207,803 |
|
|
|
|
|
|
|
|
21
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 Long-Term Debt (Continued)
Aggregate annual principal maturities of long-term debt for the five years subsequent
to December 31, 2010 and thereafter, are as follows:
|
|
|
|
|
Years ending December 31, |
|
|
|
|
2011 |
|
$ |
11,014,600 |
|
2012 |
|
|
8,995,637 |
|
2013 |
|
|
14,890,305 |
|
2014 |
|
|
47,338,050 |
|
2015 |
|
|
153,187,467 |
|
Thereafter |
|
|
26,575,416 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
262,001,475 |
|
|
|
|
|
The lines of credit 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.
22
Note 8 Interest rate swap
In conjunction with the RBC Term B Loan, the Company entered into an interest rate
swap and floor agreement with a commercial bank. The swap agreement serves to convert the
underlying variable interest rates of the Term Loans. The swap has not been designated as an
effective cash flow hedge for accounting purposes, therefore changes in the fair value of the
swap are recorded as interest expense.
Interest rate swaps are valued using observable inputs, such as quotations received from the
counterparty, dealers or brokers, whenever available and considered reliable. In instances
where models are used, the value of the interest rate swap depends upon the contractual terms
of, and specific risks inherent in, the instrument as well as the availability and
reliability of observable inputs. Such inputs include market prices for reference securities,
yield curves, credit curves, measures of volatility, prepayment rates, assumptions for
nonperformance risk, and correlations of such inputs. The interest rate swap arrangements
have inputs which can generally be corroborated by market data and are therefore classified
within level 2. The fair value of the interest rate swap liability of $6,439,555 and
interest rate floor asset of $4,301,050 are included within long term liabilities and other
assets, respectively, at December 31, 2010. The net change in value of $2,138,505 is
included within interest expense for the year ended December 31, 2010.
Note 9 Leases
In May 2007, in connection with the acquisition of certain assets of Adventist,
Paradise Valley Hospital 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,
Paradise Valley Hospital leased back the real estate and hospital building (leased
property) in a lease agreement which expires in May 2022. Paradise Valley Hospital 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 Paradise Valley Hospital has the option to purchase the
leased property for $23,000,000. If at the end of the lease term, including renewal terms,
Paradise Valley Hospital does not exercise its option to purchase the leased property,
Paradise Valley Hospital 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.
23
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 Leases (Continued)
In November 2007, in connection with the acquisition of certain assets of CFHS
Holdings, Inc., Centinela Hospital Medical Center sold the real estate and related hospital
building acquired from CFHS to the REIT. As part of the sale, Centinela Hospital Medical
Center leased back the real estate and hospital building (leased property) in a lease
agreement which expires in November 2022. Centinela Hospital Medical Center 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 Centinela Hospital Medical Center has the option to purchase
the leased property for $75,000,000. If at the end of the lease term, including renewal
terms, Centinela Hospital Medical Center does not exercise its option to purchase the leased
property, Centinela Hospital Medical Center 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. During 2010, in connection with the RBC refinancing transaction, the
$75,000,000 was paid off and the lease was terminated.
In November 2008, in connection with the acquisition of certain assets of Tenet (see Note
4), San Dimas Community Hospital sold the real estate and related hospital and medical
office buildings acquired from Tenet to the REIT. As part of the sale, San Dimas Community
Hospital 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. San Dimas
Community Hospital 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 San Dimas Community Hospital
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, San Dimas Community Hospital does not exercise its
option to purchase the leased property, San Dimas Community Hospital 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 lease-back 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.
24
Note 9 Leases (Continued)
In November 2008 in connection with the acquisition of certain assets of Tenet (see
Note 4) Garden Grove Hospital Medical Center sold the real estate and related hospital and
medical office buildings acquired from Tenet to the REIT. As part of the sale, Garden Grove
Hospital Medical Center 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. Garden Grove Hospital Medical Center 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 Garden Grove Hospital Medical Center 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, Garden Grove Hospital Medical Center does not exercise its option to purchase the
leased property, Garden Grove Hospital Medical Center 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.
The Companys sales lease back liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
Hospital |
|
2010 |
|
|
2009 |
|
Paradise Valley Hospital |
|
$ |
23,000,000 |
|
|
$ |
23,000,000 |
|
Centinela Hospital Medical Center |
|
|
|
|
|
|
75,000,000 |
|
San Dimas Community Hospital |
|
|
13,000,000 |
|
|
|
13,000,000 |
|
San Dimas Medical Office Building |
|
|
7,000,000 |
|
|
|
7,000,000 |
|
Garden Grove Hospital Medical Center |
|
|
16,250,000 |
|
|
|
16,250,000 |
|
Garden Grove Medical Office Building |
|
|
8,750,000 |
|
|
|
8,750,000 |
|
|
|
|
|
|
|
|
|
|
$ |
68,000,000 |
|
|
$ |
143,000,000 |
|
|
|
|
|
|
|
|
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%.
25
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 Leases (Continued)
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 Desert Valley
Hospitals 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. On December 28, 2009, Desert Valley Hospital
and Prime A entered into an agreement with MPT to borrow up to $20 million to fund a
hospital expansion project. Desert Valley Hospital makes monthly interest payments at the
stated rate of 10.67% of the outstanding balance.
On March 1, 2007, the Company entered into a lease agreement with Prime A to lease Chino
Valley Medical Centers hospital building and land. The initial lease term is 180 months
(15 years). The lease provided for an 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 sale leaseback transactions and the related
party leases for Desert Valley Hospital and Chino Valley Medical Centers hospital
buildings, the Company also leases the hospital properties and related other medical office
buildings for Huntington Beach Hospital, La Palma Intercommunity Hospital, West Anaheim
Medical Center, and Shasta Regional Medical Center from the REIT. The significant terms of
the leases are as follows:
The Huntington Beach Hospital 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 La Palma Intercommunity Hospital 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 West Anaheim Medical Center 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 Shasta Regional Medical Center 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.
The Sherman Oaks Hospital facility lease expires in December 2020. The lease provides
for monthly rent payments of approximately $182,000 at inception, which is adjusted
annually based on the consumer price index.
26
Note 9 Leases (Continued)
Lease expense, consisting primarily of building rent and equipment leases, amounted
to approximately $53,680,000 and $52,456,000 for the years ended December 31, 2010 and 2009
respectively.
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, 2010, are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
Sale |
|
|
|
Capital |
|
|
Lease |
|
|
Leaseback |
|
Years ending December 31, |
|
Leases |
|
|
Commitments |
|
|
Commitments |
|
2011 |
|
$ |
6,868,288 |
|
|
$ |
45,305,370 |
|
|
$ |
7,122,079 |
|
2012 |
|
|
6,399,265 |
|
|
|
43,631,098 |
|
|
|
7,264,521 |
|
2013 |
|
|
1,314,252 |
|
|
|
42,962,642 |
|
|
|
7,409,811 |
|
2014 |
|
|
|
|
|
|
41,554,495 |
|
|
|
7,558,007 |
|
2015 |
|
|
|
|
|
|
39,473,963 |
|
|
|
7,709,167 |
|
Thereafter |
|
|
|
|
|
|
200,755,929 |
|
|
|
100,635,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum payments |
|
|
14,581,805 |
|
|
$ |
413,683,497 |
|
|
|
137,698,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less amounts representing interest |
|
|
(1,092,278 |
) |
|
|
|
|
|
|
(69,698,709 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,489,527 |
|
|
|
|
|
|
|
68,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion |
|
|
(6,161,122 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,328,405 |
|
|
|
|
|
|
$ |
68,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
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.
27
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 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 policys termination may be uninsured. Under
the current policy the medical groups of PHSI are covered up to a $1,000,000 per claim and
$3,000,000 general aggregate limit with no amount deductible. The hospitals of PHSI are
covered up to a $3,000,000 per claim and $15,000,000 general aggregate limit with no amount
deductible. Excess losses up to an additional $7,000,000 per incident and $14,000,000
general aggregate will be insured by CNA Insurance Company. The Company renewed its claims
made policy with DVIL for the next policy year ending December 31, 2011, under the same
terms.
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 policys 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 2011.
The Company began a medical insurance program with DVIL for healthcare coverage for
employees effective January 1, 2010. The initial policy term was through December 31, 2010,
and the Company has renewed this policy through December 31, 2011. Under the terms of the
agreement, DVIL is obligated to insure each employee medical claim subject to a deductible
of $500 per claim and up to a maximum of $250,000 per claim. Claims are adjudicated by an
independent third party administrator with anticipated stop-loss coverage by commercial
carriers for claims in excess of $250,000.
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 Companys 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 Companys
consolidated financial position.
28
Note 10 Professional Liability, and Workers Compensation, Healthcare and Earthquake
Insurance (Continued)
The Company has evaluated whether they are required to consolidate DVIL in accordance
with ASC 810 as of December 31, 2010, and has determined that DVIL is not a variable
interest entity and 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 and medical professional and general liability insurance.
DVIL had total assets of approximately $193,000,000 and $139,000,000 as of December 31, 2010
and 2009, respectively. DVIL had total admitted assets of approximately $185,000,000 and
$131,000,000 and total equity of approximately $35,000,000 and $29,000,000 as of December
31, 2010 and 2009, respectively.
Note 11 Related Party Transactions
Notes receivable from related parties as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Receivable from DVIL, related to
expenses incurred in excess of
deductibles. |
|
$ |
3,387,798 |
|
|
$ |
719,063 |
|
|
|
|
|
|
|
|
|
|
Various |
|
|
221,472 |
|
|
|
129,042 |
|
|
|
|
|
|
|
|
|
|
$ |
3,609,270 |
|
|
$ |
848,105 |
|
|
|
|
|
|
|
|
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 (see Note 10). Insurance
premiums paid to DVIL totaled $106,686,000 and $53,998,000 for the years ended December 31,
2010 and 2009, respectively. The Company receives reimbursement from DVIL for workers
compensation insurance deductibles paid on behalf of DVIL. As of December 31, 2010, the
Company has recorded a prepaid insurance expense of approximately $23,631,000 related to
workers compensation and malpractice, and approximately $37,444,000 for healthcare coverage
being provided by DVIL in future years.
The Company leases certain office buildings and parking facilities from Prime A (Note 9).
The leases are for five year terms. Rent expense incurred under these leases was $6,184,000
and $5,463,990 for the years ended December 31, 2010 and 2009, respectively.
29
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 Related Party Transactions (Continued)
During 2007, the Company entered into agreements with Prime A to lease the hospital
buildings and land at Desert Valley Hospital and Chino Valley Medical Center. The leases
are for 15-year terms (Note 9). Rent payments made under these leases totaled approximately
$14,260,107 and $9,874,000 for the years ended December 31, 2010 and 2009, respectively.
During 2006 and through February 11, 2007, Desert Valley Hospital leased its facilities
under a non-cancelable 15 year operating lease with Medical Properties Trust (MPT). On
February 12, 2007, as provided by the lease agreement, the Desert Valley Hospital exercised
its option to purchase the facility. Prime A Investments, LLC, an entity under common
control, purchased the building for $28,000,000 which was based on a formula contained in
the lease agreement with MPT. The purchase was financed by a first trust deed mortgage with
MPT. The mortgage bears interest at 9% per annum and has an outstanding balance of
$70,000,000 as of December 31, 2010. As additional security for the first trust deed
mortgage, Desert Valley Hospital is listed as the co-borrower with Prime A. The first trust
deed mortgage is not secured by any assets of Desert Valley Hospital. Management has a
reasonable basis to believe that the fair market value of the real estate and building are
sufficient to satisfy the first trust deed mortgage in the event of default and accordingly
the likelihood of Desert Valley Hospital being required to satisfy the first trust deed
mortgage is remote. As a result, the liability associated with the first trust deed mortgage
was not recorded as a liability of PHSI in the consolidated financial statements as of
December 31, 2010 and 2009.
On December 28, 2009, Desert Valley Hospital and Prime A Investments, LLC, as co-borrowers,
entered into a promissory note with MPT in the amount of $20,000,000 to fund the expansion
of Desert Valley Hospitals facilities. The promissory note bears interest at 10.67% per
annum and has an outstanding balance of $20,000,000 as of December 31, 2010. The first
trust deed mortgage is not secured by any assets of Desert Valley Hospital. Management has a
reasonable basis to believe that the fair market value of the hospital building expansion is
sufficient to satisfy the promissory note in the event of default and accordingly the
likelihood of Desert Valley Hospital being required to satisfy the promissory note is
remote. As a result, the liability associated with the first trust deed mortgage was not
recorded as a liability of PHSI in the consolidated financial statements as of December 31,
2010 and 2009.
30
Note 11 Related Party Transactions (Continued)
During 2006 and through February 28, 2007, Chino Valley Medical Center leased its
facilities under a non-cancelable 15-year operating lease with Medical Properties Trust
(MPT). On March 1, 2007, as provided by the lease agreement, Chino Valley Medical Center
exercised its option to purchase the facility. Prime A Investments, LLC, an entity under
common control, purchased the building for $21,000,000 which was based on a formula
contained in the lease agreement with MPT. The purchase was financed by a first trust deed
mortgage with MPT. The mortgage bears interest at 9.73% per annum and has an outstanding
balance of $50,000,000 as of December 31, 2010. As additional security for the first trust
deed mortgage Chino Valley Medical Center is listed as the co-borrower with Prime A. The
first trust deed mortgage is not secured by any assets of Chino Valley Medical Center.
Management has a reasonable basis to believe that the fair market value of the real estate
and building are sufficient to satisfy the first trust deed mortgage in the event of default
and accordingly the likelihood of Chino Valley Medical Center being required to satisfy the
first trust deed mortgage is remote. As a result, the liability associated with the first
trust deed mortgage was not recorded as a liability of PHSI in the consolidated financial
statements as of December 31, 2010 and 2009.
Note 12 Retirement Savings Plan
The Company has a defined contribution pension plan covering substantially all of its
employees. The Companys contribution to the plan is at the Companys 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, 2010 and 2009, the
Company made contributions of $3,910,061and $3,918,323, respectively, to the plan.
Note 13 Contingencies
The Company is aware of certain asserted and unasserted legal claims arising in the
normal course of business. While the outcomes cannot be determined at this time, it is
managements opinion that the liability, if any, from these actions will not have a material
adverse effect on the Companys financial position.
31
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 Contingencies (Continued)
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 Companys financial position.
Management believes that the Company is in compliance with government laws and regulations
related to fraud and abuse and other applicable areas. 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 14 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.
Note 15 Hospital Fee
The California Hospital Fee Program (the Program) was signed into law by the
Governor of California and became effective on January 1, 2010. Amending legislation to
conform to changes requested by the Centers for Medicare and Medicaid Services (CMS) during
the approval process was signed into law on September 8, 2010 by the Governor of California.
The Program required a hospital fee or Quality Assurance Fee (QA Fee) to be paid by
certain hospitals to a State fund established to accumulate the assessed QA Fees and receive
matching federal funds. QA Fees and corresponding matching federal funds are then paid to
participating hospitals in two supplemental payment methodologies, a fee-for-service
methodology and a managed care plan methodology.
32
Note
15 Hospital Fee (continued)
CMS approved Californias State Plan Amendment and Waiver as of October 7, 2010
allowing the State to implement the QA Fee and the fee-for-service Supplemental Payment
methodology of the legislation. Final approval of the program was effective December 30,
2010, and expense and revenue is recognized for retroactive periods in this period.
The period covered by the Program included a substantial retroactive federal matching
component, including all or a portion of the 2008-2009 and 2009-2010 federal fiscal years.
The QA Fee assessment and fee-for-service Supplemental Payments for approved periods were
assessed and paid in installments through December 2010.
Based on formulas contained in the legislation as well as modeling done by the California
Hospital Association, the Company recognized $157,540,000 in revenue and $132,574,000 in
General and Administrative expense related to the program for the year ended December 31,
2010. At December 31, 2010, the Company has recorded a receivable of $50,041,000 included
within Estimated Third-Party Payor Settlements.
Note 16 Labor Relations
Centinela Hospital Medical Center
SEIU-UHW represents approximately 800 employees at Centinela Hospital Medical Center and the
California Nurses Association (CNA) represents approximately 400 registered nurses at
Centinela Hospital Medical Center. The collective bargaining agreement with SEIU-UHW
terminated on December 31, 2009 and efforts to negotiate the terms of a new collective
bargaining agreement have been unsuccessful to date. The collective bargaining agreement
with CNA terminated on or about March 31, 2010 subject to certain agreed upon extensions
which are no longer in effect. Subject to certain exceptions, the terms and conditions of
employment as of the date on which the collective bargaining agreements terminated remain in
place until such time that new agreements are reached.
Garden Grove Hospital Medical Center
SEIU-UHW represents approximately 400 employees at Garden Grove Hospital Medical Center and
the United Nurses Association of California (UNAC) represents approximately 250 registered
nurses at Garden Grove Hospital Medical Center. The collective bargaining agreement with
SEIU-UHW terminated on March 31, 2011. Subject to certain exceptions, the terms and
conditions of employment as of the date on which the collective bargaining agreement with
SEIU terminated remain in place until such time that a new agreement is reached. The
collective bargaining agreement with UNAC remains in place until such time as an arbitrator
issues a ruling on the terms of a new agreement.
33
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
16 Labor Relations (continued)
Alvarado Hospital
CNA represents approximately 200 registered nurses at Alvarado Hospital. Although the term
of the collective agreement expired on February 28, 2011, the collective bargaining agreement
with CNA remains in place subject to either partys right to terminate the agreement by
providing advance written notice of its intent to terminate the agreement.
Shasta Regional Medical Center
Shasta Regional Medical Center received a petition from more than 50% of the 140 employees
represented by SEIU-UHW indicating that they no longer wished to be represented by SEIU-UHW.
Based on this petition, Shasta Regional Medical Center unilaterally withdrew recognition of
SEIU-UHW on January 5, 2011.
Note 17 Subsequent Event
In February 2011, the Company entered into an agreement to sell the land and buildings
acquired in the November 2010 Alvarado Hospital acquisition (see Note 4) to the REIT. As
part of the sale, Alvarado Hospital leased back the hospital and related land in a lease
agreement which expires in February 2021. Alvarado Hospital has options to extend the terms
of the lease for three additional five year periods. After ten years or at the end of the
lease term Alvarado Hospital has the option to purchase the leased property for $70,000,000
for the hospital and related land. If at the end of the lease term, including renewal terms,
Alvarado Hospital does not exercise its option to purchase the leased property, Alvarado
Hospital 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 $70,000,000. Due to the guarantee included
in the lease, this transaction was recognized as a finance obligation in 2011. The proceeds
of $70,000,000 will be recorded as sale lease-back liabilities on the consolidated balance
sheet from February 2011 forward. The lease provides for a monthly base rent of $606,667,
which is adjusted annually based on the change in the consumer price index.
34