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LISA HILL FENNING (SBN 89238) HARRY GARNER (SBN 254942) ARNOLD & PORTER LLP 777 South Figueroa Street, 44th Floor Los Angeles, California 90017 Telephone: 213.243.4000 Facsimile: 213.243.4199 Lisa.Fenning@aporter.com Harry.Garner@aporter.com Counsel to Debtor and Debtor-in-Possession UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA LOS ANGELES DIVISION In re Case No.: 09-bk-34714-BB DOWNEY REGIONAL MEDICAL CENTERHOSPITAL, INC., a California non-profit, public benefit corporation, Debtor. Chapter 11 DISCLOSURE STATEMENT DESCRIBING CHAPTER 11 PLAN OF REORGANIZATION PROPOSED BY DOWNEY REGIONAL MEDICAL CENTER-HOSPITAL, INC. (DATED APRIL 20, 2010) Disclosure Statement Hearing Date: Time: Ctrm: May 26, 2010 2:00 p.m. Courtroom: 1475 United States Bankruptcy Court 255 E. Temple Street Los Angeles, CA 90012
15 16 17 18 19 20 21 22 23 24 25 26 _______________________________________ 27 28 Tax I.D. 95-1903935
Plan Confirmation Hearing Date: Time: Ctrm: July 1, 2010 10:00 a.m. Courtroom: 1475 United States Bankruptcy Court 255 E. Temple Street Los Angeles, CA 90012
LA: 577985v13
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TABLE OF CONTENTS Page INTRODUCTION.................................................................................................................... 1 A. B. C. Purpose of This Document........................................................................................... 2 Deadlines for Voting and Objecting; Date of Plan Confirmation Hearing.................. 3 Disclaimer .................................................................................................................... 4
BACKGROUND ..................................................................................................................... 4 A. B. Description and History of Debtors Business............................................................. 4 Principals/Affiliates of Debtors Business ................................................................... 5 Management of Debtor Before and After the Bankruptcy........................................... 5 Events Leading to the Chapter 11 Filing ..................................................................... 6 Significant Events During the Bankruptcy .................................................................. 7 1. 2. 3. 4. First Day Motions Heard on Shortened Time .................................................. 7 Early Case Motions .......................................................................................... 9 Committee Adversary Complaints................................................................. 13 Actual and Projected Recovery of Preferential or Fraudulent Transfers ....... 13
INVESTIGATION REGARDING PLAN ALTERNATIVES AND SELECTION OF PIH 15 A. Solicitation and Development of Proposals ............................................................... 16 1. 2. 3. 4. First Motion to Extend Plan Exclusivity........................................................ 17 The DCHS Letter of Intent............................................................................. 17 The Prime Motion to Terminate Plan Exclusivity ......................................... 18 The Second Exclusivity Extension Motion.................................................... 18 The PIH Letter of Intent................................................................................. 18
The Principles Guiding Debtors Evaluation of the Affiliation Alternatives ............ 19 Comparison with the Prime Proposal......................................................................... 20 1. 2. Total Consideration........................................................................................ 21 Percentage Recovery...................................................................................... 21 i
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Effect on Community and Debtors Constituencies: ..................................... 22
SUMMARY OF THE PLAN OF REORGANIZATION ...................................................... 23 A. B. What Creditors Will Receive Under The Proposed Plan ........................................... 23 Unclassified Claims ................................................................................................... 23 1. Administrative Expense Claims..................................................................... 23 a. b. c. Court Approval of Professional Fees Required ................................. 25 503(b)(9) Claims and Reclamation Claims........................................ 25 Treatment of Administrative Expense Claims, Reclamation Claims, Cure Payments, 503(b)(9) Claims, Clerks Office Fees, and U.S. Trustee Fees: ....................................................................... 26
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1. E. D. 9. C. 2.
Priority Tax Claims ........................................................................................ 26
Classified Claims ....................................................................................................... 26 1. 2. 3. 4. 5. 6. 7. 8. Class 1--Priority Claims (Other than Priority Tax Claims) ........................... 26 Classes 2A, 2B, 2C and 2D--Secured Claims ................................................ 27 Class 3-- Assumed Employee PTO Claims ................................................... 32 Class 4 -- Convenience Class Claims............................................................. 33 Class 5 -- General Unsecured Claims (Not Otherwise Classified) ................ 34 Class 6 -- Risk-Share Claims ......................................................................... 35 Class 7 -- Health Plan Loan Claims ............................................................... 36 Class 8 -- Capitation Provider Claims (Overlapping with PacifiCare Proof of Claim) ........................................................................................................ 37 Class 9 -- Interest Holders.............................................................................. 39
Means of Funding and Implementing the Plan .......................................................... 39 1. 2. 3. Funding for the Plan....................................................................................... 40 Post-Confirmation Management .................................................................... 42 Disbursing Agent ........................................................................................... 42
Objections to Claims .................................................................................................. 43 Manner of Cash Payments Under the Plan .................................................... 43 ii
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2. 3. 4. 5.
No Distributions With Respect to Disputed Claims ...................................... 43 Delivery of Distributions ............................................................................... 43 Undeliverable and Unclaimed Distributions.................................................. 44 Estimation of Disputed Claims for Distribution Purposes............................. 44
Full Satisfaction ......................................................................................................... 45 Setoff, Recoupment, and Other Rights ...................................................................... 45 Conditions to Effectiveness........................................................................................ 45 1. Conditions ...................................................................................................... 45 Waiver of Conditions ..................................................................................... 46
9 10 11 12 13 14 15 16 17 18 19 20 21 22 10. 23 K. 24 25 26 27 28 2. 3. 1. Executory Contracts and Unexpired Leases .................................................. 52 a. Assumptions....................................................................................... 52 Other Provisions of the Plan ...................................................................................... 52 Non-Occurrence of the Effective Date........................................................... 52 I. J. 2. Authorization of Entity Action................................................................................... 46 Risk Factors................................................................................................................ 46 1. 2. 3. 4. 5. 6. 7. 8. 9. General Risks of the Health Care Industry .................................................... 47 Competition.................................................................................................... 47 Governmental Regulations............................................................................. 48 Uncertainty of Future Reimbursement Levels ............................................... 48 Referral Restrictions and Fraud and Abuse ................................................... 49 Pending Legislation........................................................................................ 50 Environmental Regulation ............................................................................. 51 General Economic Slowdown........................................................................ 51 Reliance on Key Personnel ............................................................................ 52
Cure Payments ............................................................................................... 53 Objections to Assumption............................................................................ 53
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4. 5.
Resolution of Claims Relating to Assumed Agreements .......................... 54 Reservation of Fair and Equitable (Cram Down) Power ............................... 54
Rejection of Executory Contracts and Unexpired Leases.......................................... 54 1. 2. 3. 4. Rejected Agreements.................................................................................... 54 Bar Date for Rejection Damage Claims...................................................... 54 Postpetition Contracts and Leases .............................................................. 55 Changes in Rates Subject to Regulatory Commission Approval................... 55
Retention of Jurisdiction ............................................................................................ 55 Tax Consequences of Plan ......................................................................................... 55 1. 2. 3. 4. Federal Income Tax Consequences To Debtor .............................................. 56 Tax Consequences To Creditors .................................................................... 56 Withholding ................................................................................................... 56 Taxation Of Certain Reserves ........................................................................ 56
CONFIRMATION REQUIREMENTS AND PROCEDURES ............................................ 57 A. Who May Vote or Object........................................................................................... 57 1. 2. Who May Object to Confirmation of the Plan ............................................... 57 Who May Vote to Accept or Reject the Plan................................................. 57 a. b. 3. 4. What Is an Allowed Claim or Interest................................................ 57 What Is an Impaired Claim ................................................................ 58
Who is Not Entitled to Vote........................................................................... 58 Who Can Vote in More Than One Class ....................................................... 59 Votes Necessary to Confirm the Plan ............................................................ 59 Votes Necessary for a Class to Accept the Plan ............................................ 59 Treatment of Nonaccepting Classes............................................................... 59 Request for Confirmation Despite Nonacceptance by Impaired Classes....... 59
23 5. 24 25 26 27 28 B. 6. 7. 8.
Liquidation Analysis .................................................................................................. 60
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Feasibility................................................................................................................... 62
EFFECT OF CONFIRMATION OF PLAN .......................................................................... 63 A. B. C. D. E. F. Discharge.................................................................................................................... 63 Exculpation: No Liability for Solicitation or Prosecution of Confirmation .............. 63 Revesting of Property in Debtor ................................................................................ 63 Preservation of Restricted Funds for Charitable Purposes......................................... 64 Preservation and Assignment of Rights of Action..................................................... 64 Modification of Plan .................................................................................................. 64 Dissolution of Creditors Committee ......................................................................... 65 Post-Confirmation Status Report ............................................................................... 65 Quarterly Fees ............................................................................................................ 65 Post-Confirmation Conversion/Dismissal.................................................................. 65 Final Decree ............................................................................................................... 66
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 VII. G. H. I. J. K.
RECOMMENDATION ......................................................................................................... 66
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I.
INTRODUCTION Downey Regional Medical Center-Hospital, Inc. (the Debtor)1 is a debtor in a Chapter 11
bankruptcy case (the Case). On September 14, 2009 (Petition Date), Debtor commenced the Case by filing a voluntary Chapter 11 petition under the United States Bankruptcy Code (Bankruptcy Code), 11 U.S.C. 101 et seq. A nonprofit corporation, Debtor is licensed to operate a 199-bed general acute care hospital (Hospital) in the city of Downey, California. This document is the disclosure statement (the Disclosure Statement) with respect to the enclosed Chapter 11 Plan (Plan) proposed by Debtor and sent to you in the same envelope as this document. A Chapter 11 Plan may provide for a debtor to reorganize by continuing to operate, to liquidate by selling assets of the estate, or a combination of both. This is a liquidating plan that provides for the continued operation of the Hospital. Debtor seeks to accomplish payments under the Plan by selling substantially all of its assets and funding plan payments from funds generated from the future operations of the Hospital with certain contributions and guarantees made by Presbyterian Intercommunity Hospital of Whittier, California (PIH) and its affiliate Newco (as defined below) (Acquirer), in conjunction with the Transaction described in more detail below and in the Asset Purchase Agreement that [will be filed] as Exhibit A hereto. The Effective Date of the proposed Plan is expected to be [July 15, 2010]. As consideration for the Acquired Assets, PIH and Acquirer will assume certain liabilities and fund the distributions to creditors under this Plan. Either directly or through replacement financing, Acquirer proposes to contribute cash sufficient to fund all payments due on the Effective Date of the Plan under the terms of the Plan (estimated to be $15-18 million, plus Cure Claims). Acquirer will assume certain debt and lease obligations, and will fund installment payments to general unsecured creditors over a period of seven years. The distributions to creditors will be handled through a Plan Trust and a Plan Trustee.
All capitalized terms not otherwise defined herein shall have the meaning set forth in the Plan. Although terms are defined in this Disclosure Statement for convenient reference, the formal definitions set forth in the Plan shall control. 1
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The treatment of creditors is still subject to further negotiations between and among Acquirer, the Creditors Committee and other creditors, and the Plan and this Disclosure Statement may be amended before the Disclosure Hearing to reflect the results of such negotiations. The Effective Date of the proposed Plan is expected to be July 15, 2010. If PIH and Debtor do not proceed with the proposed Transaction, Debtor reserves the right to amend the Plan to substitute a different Acquirer. A. Purpose of This Document
This Disclosure Statement summarizes what is in the Plan, and tells you certain information relating to the Plan and the process the Court follows in determining whether or not to confirm the Plan. All capitalized terms used but not defined herein shall have the meaning given to them in the Plan. READ THIS DISCLOSURE STATEMENT CAREFULLY IF YOU WANT TO KNOW ABOUT: (1) (2) WHO CAN VOTE OR OBJECT, WHAT THE TREATMENT OF YOUR CLAIM IS (i.e., what your claim will
receive if the Plan is confirmed), AND HOW THIS TREATMENT COMPARES TO WHAT YOUR CLAIM WOULD RECEIVE IN LIQUIDATION, (3) THE HISTORY OF DEBTOR AND SIGNIFICANT EVENTS DURING THE
BANKRUPTCY, (4) WHAT THINGS THE COURT WILL LOOK AT TO DECIDE WHETHER
OR NOT TO CONFIRM THE PLAN, (5) (6) WHAT IS THE EFFECT OF CONFIRMATION, AND WHETHER THIS PLAN IS FEASIBLE.
This Disclosure Statement cannot tell you everything about your rights. You should consider consulting your own lawyer to obtain more specific advice on how this Plan will affect you and what is the best course of action for you.
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Be sure to read the Plan as well as the Disclosure Statement. If there are any inconsistencies between the Plan and the Disclosure Statement, the Plan provisions will govern. The Bankruptcy Code requires a Disclosure Statement to contain adequate information concerning the Plan. The Bankruptcy Court (Court) has approved this document as an adequate Disclosure Statement, containing enough information to enable parties affected by the Plan to make an informed judgment about the Plan. Any party can now solicit votes for or against the Plan. B. Deadlines for Voting and Objecting; Date of Plan Confirmation Hearing
THE COURT HAS NOT YET CONFIRMED THE PLAN DESCRIBED IN THIS DISCLOSURE STATEMENT. IN OTHER WORDS, THE TERMS OF THE PLAN ARE NOT YET BINDING ON ANYONE. HOWEVER, IF THE COURT LATER CONFIRMS THE PLAN, THEN THE PLAN WILL BE BINDING ON DEBTOR AND ON ALL CREDITORS IN THIS CASE. 1. Time and Place of the Confirmation Hearing
The hearing where the Court will determine whether or not to confirm the Plan will take place on July 1, at 10:00 a.m., in Courtroom 1475, United States Bankruptcy Court, 255 E. Temple Street, Los Angeles, California 90012. 2. Deadline For Voting For or Against the Plan
If you are entitled to vote, it is in your best interest to timely vote on the enclosed ballot and return the ballot in the enclosed envelope to Lisa Hill Fenning, Esq., Arnold & Porter LLP, 777 S. Figueroa St., 44th Floor, Los Angeles, California 90017; Tel: 213-243-4000. Your ballot must be received by June 22, 2010 at 5 p.m. Pacific time or it will not be counted. 3. Deadline For Objecting to the Confirmation of the Plan
Objections to the confirmation of the Plan must be filed with the Court and served upon Lisa Hill Fenning, Esq., Arnold & Porter LLP, 44th Floor, Los Angeles, California 90017-5844 by June 22, 2010 at 5:00 p.m. Pacific time. 4. Identity of Person to Contact for More Information Regarding the Plan
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Any interested party desiring further information about the Plan should contact Lisa Hill Fenning, Esq., Arnold & Porter LLP, 777 S. Figueroa St., 44th Floor, Los Angeles, California 90017; Tel: 213-243-4000, counsel for Debtor; or Martin J. Brill, Esq., Levene, Neale, Bender, Rankin & Brill L.L.P., 10250 Constellation Boulevard, Suite 1700, Los Angeles, California 900676200, Tel: 310-229-1234, counsel for the Creditors Committee. C. Disclaimer
The business projections and liquidation analyses in support of this Plan [to be filed] were prepared by Debtors investment banker, Shattuck Hammond Partners (SHP) and Debtors financial advisor, Focus Management (Focus), based upon information provided by Debtor in consultation with the Acquirer and its advisors. The general information contained in this Disclosure Statement is provided by Debtors senior management. Debtor represents that everything stated in the Disclosure Statement is true to Debtors best knowledge. The Court has not yet determined whether or not the Plan is confirmable and makes no recommendation as to whether or not you should support or oppose the Plan. II. BACKGROUND A. Description and History of Debtors Business
The Hospital is a nonprofit general acute care and teaching hospital licensed for 199 beds located in Downey, California. The Hospital currently operates 181 staffed inpatient beds, including an intensive care unit, a neo-natal intensive care unit for newborns with special health issues, a birth center, and definitive observation units, besides general medical-surgical beds. It services approximately 14,000 inpatients per year in all services. The Hospital offers a wide variety of clinical services and provides virtually all clinical services of a major tertiary university hospital except for organ transplants. The Hospital has 11 operating rooms and a very busy surgical practice, operating on more than 7,000 patients annually. The Hospital also has numerous specialty outpatient services, seeing over 80,000 outpatients annually, including non-invasive cardiology, radiology, endoscopy, and physical therapy. Its 22-bed emergency room, while not designated as a trauma unit, is equipped for and services trauma patients who are regularly brought to the Hospital
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in extremis or who come in via transportation other than ambulance. The emergency room services over 50,000 patients annually and qualifies as one of the busiest in the area. B. Principals/Affiliates of Debtors Business
Because it is a nonprofit public benefit institution, Debtor does not have equity interest holders or principals in the usual sense. Debtors Board of Directors is composed of unpaid volunteers from the Downey community. The Board is chaired by Susanne Sundberg. James Ball serves as First Vice Chair; William Hare as Second Vice Chair; Milton Weiss as Treasurer; and Beverly Mathis as Secretary. Debtors sole corporate member is Downey Regional Medical Center, Inc. (Parent). Parent is also the parent of DRMC Properties, Inc. (Properties), a non-debtor, for-profit affiliate of the Hospital that owns and operates a 72,000 square foot medical office building on the Hospitals campus. Parent is also the parent of (i) the Memorial Foundation, a fundraising charitable Section 501(c)(3) corporation that holds restricted charitable grants for specified purposes, (ii) a for-profit insurance brokerage that ceased operations some years ago, and (iii) a senior services company that never became operational. Although not debtors in this Case, Parent and Properties are voluntarily participating in the Transaction contemplated in this Plan. C. Management of Debtor Before and After the Bankruptcy
During the period immediately before the bankruptcy filing, Debtors management team consisted of Kenneth Strople, President and Chief Executive Officer (CEO), who was hired as CEO in July 2007; Robert E. Fuller, Chief Operating Officer and Executive Vice President (COO), who has served in several capacities since joining Debtor in 2001; and Richard Yardley, an interim Chief Financial Officer (CFO), a consultant provided by Debtors outside healthcare consulting company, Medical Development Specialists(MDS), who had been with Debtor since April 2008. Mr. Strople replaced the long-term CEO, Allen Korneff, who had been CEO since the early 1970s until he was involuntarily terminated in June 2007. Throughout the Case, Mr. Strople and Mr. Fuller have continued to serve as CEO and COO respectively, with Mr. Fuller taking responsibility for the management of the restructuring processes and overseeing the professionals in the Case, while Mr. Strople concentrated on hospital operations.
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Mr. Yardley, however, replaced on an interim basis by William Reilly, an employee of FTI Consulting (FTI), in September 2009. On November 30, 2009, Mr. Reilly was replaced as CFO by Galen R. Gorman, who currently serves as CFO and Executive Vice President (Mr. Gorman together with Messrs. Strople and Fuller, the Executive Management Team). D. Events Leading to the Chapter 11 Filing
The Hospital commenced the Chapter 11 Case because of a liquidity crisis that resulted from two primary causes. First, the Hospital incurred substantial losses as a result of severe problems on the finance side of its business due to, among other problems, defective charge capture practices and software billing practices that resulted in the Hospital not collecting all the revenues to which it would be entitled. Second, the Hospital was incurring significant losses due to problems with respect to its capitation arrangements with certain physician groups and health plans losses were so severe that the Hospital concluded it had to terminate its capitation program and adopt a fee-forservice model, despite the short term cash flow interruption and claims that would result. These losses were stemmed by the termination of the capitation agreements in late 2008 and early 2009, except for one that was rejected during the Case. However, Debtors fee-for-service contract rates with the major health plans have remained at the rock-bottom of the market, continuing to pressure Debtors revenues and top line, with negative consequences for the bottom line. It should be noted that, although Debtor recognizes the paramount importance of negotiating better health plan contracts to correct this problem, it has been unable to do so during the Case because negotiating better rates would require entry into long term contracts at a time when Debtors post-bankruptcy future was uncertain. The urgency of negotiating new contracts and its impact on the bottom line have pressured Debtor to try to find additional capital or an affiliation partner so that it can exit from bankruptcy as quickly as possible. Since Petition Date, Debtor has experienced some savings resulting from a reduction of staff due to attrition and some reductions in force, as well as an initial 60-day 10% across the board cut in wages and salaries necessitated by cash flow constraints, which was recently reinstated for the remainder of the Case. Debtor has also achieved some improvements in collections practices and some other reductions in expenses, but
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the overall financial picture will not significantly improve until new health plan contracts are in place. E. Significant Events During the Bankruptcy
The following is a chronological summary of significant Court events that have occurred during this Case. 1. First Day Motions Heard on Shortened Time
At the outset of the Case, Debtor filed a series of motions and applications to lay the foundation for the financing and various administrative procedures necessary at the start of any Chapter 11 bankruptcy case (the First Day Motions). Certain of the First Day Motions were heard and approved within the first few days of the Case on shortened time, including the following: a) Cash Management and Financing
Emergency Motion for Interim and Final Orders Authorizing Debtor to Obtain Post-
Petition Financing (the DIP Financing Motion), interim order entered September 18, 2009 and final order entered on October 19, 2009: These orders authorized Debtor to borrow up to $4 million on an interim basis, and up to $10 million (the DIP Loan) once certain conditions were satisfied or waived by the lender, Heathcare Finance Group (HFG or DIP Lender). The DIP Loan is secured by a first priority lien on essentially all of Debtors assets. Emergency Motion for Interim and Final Orders Authorizing Debtors to Utilize Cash
Collateral, Granting Adequate Protection to Pre-Petition Secured Lenders, and Scheduling Final Hearing (the Cash Collateral Motion), interim order entered September 18, 2009 and final order entered on October 16, 2009: These orders provided for the subordination of the liens of existing secured creditors Wells Fargo Bank National Association (Wells Fargo) as indenture trustee for Debtors tax-exempt bonds and Apollo Health Street (Apollo), a junior lien creditor to those of the DIP Lender, and authorized adequate protection payments to Wells Fargo and the pledge of additional collateral to both secured creditors as adequate protection. Emergency Motion for Order Authorizing (I) Continued Use of Existing Cash
Management System, (II) Continued Use of Existing Bank Accounts, and (III) Continued Use of Existing Business Forms (the Cash Management Motion), order entered September 17, 2009:
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This order permitted Debtor to keep most of its cash management processes in place to minimize clerical and administrative disruption. b) Authorization to Deal with Priority Claims and Utility Deposits
Emergency Motion for Order Pursuant to Bankruptcy Code Sections 105(a), 363(b),
and 507(a) (i) Authorizing Debtor to Pay Prepetition Wages, Compensation, and Employee Benefits and (ii) Authorizing and Directing Financial Institutions to Honor and Process Checks and Transfers Related Thereto (the Employee Wage Motion), order entered September 17, 2009: This order authorized Debtor to pay the prepetition stub period for its biweekly payroll and benefit claims without interruption, in amounts up to the statutory limits for such priorities under the Bankruptcy Code, namely, up to $10,950 for wages or salary and $10,950 for benefits per employee. Emergency Motion for Order Prohibiting Utility Companies from Altering or
Discontinuing Service on Account of Prepetition Invoices, Approving Deposit as Adequate Assurance of Payment, and Establishing Procedures for Resolving Requests by Utility Companies for Additional Assurance of Payment (the Utility Motion), order entered October 8, 2009: This order prevented utilities from cancelling services, provided that Debtor posted certain deposits as security for payment. c) Procedural Motions
Emergency Motion to Extend Time for Filing of Schedules and Statement of
Financial Affairs (the Schedules Extension Motion), order entered September 17, 2009: This routine order gave Debtor additional time to complete and file its schedules and statement of affairs with the Court. The schedules and statement of affairs have been Filed. Certain amendments will be Filed in advance of the Disclosure Hearing, mostly to eliminate Claims listed on Schedule F (unsecured claims) that Debtor has since determined were paid before Petition Date. Emergency Motion of Debtor for an Interim Order (I) Establishing (A) Omnibus
Hearing Dates, and (B) Certain Noticing, Case Management, and Administrative Procedures, and (II) Scheduling a Final Hearing (the Case Management Motion), order entered October 8, 2009: This order authorized Debtor to retain an outside claims and notice processing company to relieve the bankruptcy clerks office and Debtor of various noticing and claims docketing functions.
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2.
Early Case Motions
As is typical of most Chapter 11 cases, the first few months of the Case brought numerous administrative and other motions. After the First Day hearing on shortened notice that approved the financing arrangements and other emergency motions, Debtors non-emergency First Day Motions were heard on regular notice on October 1, 2009. During October and November, applications to retain various estate professionals for Debtor, the official creditors committee appointed in the Case (the Committee), and the patient care ombudsman appointed by the Court (the Ombudsman) were approved without the need for a hearing, as no objections were filed. Also during this period, Debtor obtained approval of motions asking the Court to set deadlines to file claims, establish procedures for professional retention applications, and assume or reject certain contracts and leases. The major motions during this period are summarized below: a) Retention and Fee Procedures for Estate Professionals
Motion for Order Establishing Procedures for Interim Compensation and
Reimbursement of Professionals Pursuant to Sections 331 and 105(a) of the Bankruptcy Code (Fee Procedures Motion), order entered October 27, 2009: This Order permitted estate professionals to be paid on a monthly basis, with a certain percentage held back for possible adjustments when formal fee applications are heard every 120 days by the Court.
As set forth in the following chart, the Court has approved the employment of the
following estate professionals to provide the services described therein. Those designated as Ordinary Course Professionals (OCP) provide services that are related to the regular operations of the Hospital, are not part of the bankruptcy process, and therefore are not subject to the requirement of filing fee applications and fee statements. Name of Professional Omni Management Group LLC HNB Capital LLC Arnold & Porter LLP Date Application Filed Sept. 14, 2009 Order Entered Oct. 8, 2009 Purpose of Employment Debtors claims administrator and noticing agent Debtors investment banker Debtors general reorganization and corporate counsel
Sept. 14, 2009 Oct. 2, 2009
Oct. 23, 2009 Oct. 29, 2009
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1 2 3 4 FTI Consulting, Inc. 5 6 7 8 9 10 11 12 13 14 15 Parker Milliken, P.C. 16 17 18 19 20 21 22 23 24 25 26 27 28 Focus Management Group Levene, Neale, Bender, Rankin & Brill L.L.P. BDO Seidman LLP Shattuck Hammond Partners LLP Manatt, Phelps & Phillips, LLP Stephenson Acquisto & Colman Fonda Fraser LLP McLeod, Witham & Flynn LLP Name of Professional Hanson & Bridget LLP
Date Application Filed Oct. 2, 2009
Order Entered Oct. 29, 2009
Purpose of Employment Debtors special counsel with respect to regulatory compliance opinion for DIP Loan Debtors interim Chief Financial Officer and financial support services (assignment completed in December 2009; replaced by Focus Management) Debtors special litigation and conflicts counsel Debtors medical malpractice litigation counsel (OCP) Debtors insurance claim recovery and insurance fraud counsel (OCP) Debtors Medi-Cal claim recovery counsel (OCP) Debtors labor and employment law counsel (OCP) Debtors auditors Debtors investment banker with respect to plan transaction Debtors special counsel with respect to California Attorney Generals review and approval of plan transaction Debtors financial advisor (replaced FTI) Committees general bankruptcy counsel Committees financial advisor
Oct. 13, 2009
Nov. 12, 2009
Oct. 13, 2009
Nov. 12, 2009
Oct. 14, 2009
Nov. 12, 2009
Knott & Glazier LLP
Oct. 14, 2009
Nov. 12, 2009
Oct. 14, 2009
Nov. 12, 2009
Oct. 14, 2009
Nov. 12, 2009
Nov. 6, 2009 Feb. 1, 2010
Dec. 1, 2009 Mar. 2, 2010
Feb. 1, 2010
Mar. 16, 2010
Feb. 5, 2010
Mar. 2, 2010
Oct. 9, 2009
Nov. 12, 2009
Fenix Management LLC Oct. 9, 2009
Nov. 12, 2009
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Date Application Filed Oct. 21, 2009
Order Entered Nov. 12, 2009
Purpose of Employment Patient Care Ombudsmans medical operations advisors Patient Care Ombudsmans general bankruptcy counsel
Oct. 21, 2009
Nov. 12, 2009
Motions to Establish Claims Bar Dates
Motion for Entry of an Order Establishing and Implementing Exclusive, Global
Procedures for the Resolution and Payment of 503(b)(9) Claims and Establishing a Bar Date for 503(b)(9) Claims (the 503(b)(9) Bar Date Motion), order entered October 27, 2009 (the 503(b)(9) Bar Date Order): This order set December 1, 2009 at 5:00 p.m. Pacific Time (the 503(b)(9) Bar Date) as the deadline to file claims for goods received by Debtor in the ordinary course within 20 days before the Petition Date (503(b)(9) Claims). Motion for Order Pursuant to Bankruptcy Rule 3003(C)(3) Establishing Procedures
and Bar Dates for Filing Proofs of Claim (the General Bar Date Motion), order entered on November 12, 2009: This order set January 19, 2010 at 5:00 p.m. Pacific Time as the deadline to file general claims (the Claims Bar Date), and March 15, 2010 at 5 p.m. Pacific Time as the deadline for governmental entities to file their claims. c) Assumption and Rejection of Leases and Contracts
Motion for Order Authorizing Debtor to Assume Lease Agreement with the City of
Downey (Lease Assumption Motion), order entered October 27, 2009: This order authorized Debtor to assume the ground lease for the Hospital facility, which is essential to the continued operations of the Hospital and continued good relations with the City of Downey. Motion For Order Authorizing Debtor to Reject Agreement With Aetna Health of
California, Inc. (the Aetna Rejection Motion), order entered October 26, 2009: This order authorized Debtor to reject as burdensome its Managed Care Agreement (as amended, the Aetna Agreement) with Aetna Health of California, Inc. (Aetna), which was the only remaining capitation agreement as of Petition Date.
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Motion for Order Authorizing Debtor to Reject Agreements with London & Pacific
Capital Advisors, LLC and CapitalSource, Inc., order entered October 27, 2009 (the London & Pacific Motion): This order authorized Debtor to reject its agreement (the London & Pacific Agreement) with its prepetition investment banker, London & Pacific Capital Advisors (London & Pacific) which had failed to close on any financing for Debtor. Motion for Order Authorizing Debtor to Reject Agreement with Allen R. Korneff
(the Korneff Rejection Motion), order entered November 24, 2009: This order authorized Debtor to reject a 1995 employment agreement (the Employment Agreement) with its former CEO, Allen R. Korneff (Korneff). Although Korneffs employment had been terminated
without cause more than two years before the Petition Date, he had continued to received compensation for a three-year post-termination period, as provided in his contract, even though Debtor received no benefit from such payments. Rejection allowed Debtor to cut off any further post-termination compensation payments to him. In addition, Debtor is seeking the turnover from the custodian of more than $1.2 million of assets held in a separate investment account in Debtors name in connection with a non-ERISA qualified deferred compensation plan for Korneff that, by its terms, remains subject to creditor claims. Motion of Debtor to Approve Stipulation Between Debtor and DRMC Properties,
Inc. Extending the Time to Assume, Assume and Assign, or Reject Nonresidential Real Property Leases (Lease Extension Motion), order entered March 9, 2010: This order extended the deadline to assume or reject Debtors leases of certain ancillary office space to July 12, 2010. d) Stipulations and Settlements of Claims
Motion of Debtor to Approve Stipulation Between Debtor and Health Net of
California, Inc. Regarding Modification of Stay and Set Off of Funds Held, order entered on February 11, 2010: This order approved the offset of approximately $269,000 in funds held by Health Net against its $1.1 million loan claim against Debtor, and provided for certain limited additional offsets commencing in April 2010. Motion to Approve Stipulation Between Debtor and St. Francis Medical Center
Regarding Modification of Stay, Set Off, and Settlement and Mutual Release Of Claims, order
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entered on February 11, 2010: This stipulation settled prepetition offsets of $992,843.05 due to Debtor against the $935,243.30 due from Debtor to St. Francis Hospital, resulting in a net payment to Debtor of $57,599.75. 3. Committee Adversary Complaints.
On December 24, 2009, the Committee commenced an adversary proceeding against Wells Fargo regarding the classification of certain portions of the adequate protection payments paid to Wells Fargo and against Apollo challenging the extent and validity of its lien (the Committee Complaints). Wells Fargo and Apollo have been given open extensions to respond to the Committee Complaints. The Wells Fargo complaint seeks to preserve the Committees right to challenge the application of adequate protection payments and received by Wells Fargo. The Apollo complaint challenges a settlement between Apollo and Debtor arising from Debtors termination of Apollos collections services, that resulted in the grant of a junior security interest in accounts receivable with installment payments to pay the outstanding balance of fees owed by Debtor. As of Petition Date, the Apollo claim was about $1.2 million. These adversary proceedings may have a significant effect on the classification and/or treatment of Wells Fargo and Apollos claims under the Plan. However, Debtor has provided the Committee with documentation that establishes (i) the basis for the amount of the Apollo settlement and (ii) that both Wells Fargo and Apollo were fully secured on the Petition Date, because the fair market value of Debtors prepetition accounts receivable actually collected has substantially exceeded the combined total of the Wells Fargo and Apollo claims (taking into account the application of certain bond reserve funds that are cash collateral for the Bonds). For purposes of the Plan, both are treated as fully secured, subject to the resolution of the Committee Complaints. 4. Actual and Projected Recovery of Preferential or Fraudulent Transfers
No preferential or fraudulent transfer recovery actions (Avoidance Actions) have been filed by Debtor, but fraudulent transfer issues are among those raised in the Committees lawsuit against Apollo, as discussed above. Debtor reserves its rights to bring such actions up through the Effective Date.
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Preferences are payments made to creditors on account of a preexisting debt, while a debtor is insolvent, that means those creditors would end up receiving a higher percentage recovery on their claim than other similarly situated creditors. For general creditors, the preference period is 90 days before Petition Date. For insiders (officers and directors), the period reaches back one year. During the 90 days before the Petition Date, Debtor paid approximately $22,500,000 to general creditors. While this sounds like a lot of money, it is actually much lower than Debtors historical norm, thus reflecting its cash shortage. Historically, Debtor averages $11 million per month in payments in the ordinary course of business, so the 90-day payments are substantially lower than the $33 million that would have been expected in the ordinary course. During the year before Petition Date, approximately $800,000 in the aggregate was paid to the two senior executives pursuant to their multi-year employment contracts in the year before the Petition Date. Insiders did not receive any payments other than those due under their employment contracts and reimbursement of expenses. Based upon industry studies, Debtors Executive Management Team is paid below the norm for executives at similar hospitals. Debtors preliminary review of potential Avoidance Actions does not indicate that it would be worthwhile to spend the time and money pursuing any such actions, although review of certain transaction is continuing. Certain creditors did receive catch up payments during the 90 days before Petition Date, but Debtor generally appears to have made such payments in exchange for substantial new value in the form of shipments of additional critical goods (like pharmaceuticals) or provision of additional critical services that enabled it to continue to function. It appears highly likely that substantial defenses would preclude recovery in most cases. However, certain critical vendors received payments within the few days before Petition Date. These payments will be reviewed with the Committee and Acquirer to determine whether a preference action would be appropriate. In addition, two transactions may require some further analysis from a fraudulent transfer viewpoint as to fairness of the consideration received by Debtor. First, Debtor entered into a settlement with Siemens Medical Services (Siemens), Debtors outsourced information technology provider, with respect to disputes relating to their services to Debtor and Debtors
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accrued payment obligations under their contracts. The amount of the Siemens claim was fixed at approximately $3.5 million, and mutual releases were given. Because this settlement occurred more than 90 days before Petition Date, it is not within the preference period for noninsiders and can only be challenged on the ground that Debtor did not receive fair value for the releases it gave Siemens. Second, in June 2009, Debtor determined that its home health care division was not contributing to the overall operations and should be sold or shuttered. That division had supported the former capitation program, so when those contracts were terminated, Debtor had no further use for it. Instead of closing the division, Debtor transferred it to Accredited Nursing. As part of the transaction, until the Medicare provider number for that business transferred in January 2010, Debtor was obligated under the terms of its contract with Select Data Services, the coding, billing, and collecting service provider for the home health care business, to continue to make the monthly payments. The nature and extent of Debtors pre- and post-petition obligations to Select Data remain under review. However, Debtor does not believe that it would benefit in any way from challenging the underlying transaction transferring the money-losing home health care business. The Plan contemplates that Debtor, the Committee, and Acquirer will agree to waive listed Released Avoidance Actions, consisting of various payments made within 90 days before the Petition Date for non-insiders and within one year for insiders, and certain other transfers, to be provided before the confirmation hearing as a supplement to the Plan. The Plan Trust will retain the right to pursue certain specified Trust Avoidance Actions, while Acquirer will acquire certain other specified Acquired Avoidance Actions, together with any potential Avoidance Actions not specified as Trust Avoidance Actions or Released Avoidance Actions. Debtor does not believe that any material recovery is likely to be achieved from Avoidance Actions. III. INVESTIGATION REGARDING PLAN ALTERNATIVES AND SELECTION OF PIH When Debtor filed the Case in September 2009, it expected to be able to emerge from Chapter 11 as a standalone entity, and to provide for creditor repayments over time. Several business developments during the fall severely undercut Debtors efforts: (1) the opening of nearby outpatient centers for radiology, surgery, and endoscopic procedures caused a significant decrease in profitable outpatient procedures at the Hospital; (2) Debtors continued struggles with its
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outsourced financial and collection systems forced a reevaluation of the collectability of some of Debtors accounts receivable; and (3) continuing bleak prospects for refinancing in tight capital markets for small and mid-sized businesses meant no realistic prospects for exit financing that would pay off or subordinate to Wells Fargo and Apollo. Shortly before Thanksgiving, the Executive Management Team determined that the best plan of reorganization was to emerge from Chapter 11 proceedings as an affiliate of a hospital system. The idea of affiliating with a hospital system had been under consideration for some time before the bankruptcy filing. Debtor had recognized that, within three to five years, a standalone hospital in southeast Los Angeles County was likely to have a difficult time staying competitive for labor and capital, making affiliation almost an inevitable course of action for Debtor at some point in the future. Given their proximity and similarity of mission, Debtor had some exploratory conversations with PIH about affiliation, but nothing came of those discussions before the bankruptcy filing. Debtor had hoped to restructure in Chapter 11 to strengthen its fundamentals and reposition itself before venturing into the affiliation process, but competitive and financial pressures have forced its hand. A. Solicitation and Development of Proposals
In December 2009, Debtor began active solicitation of proposals for affiliation, asset acquisition, or other financial restructuring arrangements. Debtor also retained SHP as its investment banker for the purpose of exploring and analyzing the universe of possible counterparties. Both directly and through SHP, Debtor contacted all readily identifiable potential affiliation parties, and put itself fully in play as an acquisition target. Responses to Debtors term sheet proposal were varied, including member substitution under a plan of reorganization, asset purchase offers through auctions pursuant to Bankruptcy Code 363, modified for-profit models, management company proposals, and refinancing. The prospects were given extensive access to financial and operational information and executive management time, and were encouraged to submit proposals for evaluation. Daughters of Charity Health System (DCHS), PIH, and Prime Healthcare Services Foundation, Inc. (Prime) emerged as the leading contenders, having
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submitted proposals that varied in structure and proposed treatment of creditors. During December and January, Debtor conducted various discussions with all three. 1. First Motion to Extend Plan Exclusivity
While these discussions were ongoing, Debtor filed a motion seeking an extension of the January 12, 2010 deadline to March 15, 2010 within which to file its plan of reorganization, with a corresponding extension of the deadline to solicit votes on a plan (the First Exclusivity Extension Motion). The Court granted the extension by order entered on February 2, 2010. 2. The DCHS Letter of Intent
In late January, Debtor executed a non-binding letter of intent with DCHS (subject to Court approval) (the DCHS LOI), based upon its determination that the DCHS proposal offered the best concept for future operations of the Hospital, return for creditors, and prospects for confirmation of a plan based upon the proposal. In general, the DCHS LOI contemplated the Hospitals affiliation with the DCHS group of five hospitals through either a member substitution or asset purchase under a plan of reorganization without an auction sale. DCHS proposed to (i) have Acquirer entity assume the Bonds, (ii) provide the funding for payments due on the effective date of the plan, (iii) have Acquirer pay an estimated 25% return to general unsecured creditors (the actual percentage being dependent upon the allowed amount of Claims), up to a maximum of $16 million, over seven years out of revenues of the Hospital, with those payments partially guaranteed by DCHS, and (iv) negotiate with the health plans and physician groups on the terms of new contracts that would minimize their unsecured claims against the estate, while providing sufficient revenues to fund future Hospital operations. Debtor filed a motion to approve the binding terms of the DCHS LOI with respect to an exclusive period to try to negotiate definitive documents and an obligation to reimburse DCHSs expenses if Debtor terminated the negotiations. At the hearing on February 23, 2010, Debtors motion to approve the DCHS LOI was granted and the objections of PIH and Prime, as disappointed bidders, and several other objections were overruled by order entered on March 15, 2010 (Dkt. No. 427).
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3.
The Prime Motion to Terminate Plan Exclusivity
In addition to objecting to the DCHS LOI motion, Prime and certain of its affiliates filed a motion seeking to terminate Debtors plan exclusivity periods (the Prime Motion), supported by Apollo, to which both Debtor and the Creditors Committee filed oppositions and PIH filed a comment. The Court denied the Prime Motion by order entered on April 8, 2010. 4. The Second Exclusivity Extension Motion
Following the successful hearing on the DCHS LOI, Debtor proceeded with negotiations with DCHS on definitive documents and due diligence with the intention to file a plan before the March 15 deadline. However, on Friday March 12, DCHS notified Debtor that it had decided to withdraw from further negotiations, citing internal considerations. DCHSs decision came as a surprise to Debtor. Debtor immediately contacted the other interested parties, particularly PIH and Prime, who had expressed continuing interest in a transaction with Debtor. Debtor quickly learned that PIH, Prime and the physicians group that owns Olympia Hospital in Los Angeles, would be making revised proposals. Based upon these prospects for plan support, Debtor filed a motion seeking a further extension of (i) the exclusive period for filing a plan through May 17, (ii) the Courts deadline to file a plan through May 31, and (iii) the exclusive period to solicit votes through July 19, 2010 (the Second Exclusivity Extension Motion), that the Court granted by order entered on April 14, 2010 (Dkt. No. 502). 5. The PIH Letter of Intent
PIH, Prime and Olympia each submitted revised proposed letters of intent. After consideration of all three revised proposals, further negotiations with PIH and Prime (Olympias proposal appearing to lack sufficient exit financing), and discussions with its lenders and the Committee, Debtor concluded that the PIH proposal was superior to that of Prime, even though Prime had committed to a variety of improvements in the noneconomic terms of its offer. The PIH proposal offers a vision of future operations of the Hospital that is more consistent with Debtors mission of providing full service to the Downey community, a higher estimated percentage return for creditors, and better prospects for confirmation of a plan based upon the proposal. Debtor executed a non-binding letter of intent with PIH (the PIH LOI) and filed a motion seeking
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approval of its binding provisions regarding negotiation exclusivity and expense reimbursement (the PIH LOI Motion). The Court entered its order approving the PIH LOI Motion at a hearing on April 14 (Dkt. No. 503). Debtor proceeded to negotiate definitive documents based upon the PIH LOI. The definitive documents based upon the PIH LOI form the basis for the Transaction that will be implemented by the Plan. B. The Principles Guiding Debtors Evaluation of the Affiliation Alternatives
During the process of evaluating the various plan proposals received from DCHS, PIH, Prime, and other parties, the Executive Management Team regularly reported to the Boards of both the Hospital and Debtor. When the Executive Management Team briefed the Boards about its conclusion that exploring affiliation would be necessary, the joint Boards adopted specific criteria to direct the Executive Management Team in seeking an affiliation partner. Specifically, by resolution on November 16, 2009, the Executive Management Team was directed to seek affiliation with hospitals or hospital systems who were committed to the following (the Affiliation Principles): A. That Downey Regional Medical Center be and remain a full service, general acute care nonprofit hospital, open to serve the entire community, with a vision of enhancing the health of the community while providing excellent patient care in the hospital setting; That the interests of the employees in remaining part of the Downey Regional Medical Center staff, and the physicians on the Medical Staff, be considered paramount in any affiliation, especially ensuring that the medical staff remain autonomous and self governing at this Hospital, That any affiliation partner be a recognized, quality health care provider, committed to the same vision and values as Downey Regional Medical Center, committed to maintaining Downey Regional Medical Center as a full service, general acute care nonprofit hospital that provides excellent patient care across all service lines; That any affiliation partner have the commitment and financial strength to assist the Hospital in promptly emerging from Chapter 11, treating all creditors fairly; That any affiliation partner share the strategic vision of re-investing in the plant and facilities of Downey Regional Medical Center to ensure its long term viability; That any affiliation partner and these boards pursue an affiliation out of mutual interest and support for the enhancement of Downey Regional Medical Centers nonprofit mission.
B. 18 19 20 21 22 23 24 25 26 27 28 F. E. D. C.
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During the solicitation process, many interested parties asked what type of proposal Debtor was seeking. In response, Debtor and its outside advisors prepared a draft term sheet, based upon the Affiliation Principles, that it circulated to any interested parties that wanted to see it. Debtor sought to (i) remain intact as a community institution providing the same essential hospital services, with (ii) the affiliation partner providing the substantial recapitalization and revenue cycle management expertise necessary for long term viability of the Hospitals business and operations, so that (iii) all secured, administrative, and priority claims would be paid in full on the effective date of the plan, and unsecured claims would be paid in full over time or as close to that payment goal as Debtor could achieve. Debtor expressed its preference for a member substitution form of transaction in which the transaction partner would become the new sole corporate member of the Hospital, and thereafter direct its affairs and assist the Hospital in fixing its previously identified revenue cycle operational issues and enhancing health plan contract rates. C. Comparison with the Prime Proposal
A preliminary proposal from Prime came in on January 8, 2010, a more detailed specific proposal was received on January 25, 2010, followed by a revised proposal received in March. In December 2009, Primes representative told Debtor that Prime foresaw use of a simplified model for operations at the Hospital; in the model proposed, as it had done at other community hospitals, Prime would cancel all health plan contracts (perhaps renegotiate some), downsize the hospital to 100 beds, and offer only a few service lines that could be economically undertaken. Under the simplified model as Prime described it, the hospitals operations would be significantly changed, but it anticipated that the result would be substantially better financial performance and continued strong quality of care. That simplified model has been consistently adopted by Prime at all of the hospitals it has acquired, based upon court filings, public statements by Prime, and reports from physicians and administrators with direct experience with Primes other hospitals. Subsequently, Prime changed its offer to a non-profit, member-substitution transaction with promises to work with existing physicians and to use best efforts to retain heal plan contracts so as not to disrupt existing patient/physician relationships. Prime provided some evidence of its having health plan contracts, retaining tertiary services in the community hospital setting, working with
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existing medical staffs at other hospitals, and an emerging non-profit business model for part of its business. This track record was not, however, consistent or substantial, especially compared to the recent local example of Primes full implementation of its simplified model at Centinela Hospital where it cancelled almost all health plan contracts, a situation with which many Downey medical staff members are intimately familiar. Based upon the foregoing general information and the specific economic terms of Primes proposal, Debtor concluded that a transaction with PIH is preferable to the Prime proposal based upon the following analysis. 1. Total Consideration
The present worth value of the consideration being paid to Debtor and its creditors would be approximately the same as the PIH proposal (i.e., the secured creditors would be paid in full, the small creditors would be paid 50%, and the other creditors would be paid an aggregate total amount of about $14 million). The major difference in consideration is that Prime proposes payment in cash up front, whereas most of the creditors will be paid over several years with interest by PIH. 2. Percentage Recovery
How much creditors recover is a function of both the amount of the consideration and the amount of claims that have to share that consideration pro rata. Based upon Primes consistent historical practices, Debtor believes that Prime is highly likely to reject all or most of Debtors health plan contracts, with the result that the health plans will assert extremely rejection damages claims for the difference in the rates they would have paid under their contracts with Debtor versus the drastically higher rates they will have to pay Prime for the year or so that would have remained on those contracts. While rejection damages will also be asserted by health plans if they cannot reach agreement with PIH on their treatment, the rate differential is likely to be much narrower. The total Allowed Unsecured Claims could be as much as $50 million higher in a Prime deal. Debtor estimates that the actual total recovery for unsecured creditors would likely be as little as half as much in a Prime deal compared to the PIH deal. In addition, Debtor understands that Prime has developed a negative reputation in other bankruptcy cases for strategies that effectively retrade
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its offers by various tactics, creating suspicion as to the ultimate value of the offer to general unsecured creditors. 3. Effect on Community and Debtors Constituencies:
The City of Downey: Prime is a relatively newly created non-profit affiliate of Prime Healthcare, a for-profit chain of hospitals that has mostly been acquired out of bankruptcy proceedings or financial distressed circumstances. Prime only recently began operating one other nonprofit hospital. It does not yet have a track record of operating nonprofit community hospitals in conjunction with a local community such as the City of Downey, whereas PIH does. The Physicians: Prime staffs its hospitals with hospitalists, that is, doctors employed directly by Prime who practice wholly within the hospital setting, as opposed to contracting with independent physicians as Debtor does. PIH sponsors the Bright Health Physicians group, but has provided assurances to the physicians groups practicing at the Hospital that it is also willing to contract with them. The Health Plans: The health plans have historically had very rocky relations with Prime and its affiliates, according to both public and private reports. Because Prime and its affiliates generally do not have preferred provider contracts with health plans, they usually charge full rates for services that are often very much higher than contracted rates. Health plans relationships with PIH have been somewhat better, although PIH is known for having a particular aggressive and effective outside contract negotiator. The Local Patients: Because Prime probably will not have preferred provider status with most health plans, Downey residents may be required or pressured (depending upon the terms of their insurance) to use other hospitals outside of Downey that are in network providers. This is likely to restrict the availability of the Hospitals services to the community. Prime is, however, known for efficient emergency rooms. With respect to PIH, some concerns have been raised as to whether PIH is likely to move major units to its Whittier facility and to shrink the Hospital significantly. Many of the Hospitals departments are required to support the emergency room, however, so as long as the emergency room stays active -- as required by the Citys lease -- the
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degree of shrinkage will be limited and local patients will continue to have a comprehensive range of services available. Mission: The final important consideration for the Hospitals Board is the match of mission. On this factor, PIH is highly similar to Debtor and has been for nearly six decades, whereas Primes historically for profit orientation is quite different. On balance, the considerations of business model and reputation persuaded Debtor that PIH would be a better affiliation partner. IV. SUMMARY OF THE PLAN OF REORGANIZATION A. What Creditors Will Receive Under The Proposed Plan
As required by the Bankruptcy Code, the Plan classifies Claims in various classes according to their right to priority. The Plan states whether each Class of Claims is impaired or unimpaired. The Plan provides the treatment each Class will receive. B. Unclassified Claims
Certain types of claims are not placed into voting classes; instead they are unclassified. They are not considered impaired and they do not vote on the Plan because they are automatically entitled to specific treatment provided for them in the Bankruptcy Code. As such, Debtor has not placed the following Claims in a Class. 1. Administrative Expense Claims
Administrative Expense Claims are claims for costs or expenses of administering Debtors Chapter 11 case which are allowed under Bankruptcy Code 507(a)(1). The Code requires that all administrative claims be paid on the Effective Date of the Plan, unless a particular claimant agrees to a different treatment. Administrative expenses that have been or will be paid by Debtor in the ordinary course of business are not included in this summary. The following chart lists Debtors Administrative Expense Claims that will be payable on the Effective Date of the Plan:
Type of Claim DIP Loan
Estimated Amount $10.2 million
Basis for Claim Outstanding balance on DIP Loan,
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Clerks Office Fees Office of the U.S. Trustee Fees TOTAL $[___] $[___] $[___] 503(b)(9) Claims (as set forth on Exhibit C to the Plan) $1.0 million Cure Payments $[___] Other Unpaid Administrative Expenses $[1.0 million] Professional Fees and Expenses (subject to final fee applications and court approval) $[1.0 million]
including exit fee Balance due to professionals of Debtor, the Committee, and the Patient Ombudsman for services during the Case (includes SHP success fee) Any other unpaid administrative priority expenses, other than expenses paid in the ordinary course during the Case Payments necessary to cure monetary defaults under assumed executory contracts or unexpired leases (depends upon which contracts and leases are chosen to be assumed by Acquirer) Administrative Expense Claims arising under Bankruptcy Code 503(b)(9).
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a.
Court Approval of Professional Fees Required
For all Professional Fees (not including Clerks Office fees and U.S. Trustees fees), the professional in question must file and serve a properly noticed fee application and the Court must rule on the application. Only the amount of professional fees and expenses allowed by the Court will be required to be paid under the Plan. The Disputed Administrative Claims Reserve shall include funds sufficient to pay the full amount of professional fees and expenses requested by professionals, pending the allowance of the final fee applications. Any adequate protection payments for Wells Fargos unpaid fees and expenses that have not otherwise been paid shall be deemed Allowed. b. 503(b)(9) Claims and Reclamation Claims
Prior to the Petition Date and in the ordinary course of its business, Debtor purchased a variety of goods used in the operation of the Hospital (the Goods). As of the Petition Date, Debtor was in possession of certain goods that had been delivered to it, but for which it had not yet received invoices or made payment to suppliers. The 503(b)(9) Claims are Claims asserted against Debtor pursuant to Bankruptcy Code 503(b)(9) for the value of goods received by Debtor within 20 days before the Petition Date, as listed on Exhibit C to the Plan. Many creditors filed Claims asserting that they qualified for priority treatment under 503(b)(9), even though their Claims, on their face, are (i) for services and not for Goods or (ii) for Goods delivered before the applicable period (the Nonqualifying 503(b)(9) Claims), as set forth on Exhibit C to the Plan. Debtor intends to file objections to the priority of the Nonqualifying 503(b)(9) Claims before the Confirmation Hearing. Such Claims, however, may be allowable as General Unsecured Claims. Debtor has included the Nonqualifying 502(b)(9) Claims in the estimated totals for the General Unsecured Claims or Convenience Class Claims, as appropriate, rather than the Administrative Claims totals.
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c.
Treatment of Administrative Expense Claims, Reclamation Claims, Cure Payments, 503(b)(9) Claims, Clerks Office Fees, and U.S. Trustee Fees:
All Allowed Administrative Expense Claims, including Professional Fees, other Administrative Claims, Cure Payments, Allowed 503(b)(9) Claims, Clerks Office Fees, and U.S. Trustee Fees will be paid in full in cash on the later of the Effective Date or the date such claims are allowed. 2. Priority Tax Claims
Priority Tax Claims are certain unsecured income, employment and other taxes described by Bankruptcy Code 507(a)(8). The Code requires that each holder of such a Priority Tax Claim receive the present value of such claim in deferred cash payments, over a period not exceeding six years from the date of the assessment of such tax. In this Case, no Priority Tax Claims have been filed. Only one such Claim was scheduled for property taxes, but it was filed and will be treated as a Class 2 Secured Claim. Any Allowed Priority Tax Claims will be paid in full on the Effective Date. Description No priority tax claims have been filed. The only scheduled priority tax claim that was Filed is the of claim of the Los Angeles County Treasurer and Tax Collector for Property Taxes, which was Filed as a secured claim and will be treated as a Secured Claim in Class 2D. Amount Owed $0
Classified Claims 1. Class 1--Priority Claims (Other than Priority Tax Claims)
Class 1 consists of Priority Claims against Debtor, other than Priority Tax Claims. These Priority Claims are entitled to priority treatment in that each holder of such a claim is entitled to receive cash on the Effective Date equal to the allowed amount of such claim, unless. the class votes to accept deferred cash payments of a value, as of the Effective Date, equal to the allowed amount of such claims. The Priority Claims consist of wage and benefits Claims under 507(a)(4) and (5) for PTO Claims that were not paid pursuant to the Order Authorizing Payment of Prepetition Wages, entered
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on September 17,2009, because they arise from the termination of employment during the Case or on the Effective Date, or because they are arise from PTO Claims of Debtors employees who are retained by Acquirer, but whose PTO Claims exceed the maximum amount of PTO eligible for assumption under PIHs human resources policies. Wage claims (including severance pay) in excess of the statutory limit of $10,950, and PTO Claims in excess of the statutory limit of $10,950 for benefits will be treated as General Unsecured Claims in Class 5. Almost all Claims filed by employees were in an unknown amount and remain to be determined. The Assumed Employee PTO Claims of Debtors employees that are being retained by Acquirer are treated as assumed obligations and are excluded from this Class. Certain medical services providers also asserted priority status on their proofs of Claim forms in the aggregate amount of approximately $195,000, but provided no evidence that they qualified for priority. Debtor will file objections to the priority status of those Claims and therefore has excluded them from the estimated Priority Claims. The Priority Claims shall be treated as follows: CLASS# DESCRIPTION Priority unsecured claims alleged pursuant to Bankruptcy Code 507(a)(4) and (5) Total amount of claims = [$200,000] 2. Classes 2A, 2B, 2C and 2D--Secured Claims IMPAIRED (Y/N) No TREATMENT Paid in cash in full on later of Effective Date or when allowed
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Classes 2A, 2B, 2C and 2D consist of Secured Claims against Debtor. Secured Claims are claims secured by liens on property of the estate. The Secured Claims shall be treated as follows: CLASS # 2A DESCRIPTION INSIDERS (Y/N) No IMPAIRED (Y/N) Yes TREATMENT
Secured claim of Wells Fargo Collateral description = Gross Operating Revenues, as defined in
The Bonds shall be paid in full by Acquirer, and shall be (i) assumed by Acquirer, subject to
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 CLASS # DESCRIPTION the Bond Documents; Funds held in bond reserve account (collectively, the Bond Funds) Collateral value = Fully secured as of Petition Date: Gross Operating Revenues (as defined in the Bond Documents) value of $30 million; Bond Funds est. value of $6,785,360 (est. $5.4 million as of Effective Date) Priority of security interest = First Principal owed = est. $20.9 million as of Effective Date (assuming May, June and July payments are made) Pre-pet. Arrearage amount = $0 Post-pet. Arrearage amt = approx. $310,000 attorneys fees (as of 2/28/2010) Total claim amount = est. $21.4 million (with $5.4 million in Bond Funds as cash collateral; additional fees and costs may accrue through the Effective Date) INSIDERS (Y/N) IMPAIRED (Y/N) TREATMENT such modifications of covenants as may reasonably be necessary (including permitting the Apollo junior lien); (ii) provided a first priority lien on the Gross Operating Revenues (as defined in the Bond Documents) of Acquirer; (iii) [permitted to retain the Affiliate Lien (as defined in the Order Regarding Use of Cash Collateral and Adequate Protection entered on October 16, 2009), such lien being a first priority mortgage, lien and security interest in the Medical Office Building, subject only to prior valid and perfected liens, if any, existing on the Petition Date;] (iv) included by PIH as part of its obligated group for PIHs existing tax-exempt bonds; (v) paid according to their terms
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 2C(i) Secured claim of Bank of the West Collateral description = Imaging System and Alaris System Equipment Collateral value = [____] Priority of security int. = 1st Pre-pet. Arrearage Amt. = $0 Post-pet. arrearage Amt = $0 Total claim amount = 29 No No These security interests were recorded with respect to equipment leases that will assumed and paid by Acquirer according to their terms, with Cure Amounts paid in full when Allowed. If the equipment leases are not assumed, Debtor will reject them and lessor shall be permitted to recover on the collateral on which it has a first lien, and to File a General Unsecured Rejection Claim for any amounts due in excess of its CLASS # 2B DESCRIPTION INSIDERS (Y/N) No IMPAIRED (Y/N) Yes TREATMENT
Secured claim of Apollo Collateral description = Accounts receivable Collateral value = in excess of $5 million Priority of security int. = Second/Junior Principal owed = Approximately $1.2 million Pre-pet. Arrearage amount = approx. $200,000 of principal Post-pet. arrearage amount = approx. $986,000 of principal Total claim amount = $1,201,919.22, plus such interest, attorneys fees, and expenses as may be Allowed
The Apollo debt shall be paid in full by Acquirer and shall be: (i) assumed by Acquirer and provided with a second priority lien on its accounts receivable [other assets?]; (ii) paid in equal quarterly payments on a fully amortized basis over a two-year period, including interest at the Interest Rate, beginning with the first payment due on [Effective Date?]
Case 2:09-bk-34714-BB
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Post-pet. arrearage Amt = $0 Total claim amount = [Unknown] Priority of security int. = First Pre-pet. Arrearage Amt. = $0 Collateral description = EEG Equipment Collateral value = [____] 2C(iii) Secured claim of Cadwell Laboratories Inc. No No These security interests were recorded with respect to equipment leases that will assumed and paid by Acquirer according to their terms, with Cure Amounts paid in full when Allowed. If the equipment leases are not assumed, Debtor will reject them and lessor shall be permitted to recover on the collateral on which it has a first lien, and to File a General Unsecured Rejection Claim for any amounts due in excess of its collateral value. Total claim amount = $683,725.97, less payments made during Case Pre-pet. Arrearage Amt. = $0 Post-pet. arrearage Amt = $0 Collateral value = [____] Priority of security int. = First 2C(ii) CLASS # DESCRIPTION [$1,780,407.45 less payments made during Case] Secured Claim of Cisco Systems Collateral description = Computer servers and related equipment No No INSIDERS (Y/N) IMPAIRED (Y/N) TREATMENT collateral value.
These security interests were recorded with respect to equipment leases that will assumed and paid by Acquirer according to their terms, with Cure Amounts paid in full when Allowed. If the equipment leases are not assumed, Debtor will reject them and lessor shall be permitted to recover on the collateral on which it has a first lien, and to File a General Unsecured Rejection Claim for any amounts due in excess of its collateral value.
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 2C(v) CLASS # 2C(iv) DESCRIPTION INSIDERS (Y/N) No IMPAIRED (Y/N) No TREATMENT These security interests were recorded with respect to equipment leases that will assumed and paid by Acquirer according to their terms, with Cure Amounts paid in full when Allowed. If the equipment leases are not assumed, Debtor will reject them and lessor shall be permitted to recover on the collateral on which it has a first lien, and to File a General Unsecured Rejection Claim for any amounts due in excess of its collateral value.
Secured claim of Philips Medical Capital Collateral description = Digital Diagnostic and X-Ray Equipment Collateral value = [____] Priority of security int. = First Pre-pet. Arrearage amt. = $0 Post-pet. arrearage amt. = $0 Total claim amount = $19,722, less payments made during the Case Secured claim of U.S. Bank Collateral Description = Advia Immunoassay System Equipment Collateral value = [____] Priority of security int. = First Pre-pet. Arrearage amt. = $0 Post-pet. arrearage amt. = $0 Total claim amount = $[Unknown]
No
No
These security interests were recorded with respect to equipment leases that will assumed and paid by Acquirer according to their terms, with Cure Amounts paid in full when Allowed. If the equipment leases are not assumed, Debtor will reject them and lessor shall be permitted to recover on the collateral on which it has a first lien, and to File a General Unsecured Rejection Claim for any amounts due in excess of its collateral value.
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Case 2:09-bk-34714-BB
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3. Class 3-- Assumed Employee PTO Claims CLASS # 2D DESCRIPTION INSIDERS (Y/N) No IMPAIRED (Y/N) No TREATMENT
Secured claim of Los Angeles County Treasurer and Tax Collector for Property Taxes Collateral description = Real property and improvements on Dolan Street property Collateral value = Assessed value of $1,656,120; fair market value of $[____] Priority of security int. = First Pre-pet. Amount due = $19,802.82 Post-pet. Amount due = $0 Total claim amount = $19,802.82
Paid in full on Effective Date
Class 3 Assumed Employee PTO Claims are certain PTO Claims for accrued nonworking days and paid time off (PTO) of Hospital employees in good standing as of the Effective Date who are retained by Acquirer as employees. Under Debtors human resources policies, employees may have accumulated PTO that the employees were able to roll forward from year to year, or cash out at retirement or departure. Acquirer will honor PTO Claims for retained employees up to the maximum amount permitted to be accrued pursuant to PIHs human resources policies (___ days/hours of PTO). The Assumed Employee PTO Claims shall be treated as follows:
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Case 2:09-bk-34714-BB
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 4. Class 4 -- Convenience Class Claims CLASS # 3 DESCRIPTION IMPAIRED (Y/N) No TREATMENT
Assumed Employee PTO Claims Total amt of claims = [Approximately $450,000 alleged per proofs of claim; additional amounts to be determined, but total assumed to be approximately $3.8 million]
For all employees that are retained by Acquirer as employees of the Hospital, PTO will be allowed to be used on the same terms and conditions as before Petition Date, subject to a cap of [____hours/days] For employees that are not retained by Acquirer, if any, PTO claims will be treated as Class 5 Claims (or as Priority or Convenience Class Claims, if they qualify). Such nonretained employees shall have 30 days after notice that they will not be retained within which to file amended proofs of claims setting forth the cash equivalent of their accrued PTO pursuant to Debtors existing policies.
Class 4 consists of Convenience Class Claims, meaning those General Unsecured Claims that are either less than or equal to $7,500, or if the claim amount is greater, the claimant elects to reduce its Claim to $7,500 pursuant to the Convenience Class Election, and thus accept a maximum of $3,750 as payment in full. Debtor estimates that there are approximately 850 claimants with Claims less than or equal to $7,500, and 150 additional claimants with Claims between $7,500 and $15,000 who can be expected to elect treatment as Convenience Class Claims because $3,750 would equal the maximum 25% distribution that they might otherwise receive over a seven year period as part of Class 5, 6, or 8. It is possible that holders of Claims greater than $15,000 will also elect treatment in Class 4 to obtain the benefit of an immediate cash payment rather than payments of a greater amount over a period of years. There is no limit on the number or amount of Claims that may be the subject of a Convenience Class Election. Convenience Class Claims will be treated as follows:
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1 2 3 4 5 6 7 8 9 10 11 12 5. 13 Class 5 consists of General Unsecured Claims that are not Priority Claims, Assumed 14 Employee PTO Claims, Convenience Class Claims,, Risk-Share Claims, Capitation Provider 15 Claims, or Health Plan Loan Claims. The Class 5 Claims shall be treated as follows: 16 17 18 19 20 21 22 23 24 25 26 27 28 CLASS # 5 DESCRIPTION IMPAIRED (Y/N) Yes TREATMENT Class 5 -- General Unsecured Claims (Not Otherwise Classified) CLASS # 4 DESCRIPTION IMPAIRED (Y/N) Yes TREATMENT
Convenience Class Claims Total amt of claims = Est. Allowed amount of $1.6 million, assuming all claimants with Claims between $1 and $15,000 elect treatment as Convenience Class Claims; [total Claimed amount of approximately $3 million]
To be paid 50% of allowed amount of claim up to a maximum of $3,750, on the Effective Date or as soon as practicable thereafter. There shall be no limitation on the number of Convenience Class members.
General Unsecured Claims (Not Otherwise Classified) Total amt of claims = [Approximately $30 million for Trade, Rejection, Litigation, and other claims not separately classified]
Class 5 Claims shall be paid: Effective Date Payments: 5% in cash ($265,000) (for Disputed Claims, payment to be made on the Next Payment Date after the Claim is Allowed) Installment Plan Payments: Interest-only annual cash payments at the Interest Rate, commencing on the first anniversary of the Effective Date; and Pro Rata principal payments in the aggregate amount up to another 20% of the Allowed Claim, not to exceed $7.5 million in the aggregate (including the Effective Date Payment), payable in full on the 7-year anniversary of the Effective Date. 34
Case 2:09-bk-34714-BB
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 CLASS # 6 DESCRIPTION IMPAIRED (Y/N) Yes TREATMENT Class 6 Claims shall be paid: Risk-Share Claims held by AppleCare, Alliance, and Pioneer Total amt of claims = Estimated Allowed amount of $[3.2] million; filed Claims in the amount of $18.5 million Effective Date Payments: 5% in cash ($160,000) (for Disputed Claims, payment to be made on the Next Payment Date after the Claim is Allowed) Installment Plan Payments: (i) Interest-only annual cash payments at the Interest Rate, commencing on the first anniversary of the Effective Date; and (ii) Pro Rata principal payments in the aggregate amount up to another 20% of the Allowed Claim, not to exceed $800,000 in the aggregate (including the Effective Date Payment), payable in full on the 7-year anniversary of the Effective Date. Guarantee Option: By voluntarily reducing its Allowed Claim by 25%, each creditor may individually elect to have payment of the principal portion of its Installment Plan Payments guaranteed by PIH. 6. Class 6 -- Risk-Share Claims CLASS # DESCRIPTION IMPAIRED (Y/N) TREATMENT
Guarantee Option: By voluntarily reducing its Allowed Claim by 25%, each creditor may individually elect to have payment of the principal portion of its Installment Plan Payments guaranteed by PIH.
Class 6 consists of certain disputed General Unsecured Claims held by AppleCare, Alliance, and Pioneer with respect to alleged risk-sharing profit allocations arising from Debtors former capitation agreements. The Risk-Share Claims shall be treated as follows:
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7.
Class 7 -- Health Plan Loan Claims
Class 7 consists of the Health Plan Loan Claims held by Health Net and PacifiCare with respect to unsecured prepetition loans made to Debtor or payments made to third-party providers for Debtors benefit and at Debtors request. PacifiCares Filed Proof of Claim also includes amounts attributed to possible Claims for reimbursement by Debtor if PacifiCare pays Debtors obligations to holders of Class 8 Capitation Provider Claims (the PacifiCare Reimbursement Claim). Debtor has determined that many of the invoices listed in the PacifiCare Proof of Claim have already been paid or settled, are overstated, or otherwise do not constitute an obligation of Debtor, thereby significantly reducing the potential amount of the PacifiCare Reimbursement Claim. Debtor is in the process of working with PacifiCare to reconcile the invoices included in the PacifiCare Proof of Claim against the Filed and scheduled Claims in this Case. However, after eliminating the paid, settled, or erroneous invoices from the PacifiCare Proof of Claim, a significant portion of the PacifiCare Proof of Claim (the Duplicate Invoices) is duplicative of certain proofs of claims filed in this Case directly by the third-party providers (the Class 8 Capitation Provider Claims), and this duplication must be addressed. Debtor contends that PacifiCare has no legal obligation to pay the Capitation Provider Claims, but understands that PacifiCare is concerned about having to defend against the such claims even if it has strong defenses to any such third-party lawsuits. The Plan proposes to (i) disallow the PacifiCare Reimbursement Claim pursuant to Section 502(d)(1)(B) as a contingent claim for reimbursement in exchange for incentives for ; (ii) provide incentive to the holders of the Capitation Provider Claims to promise not to sue PacifiCare on account of the Duplicate Invoices in the form of an increase in the Effective Date cash payment to each holder of a Capitation Provider Claim that indicates on its ballot that it so covenants (such holders, the Releasing Capitation Providers); (iii) require holders of Capitation Provider Claims that do not release PacifiCare (Non-Releasing Capitation Providers) to submit to a claims resolution process in this Case to try to resolve the appropriate contracted amount of such Capitation Provider Claims against Debtor (based upon Debtors records and contracts) and to mediate the issue of PacifiCares potential liability on such Claims. The claims resolution process
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will propose a temporary stay of any collection efforts against PacifiCare to provide the opportunity for an orderly resolution of the Capitation Provider Claims. A motion to approve the claims resolution process will be submitted for approval in connection with the Confirmation Hearing (the ADR Motion). The Health Plan Loan Claims shall be treated as follows: CLASS # 7 DESCRIPTION IMPAIRED (Y/N) Yes TREATMENT
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Health Plan Loan Claims of Health Net and PacifiCare Total amt of claims = Est. Allowed amount of $5.5 million, limited to amounts actually loaned to Debtor or paid to providers on Debtors account and at its request [Note: PacifiCares Claim may be partially secured by a $500,000 letter of credit. Investigation pending]
Class 7 Claims shall be paid: Effective Date Payments: 5% in cash ($250,000) (for Disputed Claims, payment to be made on the Next Payment Date after the Claim is Allowed) Installment Plan Payments: (i) Interest-only annual cash payments at the Interest Rate, commencing on the first anniversary of the Effective Date; and (ii) Pro Rata principal payments in the aggregate amount up to another 85% of the Allowed Claim, not to exceed $5 million in the aggregate (including the Effective Date Payment), payable in full on the 7-year anniversary of the Effective Date. Guarantee Option: By voluntarily reducing its Allowed Claim by 25%, each creditor may individually elect to have payment of the principal portion of its Installment Plan Payments guaranteed by PIH.
8.
Class 8 -- Capitation Provider Claims (Overlapping with PacifiCare Proof of Claim)
Capitation Provider Claims are General Unsecured Claims Filed by approximately 100 hospitals, physicians, ambulance services, and other healthcare providers that provided services to individuals who were insured members under Debtors terminated capitation contracts, and whose Claims overlap the Duplicate Invoices portion of the PacifiCare Reimbursement Claim. Debtor 37
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contends that PacifiCare has no legal obligation to pay the Capitation Provider Claims, and believes that the holders of the Capitation Provider Claims would encounter substantial litigation risk and expense were they to attempt to collect from PacifiCare on account of their Claims in this Case. The Plan proposes to resolve these issues without litigation by providing each holder of a Capitation Provider Claim an additional Effective Date cash payment equal to 5% of their Allowed Claims if such holder affirms on its ballot that it agrees not to sue PacifiCare on account of such Claim. This offer is likely to be accepted by many (maybe most) of the holders of Capitation Provider Claims. Those that decline to give up the right to sue PacifiCare will be required to look to Debtor in the first instance to determine the appropriate amount of such Claims, pursuant to the separate ADR Motion pursuant to which Debtor will seek a temporary stay of other proceedings against PacifiCare to allow for the proper amounts of the Capitation Provider Claims to be determined by accounting reconciliation and mediation. The mediation process, while mandatory, will not impose substantive settlements. Debtor believes that this process is highly likely to result is resolution of most of these Claims in a quick, cost-effective manner. In exchange for the
opportunity to resolve the Duplicate Invoices, Debtor believes that PacifiCare should be required not to offset or recoup its Health Plan Loan Claim against amounts otherwise due to Debtor or to Acquirer, as purchaser of Debtors accounts receivable. The Capitation Provider Claims shall be treated as follows: CLASS # 8 DESCRIPTION Capitation Provider Claims (Overlapping PacifiCare Proof of Claim) Total amt of claims = Est. Allowed amount of $[1.3] million IMPAIRED (Y/N) Yes TREATMENT Class 8 Claims shall be paid: Effective Date Payments: (i) 5% in cash ($65,000) (for Disputed Claims, payment to be made on the Next Payment Date after the Claim is Allowed); and (ii) provided that the individual creditor covenants not to sue PacifiCare on account of the Capitation Provider Claim (by so noting on the Ballot), with respect to such creditors Claim, an additional 5% in cash. Installment Plan Payments: (i) Interest-only annual cash payments at the Interest Rate, commencing on the first anniversary of the Effective Date; and (ii) Pro Rata principal 38
Case 2:09-bk-34714-BB
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 9. Class 9 -- Interest Holders CLASS # DESCRIPTION IMPAIRED (Y/N) TREATMENT payments in the aggregate amount up to another 20% of the Allowed Claim, not to exceed $325,000 in the aggregate (including the Effective Date Payment) of the Effective Date. Guarantee Option: By voluntarily reducing its Allowed Claim by 25%, each creditor may individually elect to have payment of the principal portion of its Installment Plan Payments guaranteed by PIH.
Interest holders are the parties who hold ownership interest (i.e., equity interest) in Debtor. As a non-profit corporation under California law, Debtor has no Interest holders in the usual sense. Instead, Debtors non-profit Parent is its sole corporate member. Parent shall not receive any distribution on account of its interest in Debtor.. D. Means of Funding and Implementing the Plan
Debtor has entered into an Asset Purchase Agreement with Acquirer, pursuant to which PIH, through its affiliate Acquirer, will acquire the Acquired Assets, constituting substantially all of Debtors assets, on the Effective Date of the Plan. Acquirer will thereafter control and manage the operations of the hospital facilities. To pay for this acquisition, PIH will provide Exit Financing to pay all of the Effective Date Payments required under the Bankruptcy Code or under the Plan to be paid at the closing of the Transaction on the Effective Date of the Plan, including repayment in full of the outstanding balance due on the DIP Loan and/or the Replacement DIP Loan and the other Administrative Claims; the PIH Guarantee of the principal amount of the Installment Plan Payments, if Acquirer does not pay it; and such other working capital and funds for capital expenditures as may be required by the Attorney General or agreed by Debtor and Acquirer. Acquirer will assume substantial liabilities, including the $20.9 million Bonds, the $1.2 million Apollo debt, $3 million + in lease payments, and about $15 million in Installment Plan Payments.
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The combination of cash and the assumed liabilities provide a value of more than $55 million for the Transaction. 1. Funding for the Plan a. The Effective Date Payments
PIH shall: (i) provide funds to or on behalf of the Debtor on the Effective Date in an amount equal to the following: (A) all principal, interest and other amounts, if any, due or outstanding under the DIP Loan or Replacement Loan, as the case may be, as of the Effective Date; and (B) the other Effective Date Payments; and (ii) provide a written commitment to provide working capital and funds for capital expenditures in excess of the Exit Financing as agreed by Debtor and Acquirer or as may be required by the California Attorney General. The Effective Date Payments are estimated as follows: (i) the principal, interest and other amounts, if any, then outstanding under the DIP Loan or the Replacement DIP Loan, as the case may be, estimated at $10-15 million; (ii) all Administrative Expense Claims, consisting of unpaid Hospital operating expenses, professional fees and expenses, (including any Adequate Protection Payments (as such term is defined in the Order Regarding Use of Cash Collateral and Adequate Protection entered on October 16, 2009) for Wells Fargos fees and expenses that have not otherwise been paid by the Effective Date), and 503(b)(9) Claims, totaling $3-5 million (depending upon whether the DIP Loan has provided higher levels of advances to reduce outstanding bills); (iii) all Allowed Priority Claims (not quantified, but estimated at $250,000); (iv) 50% of the Convenience Claims, totaling about $800,000; (v) Secured Claims for property taxes in Class 2D, in the amount of $19,000; (vi) Cure Claims (TBD); (vii) initial cash payments to Classes 5, 6, 7, and 8 ($265,000, $40,000, $250,000, and $65,000 respectively); (viii) initial funding for the Liquidation Trust ($100,000); and (ix) the Disputed Administrative Claims Reserve, including amounts for Disputed Cure Claims (TBD). b. Working Capital Financing
PIH shall either provide or arrange for a third party lender to provide working capital for its operation of the hospital facility after the Effective Date, in an amount sufficient to satisfy the requirements of the California Attorney General, or as otherwise agreed by Debtor and Acquirer.
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c.
Payments to Class 2 Secured Creditors
The Class 2A Bonds shall be assumed and provided with a lien on the Gross Operating Revenues (as defined in the Bond Documents) of Acquirer and be paid by Acquirer according to their terms in regular monthly payments until their maturity dates. [REQUEST BY WELLS
FARGO, SUBJECT TO NEGOTIATION: The Class 2A Bonds shall also be granted a replacement lien for the Affiliate Lien (as defined in the Order Regarding Use of Cash Collateral and Adequate Protection entered on October 16, 2009), such lien being a first priority mortgage, lien and security interest in the Medical Office Building, subject only to prior valid and perfected liens, if any, existing on the Petition Date.] The Bonds shall also be guaranteed by PIH. Class 2B, Apollo, shall be assumed and provided with a lien on the accounts receivable of Acquirer in the same priority as its lien against Debtor and be fully amortized and paid over two years in quarterly payments by Acquirer [REQUEST BY APOLLO, SUBJECT TO NEGOTIATION: , with the first payment due on the Effective Date]. Class 2C, equipment leases, shall be assumed, replacement liens shall be granted in the collateral, and the lease paid according to their terms by Acquirer (or, to the extent that they are not assumed by Acquirer, Debtor shall reject them, permit them to recover their collateral, and file Rejection Claims). Class 2D, Property Taxes, will constitute part of the Effective Date Payments to be paid in full on the Effective Date from funds provided by PIH. d. Installment Plan Payments and Acquirers Guarantee for Classes 5, 6, 7, and 8. From and after the Confirmation Date, Acquirer will pay(i) the Bond Debt, the Apollo Claim, the assumed contracts and leases directly to the creditors in question the Installment Plan Payments as they come due to the Plan Trustee. Each holder of an Allowed Claim in Classes 5, 6, 7, and 8 may elect to reduce its Allowed Claim by 25% and receive from Acquirer seventy-five (75%) of the amount that would otherwise be payable to that unsecured creditor under the Plan in exchange for the PIH Guarantee of the principal portion of Acquirers Installment Plan Payment obligation with respect to that Allowed Claim. All the other terms and conditions of the treatment of the electing creditor under the Plan would remain unchanged. If Acquirer defaults with respect
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to the principal portion of the Installment Plan Payments under the Plan, the PIH would be obligated to make the payments to the Plan Trustee. 2. Post-Confirmation Management
Acquirer will provide the management for the Hospital after the Effective Date. [As of the date of the filing of the Plan, no discussions have been conducted between the Executive Management Team and PIH about any future employment with Acquirer.] [TO BE ADDED: description of the local management of the Hospital and the composition and function of the proposed new local Advisory Board for the Hospital] 3. Disbursing Agent
The Plan Trustee shall act as the disbursing agent for the purpose of making all distributions to Classes 5, 6, 7, and 8 provided for under the Plan. The Plan Trustee shall be appointed pursuant to the terms of the Plan Trust, attached as Exhibit B to the Plan [to be filed], and shall serve without a bond and shall receive quarterly compensation of [TBD] for distribution services rendered and expenses incurred pursuant to the Plan. A retainer of $100,000 for the Plan Trustee and any professionals retained by the Plan Trustee shall be included in the Administrative Expense Claims to be paid by Acquirer. The Plan Trustee may surcharge the Installment Plan Payments received from Acquirer or PIH to the extent necessary to pay reasonable and necessary fees and expenses in excess of the retainer. Any funds received by the Plan Trustee shall be maintained in segregated, interest bearing bank accounts. The Plan Trustee is authorized and encouraged to retain
professionals of Debtor or the Committee, based upon their knowledge and expertise with respect to the Claims and other matters affecting the administration of the Plan Trust and its assets. The Plan Trustee shall have access to all books, records, and former employees of Debtor that are acquired by Acquirer for purposes of objecting to Disputed Claims and for the other functions the Trust. The Plan Trustee shall also have the authority and obligation to enforce the terms of the Plan against Acquirer or PIH, as appropriate, if either fails to make payments to the Plan Trustee as required under the Plan, provided, however, such authority and obligation of the Plan Trustee shall not be in derogation of the rights of any other party in interest to enforce the terms of this Plan against Acquirer and PIH.
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E.
Objections to Claims
The following procedures set forth in the Plan apply to distributions made pursuant to this Plan whether by (i) Debtor as to the Effective Date Payments, or (ii) the Plan Trustee as to all postEffective Date distributions received from PIH or the Acquirer on account of the PIH Guarantee (either Debtor or the Plan Trustee, a Distributing Party). In connection with the Plan, to the extent applicable, the Distributing Party shall comply with all tax withholding and reporting requirements imposed on it by any governmental unit, and all distributions pursuant to the Plan shall be subject to such withholding and reporting requirements. 1. Manner of Cash Payments Under the Plan
Cash payments to domestic entities holding Allowed Claims will be tendered in U.S. Dollars and will be made by checks drawn on a domestic bank or by wire transfer from a domestic bank. Payments made to any foreign creditors holding Allowed Claims may be paid, at the option of the Distributing Party in such funds and by such means as are necessary or customary in a particular foreign jurisdiction. 2. No Distributions With Respect to Disputed Claims
No payments of cash or distributions of other property or other consideration of any kind shall be made on account of any Disputed Claim unless and until such Claim becomes an Allowed Claim or is deemed to be such for purposes of distribution, and then only to the extent that the Claim becomes, or is deemed to be for distribution purposes, an Allowed Claim. Separate Disputed Claims Reserves will be established for Administrative Claims and for each of Classes 5, 6, 7 and 8 in amounts to be determined at confirmation. Unless otherwise provided herein, any holder of a Claim that becomes an Allowed Claim after the Effective Date will receive any unpaid distribution that otherwise would have been payable under the Plan on the Next Payment Date after the date that such Claim becomes an Allowed Claim. 3. Delivery of Distributions
The Distributing Party shall make distributions to each holder of an Allowed Claim by mail as follows: (a) at the address set forth on the proof of Claim filed by such holder of an Allowed Claim; (b) at the address set forth in any written notice of address change delivered to the
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Distributing Party after the date of any related proof of Claim; and (c) at the address reflected in the Schedules if no proof of Claim is filed and the Distributing Party has not received a written notice of a change of address. 4. Undeliverable and Unclaimed Distributions
If the distribution to the holder of any Allowed Claim is returned as undeliverable, no further distribution shall be made to such holder unless and until the Distributing Party is notified in writing of such holders then current address. Subject to the other provisions of the Plan,
undeliverable distributions shall remain in the possession of the Distributing Party pursuant to this Section until such time as a distribution becomes deliverable. All undeliverable cash distributions will be held in unsegregated, interest-bearing bank accounts for the benefit of the entities entitled to the distributions. These entities will be entitled to any interest actually earned on account of the undeliverable distributions. The bank account will be maintained in the name of the Distributing Party, but it will be accounted for separately. Any holder of an Allowed Claim who does not assert a Claim in writing for an undeliverable distribution within one year after the date such distribution was due shall no longer have any Claim to or interest in such undeliverable distribution, and shall be forever barred from receiving any distributions under this Plan, or from asserting a Claim against the Debtor, Acquirer, the Plan Trust, PIH, or their respective property, and the Claim giving rise to the undeliverable distribution will be discharged. Nothing contained in the Plan shall require the Distributing Party to attempt to locate any holder of an Allowed Claim. 5. Estimation of Disputed Claims for Distribution Purposes
Debtor (on or before the Effective Date) or the Plan Trustee (after the Effective Date) may move for a Court order estimating any Disputed Claim. The estimated amount of any Disputed Claim so determined by the Court shall constitute the maximum recovery that the holder thereof may recover after the ultimate liquidation of its Disputed Claim, irrespective of the actual amount ultimately Allowed.
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F.
Full Satisfaction
The Distributing Party shall make, and each holder of a Claim shall receive, the distributions provided for in the Plan for full satisfaction and discharge of such Claim. G. Setoff, Recoupment, and Other Rights
Notwithstanding anything to the contrary contained in the Plan, the Plan Trustee may, but shall not be required to, setoff, recoup, assert counterclaims or withhold against the distributions to be made pursuant to this Plan on account of any claims that Debtor or the Estate (or the Plan Trust as successor to the Estate) may have against the entity holding an Allowed Claim; provided, however, that neither the failure to effect such a setoff or recoupment, nor the allowance of any Claim against Debtor, nor any partial or full payment during the Cases or after the Effective Date in respect of any Allowed Claim, shall constitute a waiver or release by Debtor or the Estate of any claim that they may possess against such holder. H. Conditions to Effectiveness
The Plan shall not become binding unless and until the Effective Date occurs. The Effective Date is the first Business Day (a) that is at least fourteen days after the Confirmation Date; (b) on which no stay of the Confirmation Order is in effect; and (c) on which all of the following conditions have been satisfied as set forth below or waived: 1. a) b) Conditions The Confirmation Order shall have become a Final Order; The Exit Financing shall be in full force and effect and all conditions therein to
the obligations of the parties to the Exit Financing will have been satisfied or waived as set forth in the Exit Financing documents; c) All conditions for the closing of the Transaction have been satisfied or
waived by the party in whose favor such condition exists; and d) All other Transaction Documents, agreements, writings and undertakings
required under the Plan shall be executed and ready for consummation. Debtor shall mail a Notice of Occurrence of Effective Date to all creditors and interest holders of record as of the date of entry of the Confirmation Order.
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2.
Waiver of Conditions
Except as otherwise specified herein, the requirement that the conditions to the occurrence of the Effective Date be satisfied may be waived in whole or in part, and the time within which any such conditions must be satisfied may be extended, by Debtor, but only with the concurrence of Acquirer. The failure to timely satisfy or waive any of such conditions may be asserted by Debtor regardless of the circumstances giving rise to the failure of such condition to be satisfied, including any action or inaction by Debtor. The failure of Debtor to exercise any of the foregoing rights shall not be deemed a waiver of any other rights and each such right shall be deemed ongoing and subject to assertion at any time. I. Authorization of Entity Action
Each of the matters provided for under this Plan involving the entity structure of Debtor or Acquirer or entity action to be taken by or required of Debtor or Acquirer shall, as of the Effective Date, be deemed to have occurred and be effective as provided herein, and shall be authorized, approved and, to the extent taken prior to the Effective Date, ratified in all respects without any requirement of further action by creditors or directors of Debtor or Acquirer. J. Risk Factors
Debtors ability to perform its obligations under the Plan is subject to various factors and contingencies, some of which are described in this section. The following discussion summarizes only some material risks associated with the Plan and is not exhaustive. Moreover, this section should be read in connection with the other disclosures contained in the Plan and Disclosure Statement. Each Claim holder, in conjunction with its advisors, should supplement the following discussion by analyzing and evaluating the Plan and the Disclosure Statement as a whole. THE RISKS ASSOCIATED WITH THE PLAN AND REORGANIZED DEBTOR MUST BE CAREFULLY CONSIDERED IN DETERMINING WHETHER TO VOTE TO ACCEPT THE PLAN. This discussion assumes that the Plan is confirmed and that the Effective Date occurs. However, the occurrence of the Effective Date of the Plan is subject to a number of conditions (set
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forth in Section [III.J] of the Plan), the failure of any one of which may delay the Effective Date, or prevent the Effective Date from occurring at all. 1. General Risks of the Health Care Industry
The health care industry, and markets within the health care industry in which the Hospital competes, are subject to various risks, including: (i) adverse changes in general economic conditions; (ii) adverse changes in governmental healthcare policy, adverse regulatory actions, and decreases in reimbursement rates; (iii) evolving consumer preferences; (iv) professional liability claims; and (v) the availability and expense of professional liability insurance. Acquirers ability to make the Installment Plan Payments and the required payments on the Secured Claims, assumed contracts and leases, and PIHs ability to make the payments required under the PIH Guarantee, will depend in part on the ability of Acquirers management to anticipate and respond to changing patient needs and demands and to translate market trends into appropriate service and product offerings. If Acquirer is unable successfully to anticipate, identify, or react to changing patient needs and demands, or misjudges the market for their services or products, revenues will be lower, and Acquirer may be faced with excess capacity in its facilities, or a decrease in revenues that may impact its ability to make the Installment Plan Payments. Acquirers future performance will be affected by these factors, the other factors listed herein, and possibly other unanticipated factors that are beyond its control. These factors may have a material effect on Acquirers businesses. 2. Competition
Debtor and Acquirer operate in a highly competitive industry. Some competing facilities provide services not offered by Debtor or Acquirer, and some are operated by entities having greater financial and other resources than Debtor or Acquirer. Furthermore, cost containment efforts, which encourage more efficient utilization of acute care hospital services, have resulted in decreased hospital occupancy in recent years. As a result, a significant number of acute care hospitals have converted portions of their facilities to other purposes, including specialty and subacute units. These factors may also affect Acquirers ability to make the Installment Plan Payments.
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3.
Governmental Regulations
The business of providing acute healthcare is heavily regulated at both the state and federal levels. This complex regulatory structure can affects a hospitals ability to operate, facility standards, services offered, patient care reimbursements, and operating costs. The operation of a hospital and the provision of health care services are subject to federal, state, and local laws relating to the adequacy of medical care, equipment, personnel, operating policies, rate-setting, and compliance with building codes and environmental laws. Hospitals are also subject to periodic inspection by governmental and other authorities to assure continued compliance with various standards, continued licensing under state law, and certification under the Medicare and Medicaid programs. From time to time, a hospital may receives notices from federal and state regulatory agencies relating to alleged deficiencies for failure to comply with applicable regulations. Facilities that are not in substantial compliance and do not correct deficiencies within a certain time frame may be subject to civil monetary penalties and/or terminated from the Medicare and/or Medicaid Programs. In addition, denial of certification or licensure revocation may occur. While Debtor is currently in good standing, there can be no assurance that Acquirer will not be subject to sanctions and/or penalties in the future. 4. Uncertainty of Future Reimbursement Levels
There can be no assurance that payments under government and other third-party payor programs will be sufficient to cover costs for patients eligible for such programs. In addition, there can be no assurance that facilities operated by, or services provided by, Acquirer will meet the requirements for participation in such programs. Acquirer and PIH could be adversely affected by continuing efforts of government and other third-party payors to contain the cost of reimbursement for healthcare services. In particular, budgetary pressures in the state of California have led to certain proposals from the Governor to limit reimbursement for certain services offered by Debtor under the California Medi-Cal program. In general, reimbursement rates have increased at a rate that is less than the rate of inflation applicable to healthcare providers. Debtor believes that the Plan projections make reasonable assumptions about the Medi-Cal, Medicaid, and Medicare programs
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and conservatively project future reimbursement rates to remain at the levels mandated by current law. There can be no assurance, however, that these reimbursement rates will not be reduced further. 5. Referral Restrictions and Fraud and Abuse
Debtor is and Acquirer will also be subject to federal and state laws that govern financial and other arrangements between healthcare providers. Federal law, as well as the law in California, prohibits direct or indirect payments or fee-splitting arrangements between healthcare providers that are intended to induce or reward the referral of patients to, or the recommendation of, a particular provider for medical products and services. These laws include the federal Anti-Kickback Statute that prohibits, among other things, the offer, payment, solicitation, or receipt of any form of remuneration in return for, or to induce, the referral of federal health care program (Medicare and Medicaid) patients or recommending or arranging for the purchase of items or services covered by a federal health care program. A wide array of relationships and arrangements, including ownership interests in a company by persons who refer or are in a position to refer patients, as well as personal service agreements have, under certain circumstances, been alleged or been found to violate these provisions. Certain arrangements, such as the provision of services for less than fair market value compensation, may also violate such laws. Because of the laws broad reach, the federal government has published regulations, known commonly as safe harbors, which set forth the requirements under which certain relationships will not be considered to violate the law. One of these safe harbors protects payments for personal services or management services if the aggregate payment is set in advance at a fair market rate and does not vary with the value or volume of services referred, provided there is a written contract which meets certain requirements. A safe harbor for certain discounts, which focuses primarily on appropriate disclosure, is also available. A violation of the federal Anti-Kickback Statute could result in the loss of eligibility to participate in Medicare or Medicaid, criminal penalties of up to five years imprisonment and/or $25,000 in fines, as well as civil monetary penalties. Violations of similar state laws can result in comparable penalties.
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In addition, the federal government and some states restrict certain business relationships between physicians and other providers of healthcare services. Effective January 1, 1995, the Omnibus Budget Reconciliation Act of 1993 (Stark II) prohibits any physician with a financial relationship (defined as a direct or indirect ownership or investment interest or compensation arrangement) with an entity from making any Medicare referrals for a broad array of designated health services to such entity. Violations of Stark II may result in the imposition of civil monetary penalties of up to $15,000 for each prohibited service provided and billed, as well as restitution of reimbursement for such services. Various federal and state laws prohibit other types of fraud by healthcare providers, including criminal provisions that prohibit filing false claims or making false statements to receive payment or certification under Medicare and Medicaid. Violation of these provisions is a felony punishable by up to five years imprisonment and/or $25,000 in fines. Civil provisions prohibit the known filing of a false claim or the known use of false statements to obtain payment. The penalties for such a violation are fines of not less than $5,500 or more than $11,000, plus treble damages, for each claim filed. State and federal governments are devoting increasing attention and resources to antifraud initiatives against healthcare providers. The Accountability Act and the Balanced Budget Act expand the penalties for healthcare fraud, including broader provisions for the exclusion of providers from the Medicare and Medicaid Programs and the establishment of civil monetary penalties for violations of the anti-kickback provisions. While Debtor believes that its practices are consistent with Medicare and Medicaid guidelines, those guidelines are often vague and subject to interpretation. There can be no assurance that antifraud enforcement actions will not adversely affect Acquirer or PIH following the Effective Date. 6. Pending Legislation
Government reimbursement programs are subject to statutory and regulatory changes, retroactive rate adjustments, administrative ceilings and government funding restrictions, all of which could materially decrease the rates paid to Debtor (or Reorganized Debtor following the Effective Date) for their services. Since 1972, Congress has consistently attempted to restrain the
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growth in federal spending on healthcare programs. Debtor expects that there will continue to be a number of state and federal proposals to limit Medicare and Medicaid reimbursement for healthcare services. Debtor cannot, at this time, predict what healthcare reform legislation will ultimately be enacted and implemented or whether other changes in the administration or interpretation of the governmental healthcare programs will occur. There can be no assurance that future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs, if enacted, will not have a material adverse effect on Acquirers results of operations. 7. Environmental Regulation
Debtor is and Acquirer will also be subject to a wide variety of federal, state, and local environmental and occupational health and safety laws and regulations. Regulatory requirements faced by healthcare providers include the following areas: air and water quality control; waste management; asbestos, polychlorinated biphenyls, and radioactive substances; and requirements for providing notice to employees and members of the public about hazardous materials and wastes. In Debtors role as owner and operator of the Hospital, Debtor may be subject to liability for investigating and remediating any hazardous substances that are located on the property, including any such substances that may have migrated off, or emitted, discharged, leaked, escaped, or been transported from the property. Part of Debtors operations may involve the handling, use, storage, transportation, disposal, and/or discharge of hazardous, infectious, toxic, radioactive, flammable, and other hazardous materials, waste, pollutants, or contaminants. Such activities may result in damage to individuals, property or the environment; may interrupt operations and/or increase costs; may result in legal liability, damages, injunctions, or fines; may result in investigations, administrative proceedings, penalties, or other governmental agency actions; and may not be covered by insurance. There can be no assurance that Debtor (or Acquirer or PIH following the Effective Date) will not encounter such risks in the future, and that such risks will not result in material adverse consequences to Acquirer or PIHs operations or financial condition. 8. General Economic Slowdown
Debtor is and Acquirer will be exposed to risks related to a slowdown in the national and global economies, which is due to many factors, including decreased consumer confidence,
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concerns about inflation, and reduced corporate profits and capital spending.
If economic
conditions worsen, Acquirers business, financial condition, and results of operations may be materially and adversely affected. 9. Reliance on Key Personnel
Debtor depends on key personnel. Debtors loss of current personnel or failure to hire and retain additional personnel could affect its business negatively. Debtor depends on its ability to attract and retain highly skilled technical and managerial personnel and believes that its future success in developing products and achieving a competitive position will depend in large part on the ability to identify, recruit, hire, train, retain, and motivate highly skilled personnel. Acquirer may not continue to retain, and may not be able to find qualified replacements for, members of its management team. The loss of services of one or more of them could have a material adverse effect on Acquirers business, financial condition, and operations. In addition, Acquirer may need to expend additional capital to attract and retain key personnel. 10. Non-Occurrence of the Effective Date
The Plan shall not become binding until the Effective Date occurs. The Effective Date is the first Business Day (a) that is at least 14 days after the Confirmation Date; (b) on which no stay of the Confirmation Order is in effect; and (c) on which the conditions set forth in Section III.J of the Plan have been satisfied or waived by Debtor. If the conditions set forth on section III.J of the Plan do not occur (or are not waived), the Effective Date may never occur. While the exact Effective Date remains to be determined, based on the current circumstances of the Case, Debtor presently believes that the Effective Date will occur within 30 days following the Confirmation Date. K. Other Provisions of the Plan 1. Executory Contracts and Unexpired Leases a. Assumptions
On the Effective Date, Acquirer shall assume all executory contracts and unexpired leases of Debtor listed on the Schedule of Assumed Agreements. Subject to the terms of the APA, Debtor reserves the right to amend the Schedule of Assumed Agreements at any time prior to the Effective Date to: (a) delete any executory contract or
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unexpired lease and provide for its rejection under the Plan or otherwise, or (b) add any executory contract or unexpired lease and provide for its assumption under the Plan. Debtor will provide notice of any amendment to the Schedule of Assumed Agreements to the party or parties to the agreement affected by the amendment. The Confirmation Order will constitute a Court order approving the assumption, on the Effective Date, of all executory contracts and unexpired leases identified on the Schedule of Assumed Agreements. 2. Cure Payments
Any monetary amounts by which each executory contract and unexpired lease to be assumed is in default shall be satisfied, pursuant to Bankruptcy Code 365(b) (l), by payment of the default amount (as set forth in the Debtors books and records), a schedule of which will be Filed and served by the Exhibit Filing Date, in full in cash on the later of the Effective Date or when such Cure Claim is Allowed, or on such other terms as the parties to each such executory contract or unexpired lease may otherwise agree. In the event of a dispute regarding (a) the amount of any Cure Payments, (b) the ability of Acquirer (or the assignee, if applicable) to provide adequate assurance of future performance (within the meaning of Bankruptcy Code 365) under the contract or lease to be assumed, or (c) any other matter pertaining to assumption, the cure payments required by Bankruptcy Code 365(b)(1) shall be made following the entry of a Final Order resolving the dispute and approving the assumption. Pending the Bankruptcy Courts ruling on such motion, the executory contract or unexpired lease at issue shall be deemed assumed by Acquirer (or the assignee, if applicable) as of the Effective Date, unless otherwise ordered by the Bankruptcy Court. 3. Objections to Assumption
Any entity who is a party to an executory contract or unexpired lease that will be assumed under the Plan must File with the Court and serve upon interested parties a written statement and supporting declaration stating the basis for its objection. This statement and declaration must be Filed and served by no later than the last business day that is ten days prior to the Confirmation Hearing. Any entity that fails to timely File and serve such a statement and declaration will be
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deemed to waive any and all objections to the proposed assumption of its contract or lease. In the absence of a timely objection by an entity who is a party to an executory contract or unexpired lease, the Confirmation Order shall constitute a conclusive determination as to the amount of any cure and compensation due under the executory contract or unexpired lease, and that Acquirer that has demonstrated adequate assurance of future performance with respect to such executory contract or unexpired lease. 4. Resolution of Claims Relating to Assumed Agreements
In accordance with the procedures set forth in Section IV.A.2 relating to the Cure Payments, payment of the Cure Payments with respect to executory contracts or unexpired leases that will be assumed under the Plan shall be deemed to satisfy, in full, any prepetition or postpetition arrearage or other Claim asserted in a Filed proof of Claim or listed in the Schedules, irrespective of whether the Cure Payment is less than the amount set forth in such proof of Claim or the Schedules. Upon the tendering of the Cure Payment, such Claim shall be disallowed, without further order of the Court or action by any party. 5. Reservation of Fair and Equitable (Cram Down) Power
Debtor reserves the right to confirm the Plan as to any impaired Class that does not accept the Plan by the requisite number of votes pursuant to the fair and equitable power of Bankruptcy Code 1129(b). L. Rejection of Executory Contracts and Unexpired Leases 1. Rejected Agreements
On the Effective Date, Debtor will reject all executory contracts and unexpired leases set forth on the Schedule of Rejected Agreements. The Confirmation Order will constitute a Court order approving the rejection, on the Effective Date, of the executory contracts and unexpired leases not assumed under the Plan. 2. Bar Date for Rejection Damage Claims
Any Rejection Damage Claim or other Claim for damages arising from the rejection under the Plan of an executory contract or unexpired lease must be Filed and served upon counsel to the Plan Trustee within 30 days after the mailing of notice of the occurrence of the Effective Date. Any
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such Claims that are not timely Filed and served will be forever barred and unenforceable against Debtor, the Plan Trust, the Estate, Acquirer, and their respective property, and entities holding these Claims will be barred from receiving any distribution under the Plan on account of such untimely claims. 3. Postpetition Contracts and Leases
Except as set forth in the Schedule of Postpetition Contracts and Leases or as otherwise expressly provided in the Plan or the Confirmation Order, all contracts, leases, and other agreements that Debtor entered into after the Petition Date will be assumed and assigned to Acquirer 4. Changes in Rates Subject to Regulatory Commission Approval
This Debtor is not subject to governmental regulatory commission approval of its rates. M. Retention of Jurisdiction
The Court will retain jurisdiction to the extent permitted by law. N. Tax Consequences of Plan
CREDITORS CONCERNED WITH HOW THE PLAN MAY AFFECT THEIR TAX LIABILITY SHOULD CONSULT WITH THEIR OWN ACCOUNTANTS, ATTORNEYS, AND/OR ADVISORS. The following disclosure of possible tax consequences is intended solely for the purpose of alerting readers about possible tax issues this Plan may present to Debtor. Debtor CANNOT and DOES NOT represent that the tax consequences contained below are the only tax consequences of the Plan because the Tax Code embodies many complicated rules which make it difficult to state completely and accurately all the tax implications of any action. Debtor has not requested a ruling from the IRS or an opinion of counsel with respect to any of the tax aspects of the Plan. Thus, no assurance can be given as to the interpretation that the IRS will adopt concerning any issue discussed herein. In addition, this summary does not address foreign, state or local tax consequences of the Plan, nor does it purport to address the federal income tax consequences of the Plan to special classes of taxpayers (such as foreign taxpayers, broker-dealers, banks, mutual funds, insurance companies, financial institutions, small business investment companies, regulated investment companies, tax-exempt organizations, and investors in pass-through entities).
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This discussion assumes that the various debt and other arrangements to which Debtor is a party will be respected for federal income tax purposes in accordance with their form. There is no assurance, however, that the IRS will not take contrary positions to those described herein or upon which this summary is based. 1. Federal Income Tax Consequences To Debtor
Based upon preliminary discussions with its professionals, and due to its status as a non-profit California corporation, Debtor does not expect that the Plan will result in any significant federal income tax consequences to Debtor. 2. Tax Consequences To Creditors
The character, amount and timing of income, gain or loss the holders of Allowed Claims recognize as a consequence of the distributions under the Plan will depend upon, among other things, (i) the manner in which the Claim was acquired, (ii) the length of time the Claim was held, (iii) whether the Claim was acquired at a discount, (iv) whether the holder of an Allowed Claim has taken a bad debt deduction for the Claim, (v) whether the holder has previously included accrued but unpaid interest with respect to the claim, (vi) the holders method of tax accounting, (vii) whether the claim is an installment obligation under the tax laws, and (viii) the type of consideration received by the holder in exchange for its Claim. Therefore, holders of Allowed Claims should consult their tax advisors for information that may be relevant to their particular situations and circumstances and the particular tax consequences to such holders as a result thereof, Debtor expresses no views regarding the tax effects of the Plan on creditors. 3. Withholding
The Distributing Party will withhold any amounts required by law from payments made to creditors holding Allowed Claims. In addition, creditors may be required to provide general tax information to the Distributing Party. 4. Taxation Of Certain Reserves
Section 468B(g) of the Internal Revenue Code provides that escrow accounts, settlement funds, or similar funds are subject to current taxation. It also provides that the IRS shall prescribe regulations for the taxation of any such account or fund, whether as a grantor trust or
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otherwise. The IRS issued final regulations regarding settlement funds on or about December 18, 1992. However, such regulations specifically reserve the tax treatment of settlement funds in bankruptcy and the treatment of stock of the issuer to satisfy such obligations. It is thus uncertain as to who is responsible for reporting income generated by the funds in any unclaimed property or reserves for Disputed Claims formed pursuant to the Plan. V. CONFIRMATION REQUIREMENTS AND PROCEDURES PERSONS OR ENTITIES CONCERNED WITH CONFIRMATION OR THIS PLAN SHOULD CONSULT WITH THEIR OWN ATTORNEYS BECAUSE THE LAW ON CONFIRMING A PLAN OF REORGANIZATION IS VERY COMPLEX. The following discussion is intended solely for the purpose of alerting readers about basic confirmation issues, which they may wish to consider, as well as certain deadlines for filing claims. The proponent CANNOT and DOES NOT represent that the discussion contained below is a complete summary of the law on this topic. Many requirements must be met before the Court can confirm a Plan. Some of the requirements include that the Plan must be proposed in good faith, acceptance of the Plan, whether the Plan pays creditors at least as much as creditors would receive in a Chapter 7 liquidation, and whether the Plan is feasible. These requirements are not the only requirements for confirmation. A. Who May Vote or Object 1. Who May Object to Confirmation of the Plan
Any party in interest may object to the confirmation of the Plan, but as explained below not everyone is entitled to vote to accept or reject the Plan. 2. Who May Vote to Accept or Reject the Plan
A creditor has a right to vote for or against the Plan if that creditor has a claim which is both (1) allowed or allowed for voting purposes and (2) classified in an impaired class. a. What Is an Allowed Claim or Interest
As noted above, a creditor must first have an Allowed Claim to have the right to vote. Generally, proofs of Claim will be allowed unless a party in interest brings a motion objecting to the claim. When an objection to a Claim is Filed, the creditor holding the claim cannot vote unless the
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Court, after notice and hearing, either overrules the objection or allows the claim for voting purposes. THE GENERAL BAR DATE FOR FILING A PROOF OF CLAIM IN THIS CASE WAS JANUARY 19, 2010. THE GOVERNMENTAL ENTITY BAR DATE FOR FILING A PROOF OF CLAIM IN THIS CASE WAS MARCH 15, 2010. A creditor may have an Allowed Claim even if a proof of Claim was not timely filed. A Claim is deemed allowed if (1) it is scheduled on Debtors schedules and such Claim is not scheduled as disputed, contingent, or unliquidated, and (2) no party in interest has objected to the Claim. b. What Is an Impaired Claim
As noted above, an Allowed Claim only has the right to vote if it is in a class that is impaired under the Plan. A class is impaired if the Plan alters the legal, equitable, or contractual rights of the members of that class. For example, a class comprised of General Unsecured Claims is impaired if the Plan fails to pay the members of that class 100% of what they are owed. In this Case, Debtor believes that Classes 2A, 2B, 4, 5, 6, 7, and 8 are impaired and that holders of claims in each of these classes are therefore entitled to vote to accept or reject the Plan. Debtor believes that Classes 1, 2C, 2D and 3 are unimpaired and that holders of Claims in each of these Classes therefore do not have the right to vote to accept or reject the Plan. Parties who dispute Debtors characterization of their Claim or as being impaired or unimpaired may file an objection to the Plan contending that Debtor has incorrectly characterized the Class. 3. Who is Not Entitled to Vote
The following four types of Claims are not entitled to vote: (1) claims that have been disallowed; (2) claims in unimpaired Classes; (3) claims entitled to priority pursuant to Bankruptcy Code 507(a)(1), (a)(2), and (a)(8); and (4) Claims in Classes that do not receive or retain any value under the Plan. Claims in unimpaired Classes are not entitled to vote because such Classes are deemed to have accepted the Plan. Claims entitled to priority pursuant to Bankruptcy Code 507(a)(1), (a)(2), and (a)(7) are not entitled to vote because such claims are not placed in Classes and they are required to receive certain treatment specified by the Bankruptcy Code. Claims in Classes that do not receive or retain any value under the Plan do not vote because such Classes are
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deemed to have rejected the Plan. EVEN IF YOUR CLAIM IS OF THE TYPE DESCRIBED ABOVE, YOU MAY STILL HAVE A RIGHT TO OBJECT TO THE CONFIRMATION OF THE PLAN. 4. Who Can Vote in More Than One Class
A creditor whose Claim has been allowed in part as a secured Claim and in part as an unsecured Claim is entitled to accept or reject a Plan in both capacities by casting one ballot for the secured part of the Claim and another ballot for the unsecured Claim. 5. Votes Necessary to Confirm the Plan
If impaired classes exist, the Court cannot confirm the Plan unless (1) at least one impaired class has accepted the Plan without counting the votes of any insiders within that class, and (2) all impaired classes have voted to accept the Plan, unless the Plan is eligible to be confirmed by cramdown on non-accepting classes, as discussed later in Section V.A.8. 6. Votes Necessary for a Class to Accept the Plan
A class of Claims is considered to have accepted the Plan when more than one-half (1/2) in number and at least two-thirds (2/3) in dollar amount of the claims which actually voted, voted in favor of the Plan. 7. Treatment of Nonaccepting Classes
As noted above, even if all impaired Classes do not accept the proposed Plan, the Court may nonetheless confirm the Plan if the nonaccepting Classes are treated in the manner required by the Bankruptcy Code. The process by which nonaccepting Classes are forced to be bound by the terms of the Plan is commonly referred to as cramdown. The Bankruptcy Code allows the Plan to be crammed down on nonaccepting Classes of Claims if it meets all consensual requirements except the voting requirements of Bankruptcy Code 1129(a)(8) and if the Plan does not discriminate unfairly and is fair and equitable toward each impaired class that has not voted to accept the Plan as referred to in Bankruptcy Code 1129(b) and applicable case law. 8. Request for Confirmation Despite Nonacceptance by Impaired Classes
In this Case, Debtor asks the Court to confirm this Plan by cramdown on impaired classes if any of these classes do not vote to accept the Plan.
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B.
Liquidation Analysis
Another confirmation requirement is the Best Interest Test, which requires a liquidation analysis. Under the Best Interest Test, if a claimant is in an impaired class and that claimant does not vote to accept the Plan, then that claimant must receive or retain under the Plan property of a value not less than the amount that such holder would receive or retain if Debtor were liquidated under Chapter 7 of the Bankruptcy Code. In a Chapter 7 case, Debtors assets are usually sold by a Chapter 7 trustee. Secured creditors are paid first from the sales proceeds of properties on which the secured creditor has a lien. Administrative claims are paid next. Next, unsecured creditors are paid from any remaining sales proceeds, according to their rights to priority. Unsecured creditors with the same priority share in proportion to the amount of their allowed claim in relationship to the amount of total allowed unsecured claims. Finally, interest holders receive the balance that remains after all creditors are paid, if any. For the Court to be able to confirm this Plan, the Court must find that all creditors who do not accept the Plan will receive at least as much under the Plan as such holders would receive under a Chapter 7 liquidation. Debtor maintains that this requirement is met here for the following reasons: Under the Plan, Acquirer is agreeing to provide funds sufficient for the following payments: (i) payment of the DIP Loan in full; (ii) payment of the Effective Date Payments, including payment in cash in full of all Administrative Claims, Priority Claims, Convenience Class Claims, Cure Claims, Class 2D Property Taxes, and certain other payments; and (iii) such committed working capital and funds for capital expenditures as agreed by Debtor and Acquirer or as may be required by the California Attorney General. Class 2A, the Bonds, will be reinstated, retain its lien on the assets of Acquirer, and be paid according to their terms by Acquirer. Class 2B, Apollo, will retain its liens, be fully amortized, and paid over time by Acquirer. Class 2C, equipment leases, will retain their lien, be assumed, and paid according to their terms by Acquirer. Class 2D, Property Taxes, will constitute part of the Effective Date Payments to be paid in full on the Effective Date from funds provided by Acquirer. From and after the Confirmation Date, Acquirer will pay the
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Installment Plan Payments as they come due, with each holder of an Allowed Claim in Classes 5, 6, 7, and 8 afforded the opportunity to exercise a PIH Guarantee Option. Administrative, Priority and Secured Claims will thus be paid in full, and unsecured Claims will be paid 25-90% of their claims over a seven year period (subject to the risk that the percentage distribution may be reduced as a result of a higher amount of Allowed Claims than estimated and the risk that Acquirer will not make the Installment Plan Payments). If the Case was converted to a chapter 7, a chapter 7 trustee would be appointed. A liquidation under chapter 7 would involve a sale pursuant to Section 363 of the Bankruptcy Code, via an auction with overbidding. However, because this is a sale of assets of a nonprofit community hospital, the sale would still be subject to approval by the California Attorney General, a process that usually takes 60 days or more. The hospital would lack funds with which to operate, as the DIP Loan would terminate upon conversion. In a sale of Debtors assets as a fire sale, and not as an operating hospital, the proceeds would likely be sufficient to repay the secured creditors, but no funds would likely be available to pay unsecured creditors. Even assuming that the current transaction could be completed through a chapter 7 sale, the amount and timing of distributions to creditors would suffer. Any distributions to creditors would be reduced by the costs of the chapter 7 trustee and the professionals employed by the chapter 7 trustee. Liquidation under a chapter 7 case would require payments to be made in accordance with the absolute priority rule, which requires that all unsecured creditors be paid pro rata. In particular, this requirement would preclude the quick payment of 50% to the Convenience Class Claims, because no distribution to any unsecured creditors could occur until substantially all objections to Claims were completed, which would likely delay any payments to any unsecured creditors for one to two years, due to the need to resolve substantial disputed and unliquidated Claims. Moreover, the Convenience Class would receive the same percentage as other classes, presumably up to 25%. Exhibit B hereto demonstrates, in balance sheet format, that all creditors will receive at least as much under the Plan as such creditor or interest holder would receive under a chapter 7 liquidation. Allowed Administrative Expense Claims and Allowed Priority Claims would receive a one hundred percent (100%) distribution under the Plan, whereas they may receive only partial
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payment under a chapter 7 liquidation. Moreover, in a chapter 7 liquidation, holders of General Unsecured Claims likely may receive nothing, whereas under the Plan, the Convenience Class Claims receive 50% on the Effective Date, and other unsecured creditors are projected to receive a partial payment on the Effective Date and a further substantial distribution over time through the Installment Plan Payments. C. Feasibility
Another requirement for confirmation involves the feasibility of the Plan, which means that confirmation of the Plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of Debtor or any successor to Debtor under the Plan, unless such liquidation or reorganization is proposed in the Plan. The feasibility analysis has two parts. The first aspect considers whether Debtor will have enough cash on hand on the Effective Date of the Plan to pay all the claims and expenses which are entitled to be paid on such date. Debtor maintains that this aspect of feasibility is satisfied by the Plan, since Acquirer will make all required Effective Date Payments, and is sufficiently capitalized to do so. The second aspect considers whether Acquirer will generate enough cash over the life of the Plan to make the required Plan payments, and whether PIH has sufficient assets to support the PIH Guarantee. Debtor and Acquirer have provided financial statements which include both historical and projected financial information. Please refer to Exhibit C hereto for the relevant financial statements. YOU ARE ADVISED TO CONSULT WITH YOUR ACCOUNTANT OR FINANCIAL ADVISOR IF YOU HAVE ANY QUESTIONS PERTAINING TO THESE FINANCIAL STATEMENTS. In summary, the Plan proposes to pay the Installment Plan Payments as they come due. As the Plans financial projections demonstrate, Acquirer will have an average cash flow, after paying operating expenses and post-confirmation taxes, of [TBD] each year, for the life of the Plan. The final Plan payment is expected to be paid on the seventh anniversary of the Effective Date. Debtor contends that Plans financial projections are feasible, based upon the reasonable assumption that
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Acquirer will be able to negotiate higher health plan rates and will reduce certain expenses of the Hospital based upon its own operating history at PIH. VI. EFFECT OF CONFIRMATION OF PLAN A. Discharge
Because this is a liquidating Plan, Debtor will not receive a discharge. However, it will not be retaining any assets after the closing of the Transaction. B. Exculpation: No Liability for Solicitation or Prosecution of Confirmation
None of Debtor, the Estate, Acquirer, the Creditors Committee, PIH, Acquirer, Wells Fargo, the lenders and agent under the Replacement DIP Loan and the Exit Financing, or any of the foregoing parties' respective members, officers, directors, employees, advisors, professionals or agents shall have or incur any liability to any holder of a Claim or Interest for any act or omission occurring on or after the Petition Date in connection with, related to, or arising out of the Case, the pursuit of confirmation of the Plan, the consummation or administration of the Plan, or property to be distributed under the Plan, except for willful misconduct or gross negligence, and in all respects, Debtor, the Estate, PIH, Acquirer, Wells Fargo, the Creditors Committee, the lenders and agent under the Exit Financing, or any of the foregoing parties respective members, officers, directors, employees, advisors, professionals or agents shall be entitled to rely on the advice of their respective counsel with respect to their duties and responsibilities during the Case under the Plan. C. Revesting of Property in Debtor
Except as provided in Section V.E. of the Plan, and except as provided elsewhere in the Plan, the confirmation of the Plan transfers the Acquired Assets to Acquirer, free and clear of all Claims, liens, encumbrances, and Interests, except as expressly provided in the Plan, and the Excluded Assets to the Plan Trust. From and after the Effective Date, Acquirer may operate its business and use, acquire and dispose of property without supervision by the Court and free of any restrictions of the Bankruptcy Code or Bankruptcy Rules, other than those restrictions expressly imposed by the Plan and the Confirmation Order. The Plan Trust shall remain subject to the jurisdiction of the Bankruptcy Court.
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D.
Preservation of Restricted Funds for Charitable Purposes
[IF APPLICABLE] Pursuant to Bankruptcy Code 1123(b) and all other applicable law and subject to the AG Consent, Acquirer shall be vested with and shall retain any and all restricted funds formerly held by Debtor. All such funds shall be held in charitable trust and may be used only for the restricted purposes permitted under applicable law. Debtor estimates that the amount of such funds was approximately $610,000 as of the Petition Date, and approximately [$____] as of the date of this Disclosure Statement, as the funds have continued to be used for their restricted purposes during the course of this Case.] E. Preservation and Assignment of Rights of Action
Except as expressly released or otherwise expressly provided in the Plan, pursuant to Bankruptcy Code 1123(b), the Plan Trust shall be vested with and shall retain and may enforce the Trust Avoidance Actions specified on Exhibit D to the Plan [to be filed]; any claims or causes of action against Debtors directors or officers, or directors and officers liability insurance; any Defenses to Claims, including counterclaims, rights of setoff, rights of recoupment, credits, recharacterization, or rights of subordination with respect to any Claim asserted against the Estate; provided however that any and all claims or causes of action against Acquirer are waived and released. F. Modification of Plan
Debtor may modify the Plan at any time before confirmation, including the substitution of a new party as an acquirer, if (i) Acquirer withdraws from the Transaction, in which case no reimbursement of expenses or breakup fee will be payable to Acquirer or PIH; (ii) the Acquirer and the Committee or other creditors negotiate changes to the distribution or other terms of the Plan; or (iii) other circumstances develop that warrant modification or amendment to the Plan. However, the Court may require a new disclosure statement and/or re-voting on the Plan if Debtor materially modifies the Plan before confirmation. Debtor may also seek to modify the Plan at any time after confirmation so long as (1) the Plan has not been substantially consummated and (2) if the Court authorizes the proposed modifications after notice and a hearing. An early payoff of the Installment Plan Payments shall not
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be deemed to require modification of the Plan. However Debtor may not modify the Plan to effect any change in the Transaction or any change in the rights held by, or relief granted to, the Acquirer or PIH pursuant to the APA and the Confirmation and Sale Order. G. Dissolution of Creditors Committee
No later than the Effective Date, the Creditors Committee shall be released and discharged from the rights and duties arising from or related to the Case, except with respect to final applications for professionals compensation. The professionals retained by the Creditors Committee and the members thereof shall not be entitled to compensation or reimbursement of expenses for any services rendered or expenses incurred after the Effective Date, except for services rendered and expenses incurred in connection with any applications by such professionals or Creditors Committee members for allowance of compensation and reimbursement of expenses pending on the Effective Date or timely Filed after the Effective Date as provided in the Plan, as approved by the Court. H. Post-Confirmation Status Report
Within 120 days of the entry of the order confirming the Plan, Reorganized Debtor shall file a status report with the Court explaining what progress has been made toward consummation of the confirmed Plan. The status report shall be served on the United States Trustee, the twenty largest unsecured creditors, and those parties who have requested special notice. Further status reports shall be filed every 120 days and served on the same entities. I. Quarterly Fees
Quarterly fees accruing under 28 U.S.C. 1930(a)(6) to date of confirmation shall be paid to the United States Trustee on or before the effective date of the plan. Quarterly fees accruing under 28 U.S.C. 1930(a)(6) after confirmation shall be paid to the United States Trustee in accordance with 28 U.S.C. 1930(a)(6) until entry of a final decree, or entry of an order of dismissal or conversion to chapter 7. J. Post-Confirmation Conversion/Dismissal
A creditor or party in interest may bring a motion to convert or dismiss the Case under 1112(b), after the Plan is confirmed, if there is a default in performing the Plan. If the Court
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orders the Case converted to Chapter 7 after the Plan is confirmed, then all property that had been property of the Chapter 11 estate, and that has not been disbursed pursuant to the Plan, will revest in the Chapter 7 estate, and the automatic stay will be reimposed upon the revested property only to the extent that relief from stay was not previously granted by the Court during this Case. The order confirming the Plan may also be revoked under very limited circumstances. The Court may revoke the order if the order of confirmation was procured by fraud and if the party in interest brings an adversary proceeding to revoke confirmation within 180 days after the entry of the order of confirmation. K. Final Decree
Once the estate has been fully administered as referred to in Bankruptcy Rule 3022, Reorganized Debtor, or such other party as the Court shall designate in the Plan Confirmation Order, shall file a motion with the Court to obtain a final decree to close the Case. VII. RECOMMENDATION Debtor believes that Plan confirmation and implementation are preferable to any feasible alternative. Accordingly, Debtor urges entities who hold impaired Claims to vote to accept the Plan.
Dated: Los Angeles, California April 20, 2010
Respectfully Submitted, /s/ Lisa Hill Fenning Lisa Hill Fenning (SBN 89238) Harry Garner (SBN 254942) Arnold & Porter LLP 777 South Figueroa Street, 44th Floor Los Angeles, California 90017 Telephone: 213.243.4000 Facsimile: 213.243.4199 Counsel to Debtor and Debtor-in-Possession
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EXHIBIT A ASSET PURCHASE AGREEMENT [TO BE FILED]
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EXHIBIT B LIQUIDATION ANALYSIS
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Downey Regional Medical Center DRMC Alternatives As of: April 20, 2010
Desc
Sale Alternatives
Estimated Class Description of Class Claims
Estimate of PIH Offer (000s) $ 10,000 3,000 200 16,100 1,200 3,800 2,900 1,600 7,175 800 5,000 325 52,100
Estimate of Prime Offer
N/A N/A Class Class Class Class Class Class Class Class Class Class Class
1 2A 2B 2C 3 4 5 6 7 8 9
DIP Loan Administrative Claims Other Priority Claims Bonds (net of DSR & Principal Fund) Apollo Secured Claim Equipment Leases Assumed Employee PTO Claims Convenience Class Claims General Unsecured Claims Risk Pool Disputes Unsecured Loans (Healthnet & United) Capitation Provider Claims Interest Holders Claims Total
10,000 3,000 200 16,100 1,200 3,800 3,800 3,000 28,700 3,200 5,500 1,300 79,800
10,000 3,000 200 16,100 1,200 3,800 2,900 1,600 7,950 800 5,500 53,050
Commitment to new DRMC
10,000
25,000
Standalone Reorganization
Situational overview DRMC's cash balances are negligible, ~$400,000 per DRMC Balance Sheet February 28, 2010 DRMC is continuing to experience operating cash losses (i.e., negative EBIDA) per DRMC Income Statement for the eight months ending February 28, 2010 Based on discussions with management, DRMC has significant revenue cycle issues which management believes are primarily IT-related Estimated requirements to exit bankruptcy and operate on a standalone basis Exit financing estimated at ~$22 million Working capital infusion including $10-15 million in cash and an additional $10-15 million in the form of a credit facility (SHP estimate) Capital and expertise to resolve revenue cycle issues Minimum 7-8% improvement in operating cash flow to provide funds for working capital and reinvestment in equipment and plant (SHP estimate)
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Case 2:09-bk-34714-BB
Downey Regional Medical Center DRMC Alternatives As of: April 20, 2010
Desc
Liquidation Analysis Assumptions DRMC closes, patients discharged, workforce dismissed Lease with the City of Downey terminates Assets, including Accounts Receivable, Property & Buildings, and Moveable Equipment, are liquidated Estimated liquidation value Estimated Value (000s) Deposits
1.
$
1.
1,600 2,000
ING Investment Account
Bank Account Subject to Purported PacifiCare Lien Accounts Receivable2. Prepaid Expenses
1.
1.
500 20,600 2,000
Property and Buildings3. Appraised value of 11445 Dolan property; net of demolition and clean-up costs Appraised value of Patton Road parking lot Total estimated liquidation value of Property and Buildings Moveable Equipment
4.
1,000 3,000 4,000 5,600 $ 36,300
Total Estimated Liquidation Value
Estimated Class Secured N/A N/A N/A 5. N/A 6. Class 1 7. Class 2A Class 2B Unsecured N/A 6. N/A N/A N/A N/A 10. N/A N/A N/A
9.
Description of Class
Claims
Distribution (000s) $ 500 10,000 3,000 2,100 1,200 16,100 1,200 34,100
Administrative Carve Out for Professionals DIP Loan Administrative Claims Other Secured Other Priority Claims Bonds (net of DSR & Principal Fund) Apollo Secured Claim Subtotal
8.
500 10,000 3,000 2,100 1,200 16,100 1,200 34,100 2,800 2,800 3,000 26,600 3,200 5,500 1,300 45,200 79,300
Equipment Leases Assumed Employee PTO Claims Convenience Class Claims General Unsecured Claims Risk Pool Disputes Unsecured Loans (Healthnet & United) Capitation Provider Claims Interest Holders Claims Subtotal Total
2,200 36,300
1. Assumes that items can be recovered at fully carrying value as of March 31, 2010. 2. Assumes a 75% collection factor on Accounts Receivable as of February 28, 2010. 3. Appraisals prepared by Johnson, O'Neill & Associates, Inc. 4. Per CBIZ fixed asset listing as of June 30, 2009. 5. Consists of claims secured by deposits and bank account. 6. Assumes $1 million of Employee PTO Claims are priority claims. 7. Wells Fargo also has a $5 million junior lien in the Medical Office Building that may be pursued in the event of a liquidation. 8. In a liquidation process, all unsecured creditors become part of a general pool. 9. Equipment leases less assumed resale value of $1 million for leased equipment. 10. Health Net and PacifiCare may assert priority to recovery of Accounts Receivable; this priority is disputed but may affect the liquidation value of Accounts Receivable.
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EXHIBIT C DEBTOR AND PIH FINANCIAL STATEMENTS
Case 2:09-bk-34714-BB
Desc
DEBTOR FINANCIAL STATEMENTS
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DOWNEY REGIONAL MEDICAL CENTER FINANCIAL STATEMENTS FISCAL YEAR 2008-2009 (In Thousands of Dollars)
Desc
INCOME STATEMENT
ACTUAL VS. BUDGET JUNE 2009 CURRENT MONTH ACTUAL $15,297 213 213 87 1,995 1,123 $18,928 BUDGET $11,750 1,400 1,600 500 0 65 $15,315 $ VAR $3,547 (1,187) (1,387) (413) 1,995 1,058 $3,613 OPERATING REVENUES: Net Patient Revenue HMO Premium Revenue - PMG HMO Premium Revenue - AppleCare HMO Premium Revenue - Alliance Physicians Net Assets Released from Restrictions Other Operating Revenue NET REVENUE OPERATING EXPENSES: Salaries/Benefits Supplies HMO Services Expense - PMG HMO Services Expense - AppleCare HMO Services Expense - Alliance Physicians Depreciation/Amortization Bad Debt Expense Other Operating Expenses TOTAL OPERATING EXPENSES OPERATING GAIN (LOSS) NON-OPERATING: MTF Income MTF Realized Gain (Loss) Investment Income Realized Gain (Loss) Interest Expense NET NON-OPERATING REVENUE NET GAIN (LOSS) EBIDA OPERATING MARGINS % TOTAL MARGIN % ROI DEBT SERVICE COVERAGE CHANGE IN NET ASSETS Unrealized Gains(Losses) on Investments INCR(DECR) IN UNRESTRICTED NET ASSETS ACTUAL $147,146 $11,040 $9,595 $3,057 $1,995 6,259 $179,092 YEAR-TO-DATE BUDGET $141,000 $16,800 $19,200 $6,000 $0 780 $183,780 $ VAR $6,146 (5,760) (9,605) (2,943) 1,995 5,479 ($4,688)
$7,508 3,152 150 (4,382) 26 640 3,700 3,392 $14,186 $4,742
$7,600 2,580 800 1,100 200 475 353 2,550 $15,658 ($343)
$92 (572) 650 5,482 174 (165) (3,347) (842) $1,472 $5,085
$94,136 $30,681 $6,033 $110 $1,568 $5,871 $10,912 32,942 $182,253 ($3,161)
$91,200 $30,960 $9,600 $13,200 $2,400 $5,700 $4,236 30,600 $187,896 ($4,116)
($2,936) 279 3,567 13,090 832 (171) (6,676) (2,342) $5,643 $955
$215 (9) (202) 0 204 ($200) $4,542 $5,386 25.05 24.00 322.81 10.14
$40 0 50 0 165 ($75) ($418) $222 (2.24) (2.73) (29.71) 0.45
$175 (9) (252) 0 (39) ($125) $4,960 $5,164
$490 ($9) $130 $0 2,165 ($1,554) ($4,715) $3,321 (1.77) (2.63) (27.93) 0.55
$480 $0 $600 $0 1,980 ($900) ($5,016) $2,664 (2.24) (2.73) (29.71) 0.45
$10 (9) (470) 0 (185) ($654) $301 $657
(383) ($5,098)
0 ($5,016)
(383) ($82)
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BALANCE SHEET ASSETS

CURRENT ASSETS: Cash & Cash Equivalents Accounts Receivable-Patient Less Reserves & Allowances Net Patient Receivables Inventories/Prepaids/Other Total Current Assets Property, Plant & Equipment Less Accumulated Depr & Amort Net Property, Plant & Equipment Board Designated Assets Other Assets: Security Deposit-Pacificare Security Deposit-Workers Comp Prepaid Bond Costs Bond Principal Fund Bond Interest Fund Investment-KEYSOP Receivable-Deferred Comp Intercompany-DRMCI Intercompany-DRMC Properties Inc. Intercompany-OMM Clinic Bond Reserve Account Total Other Assets TOTAL ASSETS June 2009 $5,545 91,796 (65,847) 25,949 3,692 35,186 158,378 (117,820) 40,558 8,426 May 2009 $6,039 86,746 (30,033) 56,713 3,634 66,386 154,877 (116,412) 38,465 6,918 June 2008 ($4,211) 75,365 (40,449) 34,916 3,385 34,090 151,139 (111,381) 39,758 8,414
500 220 230 340 118 0 1,674 970 6,160 0 5,432 15,644 $99,814 June 2009 $36,337 5,098 6,890 2,071 8,689 1,050 3,510 4,411 45 3,925 72,026 1,674 20,436
500 0 14 380 163 0 1,731 964 6,119 225 5,529 15,625 $127,394 May 2009 $33,772 5,326 6,390 2,649 12,239 1,050 0 8,911 38 3,925 74,300 1,731 20,785
500 0 47 324 152 302 1,731 957 5,314 0 5,591 14,918 $97,180 June 2008 $22,309 5,221 7,150 (65) 6,624 0 0 8,604 0 2,675 52,518 1,731 25,379
LIABILITIES & FUND BALANCE

CURRENT LIABILITIES: Accounts Payable & Accrued Exps Accounts Payable - Other Line of Credit - BOTW Third Party Cost Settlements Managed Care IBNR HealthNet Advance UHC/Pacificare Advance Accrued Shared Risk Accrued Management Fees Current Portion Long Term Debt Total Current Liabilities Accrued Deferred Compensation Long Term Debt FUND BALANCE: General Fund Balance Restricted Fund Balance Net Income-Current Year Total Fund Balance TOTAL LIABILITIES & FUND BALANCE
10,167 609 (5,098) 5,678 $99,814 June 2009 0.49 69.52 429.04 5.69
19,152 2,631 8,795 30,578 $127,394 May 2009 0.89 120.53 80.81 24.00
29,266 2,388 (14,102) 17,552 $97,180 June 2008 0.65 91.90 159.83 18.06
FINANCIAL RATIOS
Current Ratio Days in A/R (Net) Long Term Debt to Equity (%) Fund Balance to Assets (%)
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DOWNEY REGIONAL MEDICAL CENTER FINANCIAL STATEMENTS FISCAL YEAR 2008-2009
Desc
(In Thousands of Dollars)
STATEMENT OF CASH FLOWS

JUNE 2009
OPERATING ACTIVITIES & NON-OPERATING REVENUE Excess of Revenues over Expenses Unrealized Gains(Losses) on Investments Incr(Decr) in Unrestricted Net Assets Adjustments to reconcile excess of revenues over expenses to net cash provided by operating activities and non-operating revenue: Depreciation & Amortization (Incr) Decr in Inventory (Incr) Decr in patient accounts receivable (Incr) Decr in other receivables (Incr) Decr in prepaid expenses (Incr) Decr in other assets Incr (Decr) in A/P and accrued expenses Incr (Decr) in third party cost settlement Incr (Decr) in accrued deferred compensation Incr (Decr) in MTF fund balance Net Cash Provided by Oper. Activities & Non-Oper. Revenue
FYE 6/30/09 ($4,715) ($383) ($5,098)
FYE 6/30/08 ($5,123) ($4,181) ($9,304)
5,871 97 10,217 (393) 61 637 4,709 674 (57) (2,022) $14,696
5,483 187 (8,410) 3,536 278 10,360 3,996 446 95 0 $6,667
INVESTING ACTIVITIES Purchase of property and equipment Bond Principal Payments Assets whose use is limited: Net (Incr) Decr in Board Designated Assets Net Cash Used by Investing Activities Incr (Decr) in Cash & Cash Equivalents Cash & Cash Equivalents at Beginning of Fiscal Year Cash & Cash Equivalents at End of Month/Year
FYE 6/30/09 ($5,974) (3,680) (12) ($9,666) 5,030 515 $5,545
FYE 6/30/08 ($3,208) (3,144) 10,503 $4,151 10,818 (10,303) $515
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HOSPITAL SERVICES KEY STATISTICAL INDICATORS JUNE 2009 JUNE 2008 YTD JUNE 2009 YTD ENROLLMENT-PMG/DS/DA Total Senior Total Commercial Total Medi-Cal Total Equivalent Lives ACTIVITY Average Daily Census Total Discharges ER Visits ER Admits % of Total Admits UTILIZATION Hospital L.O.S. Medicare Discharge L.O.S. PPO L.O.S. All Groups Senior L.O.S. All Groups Commercial L.O.S. Case Mix Index PAYOR MIX % OF TOTAL DISCHGS Medicare Medi-Cal County Indigent Charity PPO Comm'l/Other All Groups Senior All Groups Commercial PMG Medi-cal REVENUE STATISTICS Gross I/P Revenue/Pat Day Gross O/P Revenue % Deductions from Revenue % Computed Medicare Per Diem EXPENSE/PRODUCTIVITY STATISTICS Total Expense/Adj Dischg FTE/Adj Patient Day Productive FTE/Adj Patient Day FTE/100 Adj Discharge Adj for Case Mix Index Nursing Hours/Patient Day JUNE 2008 JUNE 2009 BUDGET
N/A N/A N/A N/A
N/A N/A N/A N/A
5,653 19,816 5,805 48,233
0 5,355 0 5,355
156.85 1,160 4,029 51.16
145.84 1,130 4,168 55.03
150.63 1,106 4,043 44.34
140.40 1,131 4,392 50.84
4.12 5.49 3.28 3.51 3.54 1.41
3.93 5.28 3.09 4.06 3.16 1.43
4.09 4.69 3.52 3.34 3.73 1.40
3.72 4.94 2.95 N/A 2.80 1.36
25.0 18.2 0.1 0.1 35.3 5.5 9.2 4.9 1.7
26.2 19.0 0.6 0.2 42.5 3.7 3.8 3.0 1.0
23.9 19.1 0.7 0.5 33.8 3.3 11.7 5.3 1.7
26.5 19.8 0.7 0.0 48.2 3.4 0.0 1.4 0.0
$9,805 29.0 81.4 $2,036
$12,763 25.8 84.1 $2,233
$11,998 26.6 87.6 $2,205
$13,382 27.3 84.1 $2,381 ANNUAL BUDGET
$8,316 4.94 4.28 5.59 3.97 12.88
$9,489 5.77 5.01 6.21 4.34 13.44
$9,669 5.13 4.39 5.82 4.16 12.63
$11,828 5.87 5.18 6.07 4.46 13.87
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Case 2:09-bk-34714-BB
DOWNEY REGIONAL MEDICAL CENTER FINANCIAL STATEMENTS FISCAL YEAR 2008-2009 (In Thousands Of Dollars)
Desc
INVESTMENT PORTFOLIO REPORT

JUNE 2009 DCHF Main Acct $25 DCHF Resrv Fund $5,592 MTF Bond Ret $74 MTF Endow Fund $9,641
Total
Market Value 07/01/08 Additional Funds Invested (Distributed) Net Earnings & Growth: Interest & Dividends Realized Gains (Losses) Unrealized Gains (Losses) Net Earnings & Growth Market Value 06/30/09
$15,332
($301)
$0
($301)
$0
$0
$584 $0 ($383) $201
1 0 (3) ($2)
89 0 52 $141
1 0 (21) ($20)
493 0 (411) $82
$15,232
$23
$5,432
$54
$9,723
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Case 2:09-bk-34714-BB
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Downey Regional Medical Center Other Operating Expenses Fiscal Year 2009 as of June 30, 2009 (In Thousands of Dollars) Curr Mo Budget YTD Budget
Actual Other Purchased Services Consulting Fees Legal Fees Purchased Equipment Maintenance Utilities Medical Fees Insurance Medical Purchased Services - Outside Collection Expense Audit Fees Rent - Building Registry Maintenance Expense Dues & Subscriptions Freight Rental Equipment Recruitment Bank Charges Employee Relations Postage Travel & Conference Auto Expense Public/Community Relations Advertising Business Expense Non Medical Fees Community Outreach Program Inventory Write-off Other Taxes & Licenses Total 1,811 387 327 227 183 174 112 112 95 92 78 77 61 34 30 23 20 10 10 5 4 4 2 1 1 0 0 (7) (80) (401) 3,392
Variance (1,811) (387) (327) (227) (183) (174) (112) (112) (95) (92) (78) (77) (61) (34) (30) (23) (20) (10) (10) (5) (4) (4) (2) (1) (1) 0 0 7 80 401
Actual 13,518 2,421 1,575 2,467 1,780 1,919 2,403 1,570 274 305 870 1,611 426 406 271 317 194 155 208 75 58 105 42 20 40 65 15 (15) (38) (115) 32,942
Variance (13,518) (2,421) (1,575) (2,467) (1,780) (1,919) (2,403) (1,570) (274) (305) (870) (1,611) (426) (406) (271) (317) (194) (155) (208) (75) (58) (105) (42) (20) (40) (65) (15) 15 38 115
(3,392)
(32,942)
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Desc
INCOME STATEMENT
ACTUAL VS. BUDGET FEBRUARY 2010 CURRENT MONTH ACTUAL $13,613 0 0 0 44 $13,657 BUDGET $15,203 138 148 79 92 $15,660 $ VAR ($1,590) (138) (148) (79) (48) ($2,003) OPERATING REVENUES: Net Patient Revenue HMO Premium Revenue - PMG HMO Premium Revenue - AppleCare HMO Premium Revenue - Alliance Physicians Other Operating Revenue NET REVENUE OPERATING EXPENSES: Salaries/Benefits Supplies HMO Services Expense - PMG HMO Services Expense - AppleCare HMO Services Expense - Alliance Physicians Depreciation/Amortization Bad Debt Expense Other Operating Expenses TOTAL OPERATING EXPENSES OPERATING GAIN (LOSS) NON-OPERATING: MTF Income MTF Realized Gain (Loss) Investment Income Realized Gain (Loss) Interest Expense NET NON-OPERATING REVENUE NET GAIN (LOSS) EBIDA OPERATING MARGINS % TOTAL MARGIN % ROI DEBT SERVICE COVERAGE CHANGE IN NET ASSETS Unrealized Gains(Losses) on Investments INCR(DECR) IN UNRESTRICTED NET ASSETS ACTUAL $102,106 $824 $871 $426 572 $104,799 YEAR-TO-DATE BUDGET $121,624 $1,104 $1,184 $632 736 $125,280 $ VAR ($19,518) (280) (313) (206) (164) ($20,481)
$6,599 1,679 4 4 2 464 5,813 2,785 $17,350 ($3,693)
$8,126 2,533 73 61 33 476 773 2,856 $14,931 $729
$1,527 854 69 57 31 12 (5,040) 71 ($2,419) ($4,422)
$58,601 $17,763 $472 $80 $430 $3,711 $8,789 23,207 $113,053 ($8,254)
$65,008 $20,264 $584 $488 $264 $3,808 $6,184 22,848 $119,448 $5,832
$6,407 2,501 112 408 (166) 97 (2,605) (359) $6,395 ($14,086)
$0 0 10 0 174 ($164) ($3,857) ($3,219) (27.04) (28.24) (190.74) (6.42)
$40 0 10 0 186 ($136) $593 $1,255 4.66 3.79 29.32 2.45
($40) 0 0 0 12 ($28) ($4,450) ($4,474)
$0 $529 $80 $2 1,352 ($741) ($8,995) ($3,932) (7.88) (8.58) (55.60) (0.99)
$320 $0 $80 $0 1,488 ($1,088) $4,744 $10,040 4.66 3.79 29.32 2.45
($320) 529 0 2 136 $347 ($13,739) ($13,972)
16 ($8,979)
0 $4,744
16 ($13,723)
Page 1
Case 2:09-bk-34714-BB
Desc
BALANCE SHEET ASSETS

CURRENT ASSETS: Cash & Cash Equivalents Accounts Receivable-Patient Less Reserves & Allowances Net Patient Receivables Inventories/Prepaids/Other Total Current Assets Property, Plant & Equipment Less Accumulated Depr & Amort Net Property, Plant & Equipment Board Designated Assets Other Assets: Security Deposit-Pacificare Security Deposit-Workers Comp Prepaid Bond Costs Bond Principal Fund Bond Interest Fund Receivable-Deferred Comp Intercompany-DRMCI Intercompany-DRMC Properties Inc. Intercompany-OMM Clinic Bond Reserve Account Total Other Assets TOTAL ASSETS February 2010 $427 84,245 (54,540) 29,705 5,416 35,548 157,455 (120,059) 37,396 382 January 2010 $676 91,652 (58,952) 32,700 6,033 39,409 157,447 (119,595) 37,852 382 February 2009 $6,276 74,618 (27,607) 47,011 4,272 57,559 153,576 (114,985) 38,591 7,213
500 820 206 364 120 1,674 970 5,873 0 5,502 16,029 $89,355 February 2010 $25,556 6,774 15,241 0 (129) 7,785 1,067 3,510 4,693 4,665 45 3,925 73,132 1,674 17,851
500 520 209 361 119 1,674 970 5,871 0 5,494 15,718 $93,361 January 2010 $25,554 6,948 15,241 0 (232) 7,785 1,067 3,510 4,449 4,665 45 3,925 72,957 1,674 18,176
500 0 23 365 160 1,731 964 6,533 203 5,784 16,263 $119,626 February 2009 $28,133 5,445 0 6,390 2,893 12,099 0 0 0 8,911 38 3,710 67,619 1,731 22,222
LIABILITIES & FUND BALANCE

CURRENT LIABILITIES: Accounts Payable & Accrued Exps Accounts Payable - Other Accounts Payable - Pre Petition Line of Credit - BOTW Third Party Cost Settlements Managed Care IBNR HealthNet Advance UHC/Pacificare Advance Line of Credit - HFG Accrued Shared Risk Accrued Management Fees Current Portion Long Term Debt Total Current Liabilities Accrued Deferred Compensation Long Term Debt FUND BALANCE: General Fund Balance Restricted Fund Balance Net Income-Current Year Total Fund Balance TOTAL LIABILITIES & FUND BALANCE
5,068 609 (8,979) (3,302) $89,355 February 2010 0.49 87.77 -659.48 -3.70
5,068 609 (5,123) 554 $93,361 January 2010 0.54 87.57 3989.35 0.59
19,152 2,631 6,271 28,054 $119,626 February 2009 0.85 105.51 92.44 23.45
FINANCIAL RATIOS
Current Ratio Days in A/R (Net) Long Term Debt to Equity (%) Fund Balance to Assets (%)
Page 2
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(In Thousands of Dollars)
STATEMENT OF CASH FLOWS

FEBRUARY 2010
OPERATING ACTIVITIES & NON-OPERATING REVENUE Excess of Revenues over Expenses Unrealized Gains(Losses) on Investments Incr(Decr) in Unrestricted Net Assets Adjustments to reconcile excess of revenues over expenses to net cash provided by operating activities and non-operating revenue: Depreciation & Amortization (Incr) Decr in Inventory (Incr) Decr in patient accounts receivable (Incr) Decr in other receivables (Incr) Decr in prepaid expenses (Incr) Decr in other assets Incr (Decr) in A/P and accrued expenses Incr (Decr) in third party cost settlement Incr (Decr) in accrued deferred compensation Incr (Decr) in MTF fund balance Net Cash Provided by Oper. Activities & Non-Oper. Revenue
FYE 6/30/10 ($8,995) $16 ($8,979)
FYE 6/30/09 ($4,715) ($383) ($5,098)
3,711 (1) (3,756) (205) (1,518) (367) 3,306 (2,200) 0 0 ($10,009)
5,871 97 10,217 (393) 61 637 4,709 674 (57) (2,022) $14,696
INVESTING ACTIVITIES Purchase of property and equipment Bond Principal Payments Assets whose use is limited: Net (Incr) Decr in Board Designated Assets Net Cash Used by Investing Activities Incr (Decr) in Cash & Cash Equivalents Cash & Cash Equivalents at Beginning of Fiscal Year Cash & Cash Equivalents at End of Month/Year
FYE 6/30/10 ($549) (2,604) 8,044 $4,891 (5,118) 5,545 $427
FYE 6/30/09 ($5,974) (3,680) (12) ($9,666) 5,030 515 $5,545
Page 3
Case 2:09-bk-34714-BB
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HOSPITAL SERVICES KEY STATISTICAL INDICATORS FEBRUARY 2010 FEB 2009 YTD FEB 2010 YTD ENROLLMENT-PMG/DS/DA Total Senior Total Commercial Total Medi-Cal Total Equivalent Lives ACTIVITY Average Daily Census Total Discharges ER Visits ER Admits % of Total Admits UTILIZATION Hospital L.O.S. Medicare Discharge L.O.S. PPO L.O.S. All Groups Senior L.O.S. All Groups Commercial L.O.S. Case Mix Index PAYOR MIX % OF TOTAL DISCHGS Medicare Medi-Cal County Indigent Charity PPO Comm'l/Other All Groups Senior All Groups Commercial PMG Medi-cal REVENUE STATISTICS Gross I/P Revenue/Pat Day Gross O/P Revenue % Deductions from Revenue % Computed Medicare Per Diem EXPENSE/PRODUCTIVITY STATISTICS Total Expense/Adj Dischg FTE/Adj Patient Day Productive FTE/Adj Patient Day FTE/100 Adj Discharge Adj for Case Mix Index Nursing Hours/Patient Day FEB 2009 FEB 2010
N/A N/A N/A N/A
N/A N/A N/A N/A
0 5,650 0 5,650
0 0 0 0
147.76 1,131 4,005 56.59
129.30 1,107 4,408 64.96
143.79 1,083 3,913 52.16
122.68 1,010 3,958 67.26
3.97 5.31 3.14 3.95 3.12 1.43
3.59 4.84 2.89 N/A 2.81 1.41
3.72 5.05 2.84 12.00 3.88 1.42
3.40 4.93 2.63 N/A N/A 1.49
26.5 18.5 0.6 0.3 39.2 3.7 5.7 3.9 1.6
25.4 21.9 0.6 0.0 47.4 4.0 N/A 0.7 N/A
26.9 20.3 0.9 0.0 47.3 3.5 0.3 0.7 0.1
25.1 21.5 0.5 0.0 49.0 3.9 N/A N/A N/A
$12,463 25.4 81.6 $2,217
$14,456 27.1 84.9 $2,415
$13,168 26.1 81.5 $2,243
$15,004 27.7 84.9 $2,524
$9,117 5.70 4.92 6.21 4.34 13.23
$9,229 5.62 4.82 5.49 3.92 14.23
$9,166 5.77 5.10 6.38 4.49 13.59
$9,229 5.49 4.88 5.65 3.79 14.25
Page 4
Case 2:09-bk-34714-BB
DOWNEY REGIONAL MEDICAL CENTER FINANCIAL STATEMENTS FISCAL YEAR 2009-2010 (In Thousands Of Dollars)
Desc
INVESTMENT PORTFOLIO REPORT

FEBRUARY 2010 DCHF Main Acct $23 DCHF Resrv Fund $5,432 MTF Bond Ret $54 MTF Endow Fund $9,723
Total
Market Value 07/01/09 Additional Funds Invested (Distributed) Net Earnings & Growth: Interest & Dividends Realized Gains (Losses) Unrealized Gains (Losses) Net Earnings & Growth Market Value 02/28/10
$15,232
($10,329)
($25)
$0
($61)
($10,243)
$0 $529 $16 $545
0 2 0 $2
0 0 16 $16
0 7 0 $7
0 520 0 $520
$5,448
$0
$5,448
$0
$0
Page 5
Case 2:09-bk-34714-BB
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Downey Regional Medical Center Other Operating Expenses Fiscal Year 2010 as of February 28, 2010 (In Thousands of Dollars) Curr Mo Budget 178 0 113 12 131 39 41 12 217 18 172 18 7 17 36 7 8 8 8 7 23 73 201 147 128 1,235 2,856 YTD Budget 1,424 0 904 96 1,048 312 328 96 1,736 144 1,376 144 56 136 288 56 64 64 64 56 184 584 1,608 1,176 1,024 9,880 22,848
Actual Consulting Fees Non Medical Fees Legal Fees Taxes & Licenses Utilities Rental Equipment Maintenance Expense Employee Relations Purchased Equipment Maintenance Audit Fees Medical Fees Freight Postage Collection Expense Dues & Subscriptions Public/Community Relations Other Recruitment Travel & Conference Auto Expense Bank Charges Rent - Building Insurance Medical Purchased Services - Outside Registry Other Purchased Services Total 213 69 371 68 108 40 31 (5) 174 20 173 13 3 18 27 9 0 5 2 0 9 50 163 146 48 1,030 2,785
Variance (35) (69) (258) (56) 23 (1) 10 17 43 (2) (1) 5 4 (1) 9 (2) 8 3 6 7 14 23 38 1 80 205 71
Actual 2,786 209 2,499 286 1,405 294 384 19 1,416 160 1,390 142 28 126 293 23 20 53 22 13 77 514 1,315 960 454 8,319 23,207
Variance (1,362) (209) (1,595) (190) (357) 18 (56) 77 320 (16) (14) 2 28 10 (5) 33 44 11 42 43 107 70 293 216 570 1,561 (359)
Page 6
Case 2:09-bk-34714-BB
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PIH FINANCIAL STATEMENTS
Case 2:09-bk-34714-BB
Desc
WtlhsHRH
Telephone: 213-607-6300
Fax: Website:
213-607-6301 WVIIVII.willis.com
213-607-6321 213-607-6301 Mary.kubacki@willis.com
January 26, 2009
Direct Line: Direct Fax: E-mail:
Ms. Peggy Chulack, Chief Administrative Officer InterHealth Corp. 12401 Washington Blvd. Whittier, CA 90602-1006 Re: Master Trust Indenture Insurance Program Review Dear Peggy: This letter will confirm that we have reviewed the property and casualty insurance coverage in force that is applicable to InterHealth Corp. (IHC) and its subsidiaries, including Presbyterian Intercommunity Hospital. With the sole exception of earthquake insurance, the absence of which we understand has been separately resolved with the appropriate parties, the limits, deductibles, and other terms and conditions of IHC's insurance program are satisfactory and typical of organizations with similar exposures. Please feel free to contact us to discuss any aspect ofiHC's insurance program or exposure profile in greater detail. Best regards,
Vice President, Sr. Client Manager
'~~'~ -,~L
WillisHRH Risk and Insurance Services of Los Angeles
801 S. Figueroa Street, Suite 700

Los Angeles, CA 90017
CA Dept. of Ins. Lie # 0371719
Case 2:09-bk-34714-BB
Desc
InterHealth Corp. Presbyterian Intercommity Hosptial Debt Service Requirements
Year Ending June 1, 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2033 Total
2007 Bonds Total Debt Principal Interest Service 2,972,774 2,972,774 6,000,000 9,240,907 15,240,907 6,175,000 9,078,923 15,253,923 6,425,000 8,847,519 15,272,519 6,650,000 8,633,138 15,283,138 6,875,000 8,449,486 15,324,486 7,150,000 8,175,512 15,325,512 7,400,000 7,936,941 15,336,941 7,650,000 7,721,734 15,371,734 7,950,000 7,428,263 15,378,263 8,250,000 7,174,464 15,424,464 8,550,000 6,895,405 15,445,405 8,850,000 6,635,453 15,485,453 9,075,000 6,371,006 15,446,006 9,375,000 6,231,093 15,606,093 9,750,000 5,789,996 15,539,996 10,050,000 5,480,851 15,530,851 10,425,000 5,153,197 15,578,197 10,725,000 4,838,225 15,563,225 11,100,000 4,529,218 15,629,218 11,475,000 4,162,541 15,637,541 11,850,000 3,797,882 15,647,882 12,225,000 3,432,525 15,657,525 12,675,000 3,051,911 15,726,911 13,050,000 2,659,791 15,709,791 13,500,000 2,259,195 15,759,195 13,950,000 1,832,359 15,782,359 14,475,000 1,396,360 15,871,360 14,925,000 946,587 15,871,587 15,450,000 480,568 15,930,568 292,000,000 161,603,824 453,603,824
Case 2:09-bk-34714-BB
Desc
InterHealth Corp. Presbyterian Intercommity Hosptial Medical Staff by Specialty/Board Status/Average Age Fiscal Year Ended September 30, 2008 (Unaudited)
Board Certified Specialty Allergy/Immunology Anesthesiology Cardiology Cardiovasc/Thor Clin.Psychology Dermatology Emergency Med. Family Practice Gastroenterology General Surgery Hemat/Oncology Internal Medicine Neurology Orthopedic Surg Obstetrics/Gynecol Ophthalmology ENT/Otolaryngology Pediatrics Pulmonary Disease Radiation Oncology Radiology Urology All Others Total Active
2 11
Other 2 21
9
Total 4 32 17 9 5 5 25 70 8 17 10 64 8 15 34 20 8 81 10 3 83 9 52 589
Number Percent 3 32 14 9
N/A
Average Age
8
0 1
0
13 20 6 6 1 9
5
4 13 3 5
27
4
2 4 2 20 166
9 4 5 12 50 2 11 9 55 3 11 21 17 3 54 6 1 79 7 32 423
5 23 50 5 15 8 54 7 14 27 18 8 71 10 3 82 9 42 509
75% 100% 82% 100% ---100% 92% 71% 63% 88% 80% 84% 88% 93% 79% 90% 100% 88% 100% 100% 99% 100% 81% 86%
50 52
51
66 63 55 47 47 58 60 50 48 53 50 55 49 66 47 49 52 45 52 53
Source: Hospital Records
Case 2:09-bk-34714-BB
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InterHealth Corp. Presbyterian Intercommity Hosptial Licensed Beds Fiscal Year Ended September 30, 2008 (Unaudited)
Category General Acute Neonatal Intensive Care Pediatric Services Perinatal Intensive Care Rehabilitation Medical Surgical General Acute Care Skilled Nursing Total Licensed Beds
Licensed 34 34 32 24 17 268 409 35 444
Case 2:09-bk-34714-BB
Desc
InterHealth Corp. Presbyterian Intercommity Hosptial Sources of Discharges Fiscal Year Ended September 30, 2008 (Unaudited)
Acute 4,414 2,595 6,988 2,503 969 549 18,018 TCU 532 8 92 49 34 36 751 Total 4,946 2,603 7,080 2,552 1,003 585 18,769
Medicare Medi-Cal HMO - noncapitated PPO and POS Self-Pay Other
26% 14% 38% 14% 5% 3% 100%
Case 2:09-bk-34714-BB
Desc
InterHealth Corp. Presbyterian Intercommity Hosptial Selected Utilization Statistics Fiscal Years Ended September 30, 2005 2006 2007 2004 Licensed Beds Discharges Patient Days Average Length of Stay (days) Emergency Department Visits Outpatient Procedures Home Health Visits Hospice Days of Care (1) Deliveries
(1) Includes both In and Out Patient days
2008 444 18,769 90,776 4.8 64,412 197,753 53,059 26,892 3,615
339 17,473 79,552 4.6
483 19,175 83,219 4.3
458 19,184 85,267 4.4
444 20,172 86,983 4.3
54,437 56,701 61,564 62,161 160,244 171,488 179,756 183,375 48,387 49,437 48,099 53,800 15,997 15,860 15,061 18,968 3,548 3,874 3,493 3,725
Case 2:09-bk-34714-BB
InterHealth Corp. Presbyterian Intercommity Hosptial Capitalization of the Corporation and Affiliates
Desc
(in thousands) Fiscal Year Ended September 30, 2004 Long Term Debt: Existing Debt Series 2007 Bonds Plus: US Bank Term Loan Plus: Other ST Loan (a) Less: 2007 Bonds Repurchased (b) Less: Current Portion of Net Long Term Debt Net Assets Unrestricted Total Capitalization Percent of Long Term Debt to Capitalization Cash and Board Designated Investments Days Cash and Board Designated Investments On Hand $109,122 2005 $105,075 2006 $100,817 2007 2008
$292,000
A B C= A+B D= A/C E
(3,974) $105,148 $261,313 $366,461 28.7% $200,816 333
(4,195) $100,880 $317,531 $418,411 24.1% $210,359 303
(19,265) $81,552 $381,356 $462,908 17.6% $258,109 341
(6,000) $286,000 $424,496 $710,496 40.3% $349,080 390
$286,000 210,000 47,675 (243,175) (835) $299,665 $398,556 $698,221 42.9% $318,304 281
Operating Expenses Exclude Depreciation & Amortization Exclude Bad Debt Expense Operating Expenses Excluding Depreciation & Amortization
$242,004 (8,874) (12,914) F $220,216 365
$274,208 (10,632) (10,074) $253,502 365
$295,501 (12,875) (6,219) $276,407 365
$349,167 (14,269) (7,836) $327,062 365
$440,541 (16,153) (10,354) $414,034 366
Days in Year G Days Cash and Board Designated Investments On Hand NOTES:
(a) Reflects promissory demand note from Fiduciary International.
(b) Reflects bonds repurchased by PIH with short term debt.
H= E*G/ F
333
303
341
390
281
C:\Documents and Settings\cpalomar\Local Settings\Temporary Internet Files\OLK42\20090209038294ANOTH01.xls
2/10/200910:02 PM
Case 2:09-bk-34714-BB
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2/10/200910:02 PM
Case 2:09-bk-34714-BB
InterHealth Corp. Presbyterian Intercommity Hosptial Total restricted and unrestricted cash and investments
Desc
(in thousands) As of September 30, 2004 $3,889 38,083 158,844 $200,816 15,071 2005 $8,503 22,441 179,415 $210,359 14,330 2007 2008 2006 $6,647 $ 7,860 $ 14,773 56,462 51,965 26,359 195,000 289,255 277,172 $258,109 14,543 $349,080 $318,304 118,018 82,100
Cash and cash equivalents Investments Assets Limited as to Use Total unrestricted cash and investments Trustee-held funds Total restricted and unrestricted cash and investments
$215,887
$224,689
$272,652
$467,098
$400,404
2/10/200910:02 PM
Case 2:09-bk-34714-BB
Desc
InterHealth Corp. Presbyterian Intercommity Hosptial Historical and Pro Forma Debt Service Coverage
(in 000's) 2004 Excess of unrestricted revenues, gains and other support over expenses(1) Plus: Loss on early extinguishment of debt Plus/(Minus): Change in FV of swap Plus/(Minus): Other than temporary impairment of Investments Plus: Write-off of deferred financing costs Plus: Depreciation and Amortization Plus: Interest Net Income Available for Debt Service A Actual Debt Service (2) Actual Debt Service Coverage Ratio Maximum Annual Debt Service Maximum Annual Debt Service Coverage Ratio B C= A/B D E= A/D $47,977
(in thousands) Fiscal Year Ended September 30, 2005 2006 $46,712 $61,176
2007 $ 42,644 10,742 (1,744)
2008 $ 24,630 14,152 2,693 7,192 16,153 9,096 $ 73,916 15,096 4.9 x 15,931 4.6 x
8,874 2,006 $58,857 5,435 10.8 x 9,954 5.9 x
10,632 2,924 $60,268 5,440 11.1 x 9,954 6.1 x
12,875 5,797 $79,848 5,442 14.7 x 9,954 8.0 x
14,269 6,082 $ 71,993 9,055 8.0 x 15,931 4.5 x
(1) Excludes unrealized gains and losses. (2) Represents actual scheduled debt service, excluding amortization
2/10/200910:02 PM
Case 2:09-bk-34714-BB
Desc
InterHealth Corp. and Affiliates

Consolidated Financial Statements as of and for the Years Ended September 30, 2008 and 2007, Supplemental Consolidating Schedules as of and for the Year Ended September 30, 2008, and Independent Auditors Report
Case 2:09-bk-34714-BB
Desc
INTERHEALTH CORP. AND AFFILIATES

TABLE OF CONTENTS
Page INDEPENDENT AUDITORS REPORT CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007: Balance Sheets Statements of Operations Statements of Changes in Net Assets Statements of Cash Flows Notes to Consolidated Financial Statements SUPPLEMENTAL CONSOLIDATING SCHEDULES AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 2008: Consolidating Schedule 1 Balance Sheet Information Consolidating Schedule 2 Statement of Operations Information 23 4 5 67 826 27 2829 3031 1
Case 2:09-bk-34714-BB
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INDEPENDENT AUDITORS REPORT To the Board of Directors of InterHealth Corp. and Affiliates: We have audited the accompanying consolidated balance sheets of InterHealth Corp. and Affiliates (the Company) as of September 30, 2008 and 2007, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of September 30, 2008 and 2007, and the consolidated results of its operations, changes in its net assets, and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the consolidated financial statements, effective September 30, 2007, the Company adopted the recognition provisions of Financial Accounting Standards Board (FASB) Statement No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132R, which changed its method of accounting for its defined benefit pension plan. Our audits were conducted for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The supplemental consolidating schedules on pages 27 through 31 are presented for the purpose of additional analysis of the basic consolidated financial statements, rather than to present the financial position and results of operations, of the individual entities and are not a required part of the basic consolidated financial statements. These schedules are the responsibility of the Companys management. Such schedules have been subjected to the auditing procedures applied in our audit of the basic 2008 consolidated financial statements and, in our opinion, are fairly stated, in all material respects, when considered in relation to the basic 2008 consolidated financial statements taken as a whole.
February 2, 2009
Case 2:09-bk-34714-BB
Desc

CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2008 AND 2007 (Dollars in thousands) 2008 2007
ASSETS CURRENT ASSETS: Cash and cash equivalents Investments short term (Note 4) Patient accounts receivable net of allowance for doubtful accounts of $10,110 and $8,466 in 2008 and 2007, respectively (Notes 3 and 12) Inventory Other receivables Prepaid expenses and other assets (Note 2) Total current assets INVESTMENTS IN MUTUAL FUNDS AND OTHER INVESTMENTS (Note 4) INVESTMENTS Assets limited as to use (Notes 4 and 7) PROPERTY, PLANT, AND EQUIPMENT Net (Note 6) PREPAID PENSION (Note 9) DEFERRED FINANCING COSTS Net (Note 7) GOODWILL Net of accumulated amortization of $386 in 2008 (Note 5) INTEREST RATE SWAP (Note 7) OTHER ASSETS (Note 2) TOTAL 690 $ 808,682 $ 14,773 26,359 71,088 3,535 3,899 18,930 138,584 14,818 359,272 272,122 10,735 1,271 11,190 1,901 560 $ 799,076 (Continued) $ 7,860 51,965 60,312 2,828 2,905 17,811 143,681 16,948 407,273 209,407 10,250 9,056
-2-
Case 2:09-bk-34714-BB
Desc

CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2008 AND 2007 (Dollars in thousands) 2008 2007
LIABILITIES AND NET ASSETS CURRENT LIABILITIES: Accounts payable and accrued expenses Estimated third-party payor settlements (Note 3) Accrued interest (Note 7) Current portion of long-term debt (Note 7) Short-term debt (Note 7) Retention self-insurance programs current portion (Note 10) Total current liabilities DEFERRED COMPENSATION (Note 4) INTEREST RATE SWAP (Note 7) LONG-TERM DEBT Net of current portion (Note 7) RETENTION Self-insurance programs net of current portion (Note 10) Total liabilities COMMITMENTS AND CONTINGENCIES (Note 10) NET ASSETS: Unrestricted (Note 9) Temporarily restricted (Note 8) Permanently restricted (Note 8) Total net assets TOTAL See notes to consolidated financial statements.
$ 55,256 101 421 835 257,675 7,006 321,294 12,786 10,007 41,990 16,518 402,595
$ 37,396 2,396 182 6,000 6,820 52,794 14,368
286,000 14,002 367,164
398,556 6,560 971 406,087 $ 808,682
424,496 6,445 971 431,912 $ 799,076 (Concluded)
-3-
Case 2:09-bk-34714-BB
Desc

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 (Dollars in thousands)
2008
2007
REVENUES: Net patient service revenue (Notes 3 and 12) Capitation revenue (Note 3) Other operating revenue Net assets released from restrictions used for operations Total revenues EXPENSES (Note 14): Salaries and wages Purchased services Medical supplies and drugs Employee benefits (Note 9) Professional fees Depreciation and amortization Other expenses Provision for bad debts Interest net (Note 7) Insurance (Note 10) Rent/lease expense Total expenses EXCESS OF REVENUES OVER EXPENSES BEFORE LITIGATION SETTLEMENT LITIGATION SETTLEMENT (Note 10)
$ 362,312 80,035 10,039 1,401 453,787 156,382 86,776 49,981 44,329 43,844 16,153 15,094 10,354 9,096 5,904 2,628 440,541 13,246 3,668 16,914
$ 334,051 38,517 8,443 1,944 382,955 130,785 71,402 42,180 34,635 25,931 14,269 11,738 7,836 6,082 3,384 925 349,167 33,788
33,788 14,608 3,246 1,744 (10,742) 8,856 42,644 13,352 1,086 156 $ 57,238
OTHER GAINS AND LOSSES Net: Income from investments net of fees (Note 4) Realized gains on investments net (Note 4) Change in fair value of interest rate swap (Note 7) Loss on early extinguishment of debt net (Note 7) Write-off of deferred financing costs (Note 7) Total other gains and losses net EXCESS OF REVENUES OVER EXPENSES AND OTHER GAINS AND LOSSES CHANGE IN UNREALIZED (LOSSES) GAINS ON INVESTMENTS Net (Note 4) NET ASSETS RELEASED FROM RESTRICTIONS USED FOR LONG-LIVED ASSETS OTHER GAINS Net (Note 10) TOTAL (DEFICIENCY) EXCESS OF REVENUES OVER EXPENSES See notes to consolidated financial statements.
19,945 9,115 (14,152) (7,192) 7,716 24,630 (52,282) 1,342 370 $ (25,940)
-4-
Case 2:09-bk-34714-BB
Desc

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 (Dollars in thousands) 2008 2007
UNRESTRICTED NET ASSETS: Total (deficiency) excess of revenues over expenses Cumulative effect of change in accounting principle (Notes 2 and 9) Change in unrestricted net assets TEMPORARILY RESTRICTED NET ASSETS: Contributions and grants received Net assets released from restrictions Reclassification Change in temporarily restricted net assets PERMANENTLY RESTRICTED NET ASSETS Reclassification CHANGE IN NET ASSETS NET ASSETS Beginning of year NET ASSETS End of year See notes to consolidated financial statements.
$ (25,940) (25,940) 2,858 (2,743) 115
$ 57,238 (14,098) 43,140 1,706 (3,030) (53) (1,377) 53
(25,825) 431,912 $ 406,087
41,816 390,096 $ 431,912
-5-
Case 2:09-bk-34714-BB
Desc

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 (Dollars in thousands) 2008 2007
CASH FLOWS FROM OPERATING ACTIVITIES: Change in net assets Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization Amortization of deferred financing costs Amortization of goodwill Provision for bad debts Amortization of deferred income related to bonds Accretion of bond premium Loss (gain) on disposal of equipment Loss (gain) on interest rate swap Net realized and unrealized losses (gains) on investments Cumulative effect of change in accounting principle Loss on early extinguishment of debt Write-off of deferred financing costs Contributions restricted for purchase of long-lived assets Changes in assets and liabilities: Patient accounts receivable Inventory Other receivables Prepaid expenses and other assets Prepaid pension Other assets Accounts payable and accrued expenses Estimated third-party payor settlements Accrued interest Retention self-insurance programs Deferred compensation Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of assets limited as to use Proceeds from the sale of assets limited as to use Purchase of investments in mutual funds and other investments Proceeds from the sale of investments in mutual funds and other investments Purchase of Bright medical group Purchase of property, plant, and equipment Net cash used in investing activities
$ (25,825) 16,153 593 386 10,354 51 11,908 43,167 7,192 (275) (18,910) (346) (994) (1,104) (485) (130) 5,391 (2,295) 239 2,702 (1,582) 46,190 (818,119) 822,760 (32,528) 60,456 (9,258) (71,363) (48,052)
41,816 14,269 424 7,836 (62) (40) (5) (1,744) (16,598) 14,098 10,742 (321) (22,524) (680) 1,596 (4,025) (504) 847 (7,423) 155 (1,712) 2,936 (298) 38,783 (336,467) 155,494 (48,007) 50,540 (31,348) (209,788)
(Continued)
-6-
Case 2:09-bk-34714-BB
Desc

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 (Dollars in thousands) 2008 2007
CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt Proceeds from issuance of short-term debt Repayment of short-term debt Repurchase of long-term debt Bond issuance costs Payment of deferred income Proceeds from issuance of long-term debt Contributions restricted for purchase of long-lived assets Net cash provided by financing activities NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS Beginning of year CASH AND CASH EQUIVALENTS End of year SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest SUPPLEMENTAL INFORMATION RELATING TO NONCASH ITEMS: As of September 30, 2008 and 2007, accounts payable and accrued expenses include $4,926 and $2,141, respectively, related to purchases of property, plant and equipment. As of September 30, 2008, accounts payable and accrued expenses include $3,859 related to the second installment due for the Bright medical group acquisition. See notes to consolidated financial statements.
(6,000) 302,675 (45,000) (243,175)
$ (110,313)
275 8,775 6,913 7,860 $ $ 14,773 10,124 $ $
(9,445) (345) 292,000 321 172,218 1,213 6,647 7,860 7,052
(Concluded)
-7-
Case 2:09-bk-34714-BB
Desc

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 (Dollars in thousands)
1. ORGANIZATION InterHealth Corp. (InterHealth) is a nonprofit California corporation located in Whittier, CA. InterHealth is the sole member (as the term member is defined in California Corporations Code, Section 5056) of the following seven other nonprofit corporations: Presbyterian Intercommunity Hospital, Inc. (PIH or the Hospital) PIH Foundation (the Foundation) IHC Management Corp. (IHMC) Presbyterian Health Physicians (PHP), doing business as Bright Health Physicians of PIH (see Note 5) InterHealth Home Health Care Med Site Hacienda Heights PIH Insurance Company, A Reciprocal Risk Retention Group
These entities are collectively referred to as the Company. The accompanying consolidated financial statements include the accounts of these member corporations and affiliates. All intercompany transactions have been eliminated in consolidation. InterHealth also owns all the stock in HealthMed Services Inc., a for-profit corporation. Effective August 31, 2007, substantially all of the assets of HealthMed Services Inc. were acquired by PHP and the operations of HealthMed Services Inc. ceased as of September 30, 2007. The entity was formally dissolved in early 2008. Subsequent to September 30, 2008, PIH Insurance Company applied for and received approval on December 11, 2008, to operate as a captive insurance company within the state of Hawaii. Beginning in 2009, this entity will underwrite some of the Companys existing self-insurance programs. The Company is an integrated delivery network that provides health care services to southeastern Los Angeles County and portions of the San Gabriel Valley and Orange County. The Hospital is a 444-bed regional hospital with a full range of health services. Additionally, the Company provides transitional care services, home health, and hospice services. 2. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES Basis of Accounting The financial statements are prepared on the accrual basis of accounting.
-8-
Case 2:09-bk-34714-BB
Desc
Use of Estimates The preparation of 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, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents are short-term highly liquid investments with maturities of three months or less at the time of purchase. Cash equivalents exclude amounts whose use is limited by Board of Directors (the Board) designation or other arrangements under trust agreements. Pledges Receivable At September 30, 2008 and 2007, pledges receivable expected to be realized in one year or less are $790 and $816, respectively, and are included in prepaid expenses and other assets, and between one and five years are $690 and $560, respectively (net of $40 discount in each year), and are included in other assets in the accompanying consolidated balance sheets. The pledges due in greater than one year are reported at net present value using a risk-free interest rate at the date of such pledges, which was 5.5%, at September 30, 2008 and 2007, and are temporarily restricted. Investments Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value based upon publicly quoted market prices or quotations of similar securities. Investment income or loss, net of expenses, is included in other gains and losses, unless the income or loss is restricted by donor or law. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially differ from the amounts in the accompanying consolidated balance sheets (see Note 15). Inventory Inventory is stated at the lower of cost or market, determined using the weighted-average cost method on a first-in, first-out basis. Assets Limited as to Use Assets limited as to use include primarily (a) assets set aside by the Board for future capital improvements over which the Board retains control and may at its discretion subsequently use for other purposes, (b) investments held by trustees under indenture agreements, and (c) cash drawn on credit facilities used for the repurchase of auction rate securities issued by the Company (see Note 7). Property, Plant, and Equipment Property, plant, and equipment are recorded at cost. Depreciation on property, plant, and equipment is computed using the straight-line method over the estimated useful life of each class of depreciable assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful lives of the improvements or the term of the related lease. Interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets. For the year ended September 30, 2008, the Company capitalized interest in the amount of $3,286. For the year ended September 30, 2007, the Company did not capitalize any interest costs as the earnings from borrowed funds exceeded interest expense associated with such borrowing.
-9-
Case 2:09-bk-34714-BB
Desc
Estimated useful lives by asset type are generally as follows:

Land improvements Buildings and improvements Equipment fixed and major movable Leasehold improvements 1520 years 1540 years 515 years 520 years
When property is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting net gain or loss is included in the excess of revenues over expenses and other gains and losses in the accompanying consolidated statements of operations. The costs of normal maintenance and repairs and minor replacements are charged to expense when incurred. 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, in accordance with Financial Accounting Standards Board (FASB) Statement No. 143, Accounting for Asset Retirement Obligations, and FASB Interpretation (FIN) No. 47, Accounting for Conditional Asset Retirement Obligations an interpretation of FASB Statement No. 143, 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 differences 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 operations. Asset Impairment The Company routinely evaluates the carrying value of its long-lived assets and goodwill for impairment. The evaluations address the estimated recoverability of the assets carrying value, which is principally determined based on projected undiscounted net cash flows generated by the underlying tangible assets. When the carrying value of an asset exceeds estimated recoverability, an asset impairment is recognized. No asset impairment charges were recorded in 2008 or 2007. Deferred Financing Costs Deferred financing costs consist primarily of costs incurred in connection with the issuance of the 2007 revenue bonds, which are amortized based on the interest method over the life of the bonds. The 2007 revenue bonds are more fully discussed in Note 7. Interest Rate Swap The Company accounts for derivative instruments in accordance with FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. FASB Statement No. 133 requires all derivatives to be recorded in the consolidated balance sheets as either assets or liabilities measured at estimated fair value and the recognition of the unrealized gains and losses in the consolidated statements of operations. In certain defined conditions, a derivative may be specifically designated as a hedge for a particular exposure. The accounting for derivatives depends on the intended use of the derivatives and the resulting designation. The Company uses derivative financial instruments to manage its exposure to interest rate risk and to balance its variable rate long-term debt portfolio. Credit risk related to derivative financial instruments is considered minimal and is managed by requiring high credit standards for its counterparties and settlement on at least a monthly basis. All unrealized (losses) gains, net of interest income or expense, are recognized as change in fair value of interest rate swap in the accompanying consolidated statements of operations.
- 10 -
Case 2:09-bk-34714-BB
Desc
Net Patient Service Revenue The Company has agreements with third-party payors that provide for payments to the Company at amounts different from established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Net patient service revenue is reported at the estimated net realizable amounts due from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. These retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Net patient service revenue is recognized in the period the related services are rendered. Capitation Revenue The Company has agreements with various health maintenance organizations (HMO) to provide medical services to subscribing participants. Under these arrangements, the Company receives monthly capitation payments based on the number of each HMOs participants assigned to the Company, regardless of services performed by the Company. In addition, the HMOs make fee-for-service payments to the Company for certain covered services based upon discounted fee schedules, per diem rates, and case rates. Refer to Note 3 for additional information. Charity Care The Hospital provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. The Hospital maintains records to identify and monitor the level of charity care it provides. Because the Hospital does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. The Hospital has estimated forgone charges for charity care to be $7,756 (unaudited) and $6,885 (unaudited) for fiscal years 2008 and 2007, respectively. Charity care is calculated based on gross charges. Contributed Services Volunteers have donated significant amounts of time and services to the Hospitals operations. Contributed services are recognized if the services received, which create or enhance long-lived assets or require specialized skills, would have typically been purchased, if not provided by donation. None of the services donated met these criteria and, accordingly, no volunteer time has been reflected in the accompanying consolidated financial statements. Excess of Revenues Over Expenses and Other Gains and Losses The consolidated statements of operations include the excess of revenues over expenses and other gains and losses. Changes in unrestricted net assets, which are excluded from this total consistent with industry practice, include the change in unrealized (losses) gains on investments other than trading securities and contributions of long-lived assets (including assets acquired using contributions that by donor restriction were to be used for the purposes of acquiring such assets). Donor-Restricted Gifts Unconditional promises to give cash and other assets are reported at fair value at the date the promise is received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gift is received or when the conditions expire, whichever occurs first. The gifts are reported as either temporarily or permanently restricted support, if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statements of operations as net assets released from restrictions. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by the Company has been limited by donors to a specific time period or purpose. Permanently restricted net assets are those with donor-imposed restrictions that are to be maintained by the Company in perpetuity.
- 11 -
Case 2:09-bk-34714-BB
Desc
Pension Plan The Company adopted FASB Statement No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R), effective September 30, 2007 (2009 for the requirement to measure plan assets and benefit obligations as of the fiscal year-end), which requires a not-for-profit organization to recognize the overfunded or underfunded status of a defined benefit postretirement plan (measured as the difference between the fair value of plan assets and the projected benefit obligation as of the date of the fiscal year-end) as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through changes in unrestricted net assets. The statement also includes certain disclosure requirements. The adoption of FASB Statement No. 158 resulted in a decrease in prepaid pension costs and unrestricted net assets of $14,098 for 2007. See Note 9 for information on the Companys defined benefit plan and the impact of the adoption of FASB Statement No. 158. Income Taxes The Company adopted the provisions of FIN No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109, for the year ended September 30, 2008. FIN No. 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. The Company has not recognized a liability for unrecognized tax uncertainties as a result of the adoption of FIN No. 48. Recent Accounting Pronouncements In March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133. This statement is intended to improve reporting standards for derivative instruments and hedging activities by requiring enhanced disclosures to provide a better understanding of their effects on an entitys financial position, financial performance, and cash flows. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedge items are accounted for under FASB Statement No. 133 and its related interpretations, and (c) how derivative instruments and related hedge items affect an entitys financial position, financial performance, and cash flows. This statement is effective for the Company beginning October 1, 2009. Adoption is not expected to have a significant impact on the Companys consolidated financial position or results of operations. In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51. The objective of this statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. FASB Statement No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the reporting entity and the interests of the noncontrolling owners and that require minority ownership interests to be presented separately within net assets in the consolidated financial statements. FASB Statement No. 160 is effective for the Company beginning October 1, 2009. The Companys management is currently evaluating the effect of adopting this statement. In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements. FASB Statement No. 157 provides guidance for using fair value to measure assets and liabilities. The standard expands required disclosures about the extent to which entities measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. FASB Statement No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. FASB Statement No. 157 does not expand the use of fair value in any new circumstances. FASB Statement No. 157 is effective for the Company for its year ending September 30, 2009. Management has not completed its analysis of the effects, if any, of this statement.
- 12 -
Case 2:09-bk-34714-BB
Desc
In September 2006, the FASB has issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115, which permits entities to choose to measure many financial instruments and certain other items at fair value. This statement is effective for the Company for its year ending September 30, 2009, provided that the Company also elects to apply the provisions of FASB Statement No. 157. Management has not completed its analysis of the effects, if any, of this statement. In August 2008, the FASB issued FASB Staff Position (FSP) FAS 117-1, Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), and Enhanced Disclosures for All Endowment Funds. The guidance is intended to improve the quality and consistency of financial reporting of endowments held by not-for-profit organizations. It provides guidance on classifying the net assets (equity) associated with donor-restricted endowment funds held by organizations that are subject to an enacted version of UPMIFA, which serves as a model act for states to modernize their laws governing donor-restricted endowment funds. It also requires additional disclosures about endowments (both donor-restricted funds and board-designated funds) for all organizations, including those that are not yet subject to an enacted version of UPMIFA. The provisions are effective for fiscal years ending after December 15, 2008. Management is currently evaluating the impact that the adoption of FSP FAS 117-1 will have on the Companys financial position, results of operations, and cash flows but currently does not believe it will have a material impact on the Companys consolidated financial statements. 3. NET PATIENT SERVICE REVENUE The Company has agreements with third-party payors that provide for payments to the Company at amounts different from its established rates. The Company accrues for amounts that it believes may ultimately be due from Medicare and other third-party payors and reports such amounts in the accompanying consolidated financial statements. 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. Certain outpatient services provided to Medicare beneficiaries are paid based on prospectively determined rates for covered outpatient hospital services using ambulatory payment classification groups (APCs). APCs compose a system covering outpatient services consisting of groups arranged so that services within each group are comparable clinically and with respect to the use of resources. The Hospitals Medicare cost reports have been audited by the Medicare fiscal intermediary through September 30, 2007. Medi-Cal Inpatient services rendered to Medi-Cal program beneficiaries are paid at negotiated per diem rates. The per diem rates are not subject to retrospective adjustment. Outpatient services are paid based on prospectively determined rates per procedure provided. Capitation Revenue PHP also contracts with various HMOs to provide health care services to HMO enrollees. Under the various contracts, PHP receives monthly capitation payments based on the number of enrollees, regardless of physician services actually performed by PHP. The Company contracts with various HMOs to provide health care services to HMO enrollees. Under the various contracts, the Hospital receives monthly payments (capitation payments) based on the number of enrollees, regardless of services actually performed by the Hospital. The Hospital did not receive any capitation payments for the years ended September 30, 2008 and 2007.
- 13 -
Case 2:09-bk-34714-BB
Desc
Capitation payments are recognized as revenue based on the period the Company is obligated to provide services. As of September 30, 2008 and 2007, liabilities of $6,351 and $3,823, respectively, for services provided to enrollees by providers other than the Company are estimated and reflected in accounts payable and accrued expenses in the accompanying consolidated financial statements. Other The Company has also entered into payment agreements with certain commercial insurance carriers, HMOs, and preferred provider organizations. The basis for payment under these agreements includes prospectively determined rates per discharge, discounts from established charges, and prospectively determined daily rates. 4. INVESTMENTS AND ASSETS LIMITED AS TO USE Investments Short-term investments are stated at fair value and amounted to $26,359 and $51,965 at September 30, 2008 and 2007, respectively. Such investments are composed of U.S. Treasury bills, debt securities, and commercial paper. Investments in Mutual Funds and Other Investments The Hospital has nonqualified deferred compensation plans that provide for deferred compensation at various minimum levels, based on employment status. The plans are available to certain physician, supervisory, and executive personnel. The Hospital has invested the deferred amounts in mutual funds and other investments that are stated at fair value. Such amounts, while segregated in the accompanying consolidated financial statements, are available to satisfy the Hospitals obligations to the general creditors, if necessary. Additionally, the Hospital has a flexible benefit plan that provides for life insurance coverage for certain executive personnel. Investments in mutual funds and other investments were $14,818 and $16,948, of which $2,032 and $2,508 related to the flexible benefit plan for executives, as of September 30, 2008 and 2007, respectively. Assets Limited as to Use The composition of assets limited as to use at fair value at September 30, 2008 and 2007, is set forth in the following table:
2008 2007
Cash equivalents and certificates of deposit Equity investments Fixed income Real estate equity investments Amounts classified as assets limited as to use
$ 100,016 92,028 158,886 8,342 $ 359,272
$ 115,726 204,540 76,945 10,062 $ 407,273
Assets limited as to use at fair value at September 30, 2008 and 2007, consist of amounts designated as follows:
2008 2007
Board designated for building and equipment Designated for repurchase of long-term debt (Note 7) Held by trustee under bond indenture (Note 7): Bond Interest Fund Bond Reserve Fund Bond Revenue Fund Bond Project Fund Assets limited as to use
$ 262,672 14,500 215 16,215 794 64,876 $ 359,272
$ 289,255 476 15,951 767 100,824 $ 407,273
- 14 -
Case 2:09-bk-34714-BB
Desc
The following table shows the unrealized losses and fair value of the Companys investments with unrealized losses at September 30, 2008 and 2007, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
Unrealized Losses Less Than 12 Months Market Unrealized Value Losses September 30, 2008 Unrealized Losses 12 Months or Greater Market Unrealized Value Losses Total Unrealized Losses
Market Value
Equity investments Fixed income Total

September 30, 2007
$ 8,342 6,023 $ 14,365
(944) (172)
$ 84,225 142,656 $ 226,881
$ (7,302) (6,667) $ (13,969)
$ 92,567 148,679 $ 241,246
$ (8,246) (6,839) $ (15,085)
$ (1,116)
Equity investments Fixed income Total
$ 1,388 8,081 $ 9,469
$ (1,038) (190) $ (1,228)
$ 13,794 45,535 $ 59,329
$ (2,347) (728) $ (3,075)
$ 15,182 53,616 $ 68,798
$ (3,385) (918) $ (4,303)
The unrealized losses on the Companys investments in debt and equity securities were caused by interest rate increases or current market volatility. The Company has the ability and intent to hold these investments until a recovery of fair value (which may be maturity); it does not consider the investment in these securities to be other-than-temporarily impaired. 5. ACQUISITION Effective February 1, 2008, the Company, through its wholly owned affiliate PHP, acquired most of the assets of Bright Medical Associates, Inc., a California professional corporation, Bright Administrative Services LP, a California limited partnership, and Integrated Medical Management, Inc., a California corporation (collectively, BMA). BMA is a multispecialty medical group which provides medical services for approximately 40,000 lives under managed care contracts with licensed health care service plans. The transaction doubled the Companys delivery network of clinic physicians, Independent Physicians Association providers, and managed care lives. The combined entity is now doing business as Bright Health Physicians, a Health & Safety Code Section 1206(l) medical foundation. The purchase price consisted of $13,117, which includes $1,905 of acquisition costs and certain other cash considerations, pursuant to the purchase agreement, and the assumption of certain assets and liabilities. Goodwill of $11,576 was recorded in conjunction with the acquisition and will be amortized over 20 years.
- 15 -
Case 2:09-bk-34714-BB
Desc
The purchase price allocation for BMA is as follows:

Accounts receivable Other assets Goodwill Accounts payable and accrued expenses Claims incurred but not reported Total purchase price Cash paid for acquisition and closing cost Estimated payment due on first anniversary $ 2,220 3,005 11,576 (667) (3,017) 13,117 (9,258) $ 3,859
Pursuant to the purchase agreement, $7,353 was paid at closing of the transaction, with the remaining estimated payment of $3,859, due at the first anniversary of closing. The transaction was accounted for under the purchase method. The results of operations of BMA have been included in the Companys consolidated financial statements from the date of acquisition. The following unaudited pro forma consolidated results of operations assume that the acquisition of BMA was completed as of October 1 for each of the years shown below:
2008 2007
Total unrestricted revenues (Deficiency) excess of revenues over expenses
$ 473,617 (26,165)
$ 438,641 56,097
6. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment at September 30, 2008 and 2007, comprise the following:
2008 2007
Buildings and equipment Land and land improvements Leasehold improvements Construction in progress Total property, plant, and equipment Less accumulated depreciation Property, plant, and equipment net
$ 300,713 21,791 40,638 67,200 430,342 (158,220) $ 272,122
$ 288,439 16,546 35,365 19,373 359,723 (150,316) $ 209,407
- 16 -
Case 2:09-bk-34714-BB
Desc
7. DEBT A summary of short- and long-term debt at September 30, 2008 and 2007, is as follows:
2008 2007
Short-term debt: U.S. Bank National Association Fiduciary Trust Promissory Note Total short-term debt Long-term debt: Insured Health Facility Revenue Bonds Series 2007 Repurchase of Auction Rate Securities Less current portion Total long-term debt
$ 210,000 47,675 $ 257,675 $ 286,000 (243,175) (835) $ 41,990 $ 292,000 (6,000) $ 286,000
Insured Health Facility Revenue Bonds On January 31, 2007, the Hospital, InterHealth, and IHMC (collectively, the Obligated Group) jointly issued $292,000 aggregate principal amount of City of Whittier Health Facility Revenue Bonds, Series 2007 A, Series 2007 B, Series 2007 C, and Series 2007 D (the Series 2007 Bonds), at par. The proceeds of these Bonds were used to (1) finance the acquisition, construction, equipping, and improvement of certain Hospital-owned facilities, (2) advance refund the Series 2002 Bonds, (3) fund a portion of a bond reserve fund, and (4) pay certain costs of issuance of the bonds. On January 31, 2002, the Obligated Group jointly issued $80,000 aggregate principal amount of City of Whittier Health Facility Revenue Bonds, Series 2002 (the Series 2002 Bonds) at a discount of $472. The proceeds of the Series 2002 Bonds were used to finance and/or reimburse the prior payment of the costs of acquiring, constructing, renovating, and equipping certain health facilities; fund a bond reserve fund; and pay certain costs of issuance of the bonds. On December 6, 1995, the Obligated Group jointly issued $51,740 aggregate principal amount of City of Whittier Insured Health Facility Revenue Bonds, Series 1995 (the Series 1995 Bonds) at a premium of $2,887. The proceeds of the Series 1995 Bonds were used to reimburse the Hospital for its prior payment of the costs of acquiring, constructing, and equipping certain additions and capital improvements to certain health facilities and to refund a previous bond issue. The Series 2007 Bonds initially bear interest at a Periodic Auction Reset Securities (PARS) rate, but may be converted to another interest rate mode at the option of the Obligated Group. Series 2007 A Bonds were issued as daily PARS, Series 2007 B Bonds were issued as 7-day PARS, Series 2007 C Bonds were issued as 28-day PARS, and Series 2007 D Bonds were issued as 14-day PARS. During the year, the PARS rates paid ranged from 0.25% to 15% and its weighted average was 4%. The Series 2007 A, Series 2007 B, and Series 2007 C Bonds mature in 2036, while the Series 2007 D Bonds mature in 2017. The Series 2007 A, Series 2007 B, and Series 2007 C Bonds are subject to sinking fund requirements beginning in 2017, while the Series 2007 D Bonds are subject to a sinking fund requirement beginning in 2008.
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Case 2:09-bk-34714-BB
Desc
Under the terms of the Series 2007 Bonds, the Obligated Group is required to maintain certain investments with a trustee to pay principal and interest. These investments are included with assets limited as to use in the accompanying consolidated balance sheets (see Note 4). The covenants of the Series 2007 Bonds also place limits on the incurrence of additional borrowings and require that the Obligated Group satisfy certain measures of financial performance. In February 2008, a dislocation occurred in the auction rate securities (ARS) markets. On February 13, 2008, the Series A Bonds, with a daily reset, experienced a failed auction. As a result of the market collapse, interest costs on the Series 2007 Bonds rose to an average of 6.6% in February 2008 and then to 9.9% in March 2008. On March 14, 2008, the Securities and Exchange Commission (SEC) issued guidelines whereby issuers of ARS bonds could bid on their own debt. Based on the SEC guidelines and a favorable opinion from the Companys bond counsel, the Company implemented a program to bid on its Series 2007 Bonds, and on April 11, 2008, bid on its Series 2007 B bonds. In April, 2008, the Company entered into a secured promissory note agreement with its investment custodian, Fiduciary Trust, in the amount of $85,000 (Promissory Note). The Promissory Note has no expiration date, but is payable on demand and is collateralized by investments held on behalf of the Company by the investment custodian. Borrowings under the Promissory Note bear interest at the one-month London InterBank Offered Rate (LIBOR), plus 1.25%, which was 3.7% at September 30, 2008. During the year, the interest rate paid on borrowed funds ranged from 3.6% to 4.1%. At September 30, 2008, the outstanding borrowing was $47,675. On April 18, 2008, the Company entered into a $245,000 syndicated credit facility with US Bank National Association (the Credit Facility), under its Master Indenture of Trust dated November 1, 1995, and as supplemented by Supplemental Master Indenture Trust for Obligation No. 5 dated April 18, 2008. The Company can elect to pay interest at either the prime rate, minus 1% or one-month LIBOR, plus 1.25%. During the year, the interest rate paid on borrowed funds ranged from 3.7% to 3.9% and was 3.7% at September 30, 2008. The Credit Facility includes financial covenants requiring a minimum debt service coverage ratio, liquidity level and Standard and Poors rating. At September 30, 2008, the outstanding borrowing was $210,000. The Credit Facility expires on April 17, 2009, at which time all amounts are due and payable. The Companys Board of Directors has approved a plan to pursue $280,000 in new Series 2009 Variable Rate Demand Obligation bonds backed by a syndicated letter of credit. Management has commenced negotiations with a bank to secure this letter of credit. The issuance is expected in late March 2009 or early April 2009. In the event that such financing is not secured, management has additional potential options which include an extension or amendment of its existing short-term debt, the option to resell its Series 2007 Bonds in the open market through the auction process, and/or liquidation of a portion of its investment portfolio to satisfy any remaining outstanding short-term debt. Proceeds from the Promissory Note and Credit Facility were used to bid on the Series 2007 Bonds throughout the year. At September 30, 2008, the Company repurchased $243,175 of the Series 2007 Bonds, borrowing $47,675 under the Promissory Note and $210,000 under the Credit Facility. The $14,500 of additional borrowed funds are available for future use in the repurchase of the Companys Series 2007 Bonds and are included in assets limited as to use at September 30, 2008. As a result of the repurchase of the Series 2007 Bonds, approximately 85% of the bond issuance costs were written-off, representing the pro rata portion of the Series 2007 Bonds that have been repurchased in 2008. A write-off of deferred financing costs in the amount of $7,192 was recorded in other gains and losses in the consolidated statements of operations.
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Case 2:09-bk-34714-BB
Desc
Early Retirement of Series 1995 Bonds and Series 2002 Bonds In anticipation of the issuance of the Series 2007 Bonds, the Series 1995 Bonds were advance refunded in December 2006, payment was made through the use of proceeds from the sale of investments. A portion of the proceeds from the issuance of the Series 2007 Bonds were used to advance refund the Series 2002 Bonds. The Hospital considers the Series 1995 and 2002 Bonds defeased and the related liabilities have been removed from the consolidated financial statements. As of September 30, 2008, the amount of these defeased bonds totaled $89,940. A write-off of deferred financing costs in the amount of $10,742 was recorded in other gains and losses net in the 2007 consolidated statement of operations. Interest Rate Swap In connection with the issuance of the Series 2007 Bonds and in an effort to reduce its interest costs, the Hospital entered into three separate interest rate swap agreements having a total notional amount of $222,000. Under the terms of the agreements, the Hospital has agreed to pay to the counterparty a fixed rate of interest on the Series 2007 A, Series 2007 B, and Series 2007 C Bonds in exchange for receiving a payment from the counterparty based on a floating rate tied to the one-month LIBOR. The fixed rate of interest on the Series 2007 A, Series 2007 B, and Series 2007 C Bonds are 3.097%, 3.085%, and 3.167%, respectively, for 2008. The swap agreements effectively reduce or increase the Hospitals interest costs by swapping the variable interest rate on the Series 2007 A, Series 2007 B, and Series 2007 C Bonds to a fixed rate. The swap agreements terminate on the same date that the related bonds mature. As of September 30, 2008, the swaps were recorded as a liability of $10,007 and as an asset with a fair value of $1,901 at September 30, 2007. As of September 30, 2008, management has not designated the swap as a hedge in accordance with FASB Statement No. 133. Scheduled principal repayments on long-term debt are as follows:
Years Ending September 30 Principal Bonds Repayment Repurchased Net
2009 2010 2011 2012 2013 Thereafter Total principal repayments
6,175 6,425 6,650 6,875 7,150 252,725
(5,340) (5,556) (5,751) (5,945) (6,183) (214,400)
835 869 899 930 967 38,325
$ 286,000
$ (243,175)
$ 42,825
8. TEMPORARILY AND PERMANENTLY RESTRICTED NET ASSETS Temporarily restricted net assets at September 30, 2008 and 2007, are available for the following purposes or periods:
2008 2007
Contributions received and restricted for patient care Contributions restricted for construction projects Contributions restricted for specific programs Total temporarily restricted net assets
$ 3,827 1,867 866 $ 6,560
$ 3,404 1,759 1,282 $ 6,445
Permanently restricted net assets at September 30, 2008 and 2007, in the amount of $971 are held in perpetuity, the income from which is expended to support the Companys resident Chaplain office.
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Case 2:09-bk-34714-BB
Desc
9. PENSION PLAN The Company has a defined benefit pension plan (the Plan) covering substantially all employees. It is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Under the terms of the Plan, participants are eligible for monthly benefit payments upon reaching age 65, as defined in the Plan document. Vesting occurs after completion of five years of cumulative service. Participants are eligible for reduced benefits upon early retirement under certain circumstances. Monthly benefit payments are determined by application of a benefit formula to a participants annual wages for all years of eligibility in the Plan before retirement. Under the terms of the Plan, participants are not required or permitted to make contributions to the Plan. The Companys policy is to fund its pension cost in accordance with the provisions of ERISA. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. The following summarizes the Companys retirement plan using plan measurement dates of June 30, 2008 and 2007: For the years ended September 30, 2008 and 2007, net periodic benefit cost includes the following components:
2008 2007
Service cost Interest cost Expected return on plan assets Amortization of prior service cost Recognized actuarial loss Net periodic benefit cost
$ 4,575 5,799 (7,370) 1 491 $ 3,496
$ 3,442 5,140 (6,921) 1 833 $ 2,495
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Case 2:09-bk-34714-BB
Desc
A summary of the components of net pension cost as of the date of the latest actuarial valuation is as follows:
2008 2007
Changes in benefit obligation: Benefit obligation beginning of year Service cost Interest cost Benefits paid Actuarial (gain) loss Benefits obligation end of year Changes in plan assets: Fair value of plan assets beginning of year Actual return on plan assets Employer contributions Benefits paid Fair value of plan assets end of year Funded status Employer contributions after measurement date Prepaid benefit cost Amounts recognized in the balance sheet consist of prepaid benefit cost Amounts recognized in unrestricted net assets: Prior service cost Net actuarial loss Amounts in unrestricted net assets
$ 88,485 4,575 5,799 (2,467) (10,086) 86,306 97,985 (2,227) 3,000 (2,467) 96,291 9,985 750 $ 10,735 $ 10,735 $ (5) (13,114)
$ 80,369 3,442 5,140 (2,451) 1,985 88,485 86,299 11,137 3,000 (2,451) 97,985 9,500 750 $ 10,250 $ 10,250 $ (5) (14,093)
$ (13,119)
$ (14,098)
The amounts expected to be recognized as components of net periodic benefit cost over the next fiscal year include the following:
2008
Prior service costs Net loss
1 342
The accumulated benefit obligation for the Plan was $77,463 and $77,191 at September 30, 2008 and 2007, respectively.
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Case 2:09-bk-34714-BB
Desc
During the year ended September 30, 2007, the Company adopted the recognition provisions of FASB Statement No. 158. The effect on the consolidated financial statements at September 30, 2007, related to the adoption of FASB Statement No. 158 is as follows:
Before Application of FASB Statement No. 158 After App lication of FASB Statement No. 158
Adjustments
Prepaid pension cost Unrestricted net assets
$ 24,348
$ (14,098) 14,098
$ 10,250 14,098
Weighted-average assumptions used to determine benefit obligations at September 30, 2008 and 2007, are as follows:
2008 2007
Discount rate Rate of compensation increase
7.25 % 4.00
6.50 % 4.00
Weighted-average assumptions used to determine net periodic benefit cost for the years ended September 30, 2008 and 2007, are as follows:
2008 2007
Discount rate Expected long-term rate of return on assets Rate of compensation increase
6.5% & 6.65% 7.50 4.00
6.50 % 8.00 4.00
Pursuant to the acquisition of BMA on February 1, 2008, it was necessary to remeasure the portion of fiscal year ended September 30, 2008, expense from February 1, 2008 to September 30, 2008, using a revised discount rate of 6.65%. To develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. The primary asset classifications utilized to achieve both appreciation and diversification are domestic large cap equity, domestic mid cap equity, domestic small cap equity, domestic medium cap equity, international equity, domestic investment grade fixed income, high yield fixed income, and inflation indexed fixed income. The investment policy reflects the expected allocation between these different asset classes in order to best achieve the objectives of the Plan. Investments are rebalanced, as appropriate, to maintain the desired asset allocation.
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Case 2:09-bk-34714-BB
Desc
Asset allocations by asset category at September 30, 2008 and 2007, are as follows:
Asset Category 2008 2007
Equity securities Debt securities Real estate Other Total
39.5 % 41.7 3.3 15.5 100.0 %
45.7 % 47.6 3.5 3.2 100.0 %
The investment policy has been established to provide a total investment return that will, over time, maintain purchasing power parity for the Plans variable benefits and keep the Companys plan funding at a reasonable level. The primary asset classes utilized to attain these objectives are equity securities, debt securities, real estate, and all other with target allocations of 42%, 38%, 4%, and 16%, respectively. The Company expects to contribute $3,000 to the Plan for the fiscal year ending September 30, 2009. Benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:
Years Ending September 30
2009 2010 2011 2012 2013 20142018 Total
$ 3,242 3,424 3,646 3,954 4,314 26,874 $ 45,454
10. COMMITMENTS AND CONTINGENCIES Insurance Programs The Company partially insures or self-insures against malpractice and general liability claims, workers compensation claims, and certain health and dental benefits. The Company self-insures for certain health benefits effective January 1, 2007. Under the malpractice and general liability program, effective August 1, 2005, the Company is self-insured for up to $500 consolidated indemnity and expense per occurrence with maximum annual coverage of $19,000 per occurrence/annual aggregate. With regard to workers compensation claims, the Company has reinsurance coverage for individual claim expenses in excess of $1,000 per occurrence with maximum annual coverage of $50,000 per occurrence. Self-insurance reserves as of September 30, 2008 and 2007, are as follows: malpractice and general liability claims $6,572 and $5,353, workers compensation claims $13,804 and $13,500, dental benefits claims $380 and $269, and health insurance claims $2,768 and $1,700, respectively. Litigation From time to time, the Company is subject to claims arising in the ordinary course of business. In the opinion of management, the ultimate resolution to these legal proceedings will not have a material adverse effect on the consolidated financial position of the Company or the results of its operations.
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Case 2:09-bk-34714-BB
Desc
Litigation Settlement In January 2001, Gallatin Medical Corporation and one of its former employees brought suit against Gallatin Medical Foundation, currently known as PHP, in connection with a related physician service agreement. The parties settled the suit in fiscal year 2003, resulting in the Company making a payment of $5,125 to the third party. In 2006, the Company was successful in its pursuit of recoveries under its insurance programs and others for costs incurred related to the settlement. Total costs incurred related to the settlement were $11,697, and amounts recovered in fiscal year 2006 under the Companys insurance programs and others was $12,279. In September 2008, the Company reached a settlement in its final outstanding claim, receiving $3,800 from the other party. The Company incurred legal expenses of $132 which were offset against the settlement. This settlement has been reflected as litigation settlement in the consolidated statements of operations. Guarantees In accordance with the requirements of California Health and Safety Code section 1375.4(b)(1)(B), in December 2005, InterHealth and PHP signed a Guaranty Agreement (the Guaranty). Under the terms of the Guaranty, InterHealth has unconditionally guaranteed all liabilities of PHP, not to exceed $30,000. The Guaranty remains in effect for an indefinite period. In conjunction with the Bright Acquisition, PHP entered into a Professional Service Agreement (Service Agreement), effective February 1, 2008, with a California professional corporation composed of individual physicians providing medical and health care services at the former BMA clinics. The Service Agreement includes a payment guarantee provision, whereby PIH guarantees all obligations to the California professional corporation on behalf of PHP, not to exceed $15,000. The Guaranty remains in effect for the life of the Service Agreement, which has an initial term of ten (10) years. Operating Leases The Company leases certain buildings and equipment under noncancelable operating leases. Rent expense relating to operating leases was $2,570 and $715 for the years ended September 30, 2008 and 2007, respectively. Future minimum lease payments required under operating leases at September 30, 2008, are summarized in the following table:
Years Ending September 30
2009 2010 2011 2012 2013 Thereafter
$ 2,050 1,927 260 137 137 2,914 $ 7,425
11. INCOME TAXES InterHealth and six of its seven affiliates are nonprofit corporations as described in Section 501(c)(3) of the Internal Revenue Code (the Code) and are exempt from federal income taxes on related income pursuant to Section 501(a) of the Code and similar provisions of the California Revenue and Taxation Code. Accordingly, no provision for income taxes has been recorded in the accompanying consolidated financial statements for these affiliates.
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Case 2:09-bk-34714-BB
Desc
The only for-profit entity, HealthMed Services Inc., files a federal and California tax return annually. As of September 30, 2008, the entity has been dissolved. For the years ended September 30, 2007, this entity generated de minimis net income or losses. At September 30, 2008, the estimated federal and tax liabilities for HealthMed Services, Inc. were $7 and $24, respectively. 12. CONCENTRATION OF CREDIT RISK The Hospital and PHP grant credit without collateral to their patients, most of whom are local residents and are insured under third-party payor agreements. The mix of gross patient accounts receivable from patients and third-party payors at September 30, 2008 and 2007, was as follows:
2008 2007
Medicare Medi-Cal HMO PPO Other third-party and self-payors
22 % 15 31 15 17 100 %
27 % 16 29 15 13 100 %
13. FAIR VALUE OF FINANCIAL INSTRUMENTS Due to the short-term nature of cash and cash equivalents and other financial instruments, such as receivables and payables, their fair value approximates their carrying value. The fair values of investments, assets limited as to use, and investments in mutual funds and other investments are based on quoted market prices, if available, or estimated, using quoted market prices for similar securities on the last business day of the fiscal year. Fair values of the Companys revenue bonds are based on current traded value. For the year ended September 30, 2008 and 2007, the fair market value of the Series 2007 Bonds was $286,000 and $292,000, respectively. The fair value of the promissory note and credit facility issued in April 2008 (see Note 7) is approximately $257,675. Because the terms of loans bear interest at an adjustable rate, their carrying value approximates fair value at September 30, 2008. 14. FUNCTIONAL EXPENSES The Company provides general health care services to residents within its geographical location. Expenses related to providing these services for the years ended September 30, 2008 and 2007, are as follows:
2008 2007
Health care services Management and general Fundraising
$ 359,762 80,016 763 $ 440,541
$ 289,031 59,415 721 $ 349,167
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Case 2:09-bk-34714-BB
Desc
15. SUBSEQUENT EVENTS There was a decrease in fair value of the Companys investments short-term, investments in mutual funds and other investments, and investments assets limited to use as a result of general market conditions and the continued downturn of the economy subsequent to September 30, 2008. The Company has incurred approximately $9,440 of net unrealized losses on investments for the period from October 1, 2008 through December 31, 2008. In addition, there was a decrease in fair value of the defined benefit pension plan assets as a result of general market conditions and the continued recessionary trends in the economy subsequent to September 30, 2008, which may have an impact on the timing and amount of future funding requirements. The Companys defined benefit pension plan has incurred approximately $8,241 and $7,879 of net unrealized losses on investments, for the period from July 1, 2008 through September 30, 2008, the period subsequent to plan assets measurement date, and October 1, 2008 through December 31, 2008, respectively. As a result of continued decreases in long-term interest rates, for the three months ended December 31, 2008, the Company recognized an additional $35,921 in unrealized losses related to its interest rate swap. As of December 31, 2008, the Company has recorded a liability for the fair value of its interest rate swap of $45,928. ******
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Case 2:09-bk-34714-BB
Desc
SUPPLEMENTAL CONSOLIDATING SCHEDULES
- 27 -
Case 2:09-bk-34714-BB
Desc

CONSOLIDATING SCHEDULE BALANCE SHEET INFORMATION AS OF SEPTEMBER 30, 2008
IHC InterHealth Management Corp. Corp. Presbyterian Presbyterian Med Site PIH Intercommunity PIH Health Hacienda Insurance Hospital, Inc.* Foundation Physicians Heights Company
SCHEDULE 1
ASSETS CURRENT ASSETS: Cash and cash equivalents Investments short term Patient accounts receivable net Inventory Other receivables Prepaid expenses and other assets Total current assets INVESTMENTS IN MUTUAL FUNDS AND OTHER INVESTMENTS INVESTMENTS Assets limited as to use PROPERTY, PLANT, AND EQUIPMENT Net PREPAID PENSION INTERCOMPANY RECEIVABLES DEFERRED FINANCING COSTS Net GOODWILL Net INVESTMENT IN AFFILIATES OTHER ASSETS TOTAL
Eliminations
Total
$ 14,066 25,555 68 68 116 39,737
498 802 67,679 3,415 2,757 17,669 92,820 14,818
11 1
1,091 1,103
198 1 3,409 120 827 169 4,724
$ -
$ -
131 1 132 -
$ 14,773 26,359 71,088 3,535 3,899 18,930 138,584 14,818 359,272
64,876 56,415
294,396 212,269 10,735 168,182 1,271 11,190 2,664 (170,846) (A) 6 3,403 29
272,122 10,735 1,271 11,190 1 (B) 690
(1) 690 $ 56,482 $ 104,613 $ 794,491 $ 4,463 $ 19,317 $ 161 $-
$ (170,845)
$ 808,682
* Includes activity of InterHealth Home Health Care (A) To eliminate intercompany transactions. (B) To eliminate investment in affiliates and the related equity and results of operations.
(Continued)
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Case 2:09-bk-34714-BB
Desc

CONSOLIDATING SCHEDULE BALANCE SHEET INFORMATION AS OF SEPTEMBER 30, 2008
IHC InterHealth Management Corp. Corp. Presbyterian Intercommunity PIH Hospital, Inc.* Foundation Presbyterian Health Physicians Med Site Hacienda Heights PIH Insurance Company
Eliminations
Total
LIABILITIES AND NET (DEFICIT) ASSETS CURRENT LIABILITIES: Accounts payable and accrued expenses Estimated third-party payor settlements Accrued interest Current portion of long-term debt Short-term debt Retention self-insurance programs current portion Total current liabilities DEFERRED COMPENSATION INTEREST RATE SWAP LONG-TERM DEBT Net of current portion RETENTION Self-insurance programs Net of current portion INTERCOMPANY PAYABLES Total liabilities NET (DEFICIT) ASSETS: Unrestricted (deficit)/retained earnings Temporarily restricted Permanently restricted Total net (deficit) assets TOTAL 61,343 64,053 (7,571) 103,730 103,927 686 386,087 408,404 354 (3,422) 6,560 971 4,109 $ 4,463 $ 2,710 $ 197 $ 38,748 101 421 835 257,675 7,006 304,786 12,786 10,007 41,990 16,518 4,208 17,392 1,925 1,558 1,621 (1,460) 7 7 (7) (170,846) (170,846) 1 (B) (A) $ 354 $ 13,184 $ 63 $ $ $ 55,256 101 421 835 257,675 7,006 321,294 12,786 10,007 41,990 16,518 402,595 398,556 6,560 971 406,087 $ 808,682
2,710
197
354
13,184
63
(7,571) $ 56,482
686 $ 104,613
408,404 $ 794,491
1,925 $ 19,317 $
(1,460) 161 $ -
(7)
1 $ (170,845)
(Concluded)
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Case 2:09-bk-34714-BB
Desc

CONSOLIDATING SCHEDULE STATEMENT OF OPERATIONS INFORMATION FOR THE YEAR ENDED SEPTEMBER 30, 2008
InterHealth Corp. IHC Management Corp. Presbyterian Intercommunity PIH Hospital, Inc.* Foundation Presbyterian Health Physicians HealthMed Services Inc. Med Site PIH Hacienda Insurance Heights Company
SCHEDULE 2
Eliminations
Total
REVENUES: Net patient service revenue Capitation revenue Other operating revenue Net assets released from restrictions used for operations Total revenues EXPENSES: Salaries and wages Purchased services Medical supplies and drugs Employee benefits Professional fees Depreciation and amortization Other expenses Provision for bad debts Interest net Insurance Rent/lease expense Management services expense Total expenses (DEFICIENCY) EXCESS OF REVENUES OVER EXPENSES BEFORE LITIGATION SETTLEMENT LITIGATION SETTLEMENT
$ 4,404
1,257
$ 361,024 6,839 1,259
$ 281
676 80,035 295
$ 612
$ -
(3,040) (A)(B)
$ 362,312 80,035 10,039 1,401
142 281 466 99 35 86 39 1 37 81,006 10,599 44,538 2,779 2,852 14,793 374 1,174 403 386 735 1,875 74 80,582 424 1,765 (507) 2,189 (26) (122) (7) 3 754 460 106 15 84 21 18 13 6 153 29 (26) 876 (122) 7 (7) (3,040)
4,404 189 1,293 83 33 226 1,837 1,588
1,257
369,122 144,668 40,749 47,069 41,250 28,520 13,897 11,938 9,945 8,710 5,169 2,523 1,012 355,450 13,672 1,903
453,787 156,382 86,776 49,981 44,329 43,844 16,153 15,094 10,354 9,096 5,904 2,628 440,541 13,246 3,668 16,914 19,945 9,115 (14,152) (7,192)
(9) 236 27 340
24 3 (1) 3
6 1
6 5,255 (851) 594 663
22 3 788 (507)
(1,945) (1,095) (3,040) -
(A) (A)
(851) OTHER GAINS AND LOSSES Net: Income from investments net of fees Realized gains on investments net Change in fair value of interest rate swap Write-off of deferred financing costs Total other gains and losses net (DEFICIENCY) EXCESS OF REVENUES OVER EXPENSES AND OTHER GAINS AND LOSSES 1
663 1,974 678
15,575 17,970 8,437 (14,152) (7,192) 5,063 20,638
1 (850)
2,652 3,315
(507)
2,189
(26)
(122)
(7)
7,716 24,630
(Continued)
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Case 2:09-bk-34714-BB
Desc

CONSOLIDATING SCHEDULE STATEMENT OF OPERATIONS INFORMATION FOR THE YEAR ENDED SEPTEMBER 30, 2008
IHC Presbyterian Presbyterian HealthMed Med Site PIH InterHealth Management Intercommunity PIH Health Services Hacienda Insurance Corp. Corp. Hospital, Inc.* Foundation Physicians Inc. Heights Company Eliminations
Total
CHANGE IN UNREALIZED LOSSES ON INVESTMENTS Net NET ASSETS RELEASED FROM RESTRICTIONS USED FOR LONG-LIVED ASSETS OTHER (LOSSES) GAINS Net TOTAL (DEFICIENCY) EXCESS OF REVENUES OVER EXPENSES
$ -
$ (422)
$ (51,860) 1,342
$ -
$ -
$ -
$ (52,282) 1,342
(6)
(45)
(21)
417
25
370
$ (856)
$ 2,893
$ (29,925)
$ (528)
$ 2,606
(1)
$ (122)
(7)
$ -
$ (25,940)
(Concluded)
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Case 2:09-bk-34714-BB
Doc 510-1 Filed 04/20/10 Entered 04/20/10 17:30:27 Proof of Service Page 1 of 7
Desc
In re: Downey Regional Medical Center-Hospital, Inc. Debtor(s).
CHAPTER: 11 CASE NUMBER: 2:09-bk-34714-BB
NOTE: When using this form to indicate service of a proposed order, DO NOT list any person or entity in Category I. Proposed orders do not generate an NEF because only orders that have been entered are placed on a CM/ECF docket.
PROOF OF SERVICE OF DOCUMENT

I am over the age of 18 and not a party to this bankruptcy case or adversary proceeding. My business address is: 16501 Ventura Boulevard, Suite 440, Encino, California, 91436-2068 A true and correct copy of the foregoing document described as DISCLOSURE STATEMENT DESCRIBING CHAPTER 11 PLAN OF REORGANIZATION PROPOSED BY DOWNEY REGIONAL MEDICAL CENTER-HOSPITAL, INC. (DATED APRIL 20, 2010) will be served or was served (a) on the judge in chambers in the form and manner required by LBR 5005-2(d), and (b) in the manner indicated below: I. TO BE SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING ("NEF") - Pursuant to controlling General Order(s) and Local Bankruptcy Rule(s) ("LBR"), the foregoing document will be served by the court via NEF and hyperlink to the document. On April 20, 2010 I checked the CM/ECF docket for this bankruptcy case or adversary proceeding and determined that the following person(s) are on the Electronic Mail Notice List to receive NEF transmission at the email addressed indicated below: Service information continued on attached page II. SERVED BY U.S. MAIL OR OVERNIGHT MAIL (indicate method for each person or entity served): On April 20, 2010 I served the following person(s) and/or entity(ies) at the last known address(es) in this bankruptcy case or adversary proceeding by placing a true and correct copy thereof in a sealed envelope in the United States Mail, first class, postage prepaid, and/or with an overnight mail service addressed as follow. Listing the judge here constitutes a declaration that mailing to the judge will be completed no later than 24 hours after the document is filed. Service information continued on attached page III. SERVED BY PERSONAL DELIVERY, FACSIMILE TRANSMISSION OR EMAIL (indicate method for each person or entity served): Pursuant to F.R.Civ.P. 5 and/or controlling LBR, on April 20, 2010 I served the following person(s) and/or entity(ies) by personal delivery, or (for those who consented in writing to such service method) by facsimile transmission and/or email as follows. Listing the judge here constitutes a declaration that mailing to the judge will be completed no later than 24 hours after the document is filed. Hon. Sheri Bluebond United States Bankruptcy Court 255 E. Temple Street, Ctrm. 1475 Los Angeles, CA 90012 Service information continued on attached page I declare under penalty of perjury under the laws of the United States of America that the foregoing is true and correct. 04/20/2010 Date Nova George Type Name /s/ Nova George Signature
This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California. January 2009
F 9013-3.1
Case 2:09-bk-34714-BB
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In re: Downey Regional Medical Center-Hospital, Inc. Debtor(s). ADDITIONAL SERVICE INFORMATION (if needed):
CHAPTER: 11 CASE NUMBER: 2:09-bk-34714-BB
By Court NEF Ralph Ascher - ralphascher@aol.com Vanessa L. Au vanessaau@paulhastings.com Bruce J. Borrus bborrus@riddellwilliams.com Mark Bradshaw mbradshaw@shbllp.com Martin J. Brill mjb@lnbrb.com Richard W. Brunette rbrunette@sheppardmullin.com Russell Clementson russell.clementson@usdoj.gov Dawn M. Coulson dcoulson@eyclaw.com Jeffry A. Davis jadavis@mintz.com Joseph R. Dunn jrdunn@mintz.com, dsjohnson@mintz.com Lisa Hill Fenning lisa.fenning@aporter.com Thomas M. Gaa tgaa@bbslaw.com Paul R. Glassman glassmanp@gtlaw.com Irving M. Gross img@lnbrb.com Jodie M. Grotins jgrotins@mcguirewoods.com Brian T. Harvey bharvey@buchalter.com Michael J. Heyman michael.heyman@klgates.com Mark D. Houle mark.houle@pillsburylaw.com Raffi Khatchadourian raffi@hemar-rousso.com William H. Kiekhofer wkiekhofer@mcguirewoods.com Philip Kraft pkraft@skapiklaw.com David W. Meadows david@davidwmeadowslaw.com Jane ODonnell jane.odonnell@doj.ca.gov Randy P. Orlik rorlik@coxcastle.com Daniel H. Reiss dhr@lnbrb.com Christopher O. Rivas crivas@reedsmith.com Johanna A Sanchez jasanchez@lbbslaw.com Nathan A. Schultz schultzn@gtlaw.com Steven J. Schwartz sschwartz@dgdk.com Randye B. Soref rsoref@buchalter.com David P. Tonner operations@blueheroncapital.com United States Trustee (LA) ustpregion16.la.ecf@usdoj.gov Andrew M. Valdez avaldez@fulbright.com Annie Verdries verdries@lbbslaw.com David Weinstein dweinsten@richardsonpatel.com Douglas Wolfe dwolf@amscapital.com
Case 2:09-bk-34714-BB
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In re Downey Regional Medical Center-Hospital, Inc. Case No. 2:09-bk-34714-BB 2002 Service List
Debtor Downey Regional Medical Center 11500 Brookshire Avenue Downey, CA 90241-7010 Counsel for Prime Healthcare Management, Inc. Shulman Hodges & Bastian LLP Mark Bradshaw 26632 Towne Centre Dr., Suite 300 Foothill Ranch, CA 92610-2808 Counsel for Tenet Healthcare Corporation Tenet Health Care Lynn E Iba 1500 South Douglass Road Anaheim, CA 92806 Indenture Trustee for Secured Bonds California Health Facilities Financing Authority 915 Capitol Mall, Suite 590 Sacramento, CA 95814
Debtor's Counsel Counsel for Downey Regional Medical Center Lisa Hill Fenning Arnold & Porter LLP 777 South Figueroa Street, 44th Floor Los Angeles, CA 90017-5844 UST United States Trustee 725 South Figueroa Street. 26th Floor Los Angeles, CA 90017
Counsel to OCC Daniel Reiss Levene, Neale, Bender, Rankin & Brill 10250 Constellation Blvd., Suite 1700 Los Angeles, CA 90067 Counsel to OCC Martin J. Brill Levene, Neale, Bender, Rankin & Brill 10250 Constellation Blvd., Suite 1700 Los Angeles, CA 90067 Counsel for Blue Cross Creim Macias Koenig & Frey LLP Stuart I. Koenig 633 West 5th Street, 51st Floor Los Angeles, CA 90071 Counsel for Siemens Medical Solutions, USA Reed Smith LLP Marsha Houston, Christopher Rivas 355 South Grand Avenue, Suite 2900 Los Angeles, CA 90071 Counsel for Siemens Medical Solutions, USA Reed Smith LLP Claudia Springer 2500 One Liberty Place 1650 Market Street Philadelphia, PA 19103
Counsel For Wells Fargo, N.A., Secured Creditor William W. Kannel Mintz, Levin, Cohn, Ferris, Glovsky and Popeo One Financial Center Boston, MA 02011 Counsel For Wells Fargo, N.A., Secured Creditor Charles W. Azano Mintz, Levin, Cohn, Ferris, Glovsky and Popeo One Financial Center Boston, MA 02011 Counsel For Wells Fargo, N.A., Secured Creditor Jeffry Davis Mintz, Levin, Cohn, Ferris, Glovsky and Popeo 3580 Carmel Mountain Road, Suite 300 San Diego, CA 92130 Wells Fargo Corporate Trust Services Attn: Gavin Wilkinson 625 Marquette Avenue MAC N9311-115 Minneapolis, MN 55479
Case 2:09-bk-34714-BB
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Wells Fargo Corporate Trust Services Attn: Gavin Wilkinson 625 Marquette Avenue MAC N9311-115 Minneapolis, MN 554793
Counsel for Healthcare Finance Group, DIP Lender William Kiekhofer Jodie M. Grotins McGuireWoods 1800 Century Park East, 8th Fl. Los Angeles, CA 90067 Lienholders of Record Cerner Corp 2800 Rockcreek Parkway Kansas City, MO 64117-2521
DIP Lender Healthcare Finance Group Robert D. Lynch 199 Water Street, 20th Floor New York, New York 10038 Secured Creditor Counsel for Apollo Health Street, Inc. David R. Weinstein Richardson & Patel LLP 10900 Wilshire Boulevard, Suite 500 Los Angeles, CA 90024 Counsel for Apollo Health Street, Inc. Philip Kraft Law Office of Mark J. Skapik, APC 250 West First Street, Suite 330 Claremont, CA 91711 Lienholders of Record Alaris Medical System, Inc. 10221 Wateridge CR San Diego, CA 92121
Cisco Systems Capital Corporation 170 West Tasman Drive MS SJ13-3 San Jose, CA 95134
Cobe Cardiocascular, Inc. 1185 Oak Street Lakewood, CO 80215-4407
Computer Sales International, Inc. 10845 Olive Boulevard Suite 300 St. Louis, MO 63141
Bank of the West 9001 East Whittier Boulevard Pico Rivera, CA 90660
Computer Sales International, Inc. 9990 Old Olive Street Road St. Louis, MO 63141
Bank of the West 201 North Civic Drive Suite 360 B Walnut Creek, CA 94596
Dade Behring Financial Services 10 Riverview Drive Danbury, CT 06810
Baxter Healthcare Corporation Attn: Gail D Alesandro - DF6/3W One Baxter Parkway Deerfield, IL 60015
E.I. Du De Nemours & Co Barley Mill Plaza #24-2224 Wilmington, DE 19807
Cadwell Laboratories, Inc. 909 North Kellogg Street Kennewick, WA 99336
E.I. Du De Nemours & Co 1007 Market Street Wilmington, DE 19801
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Lienholders of Record E.I. Dupont De Nemours & CO Susan Herr Legal Department 1007 Market Street D8052-2 Legal Wilmington, DE 19898
Lienholders of Record Olympus Corp 4 Nevada Drive Lake Success, NY 11042-1114
Employment Development Department Bankruptcy Group MIC 92E PO Box 826880 Sacramento, CA 94280-0001 First Bank of Highland Park 1835 First Street Highland Park, IL 60035
Philips Medical Capital LLC 1111 Old Eagle School Road Wayne, PA 19087
Sanwa Bank Attn: Rick Lopez, VP Pico Rivera Office 9001 East Whittier Blvd Pico Rivera, CA 90660 Sovereign Bank 3 Huntington Quadrangle Suite 101N Melville, NY 11747
First Interstate BK of Calif Trustee 707 Wilshire Boulevard Los Angeles, CA 90017
Graybar Financial Services 201 West Big Beaver Road Troy, MI 48084
Terumo Cardiovascular System 6200 Jackson Road Ann Arbor, MI 48103
Johnson & Johnson Finance Corporation 501 George Street New Brunswick, NJ 08901
Bank of Tokyo-Mitsubishi UFJ Legal Department 1251 Avenue of the Americas New York, NY 10020-1104
Lanier Worldwide, Inc. 4667 North Royal Atlanta Drive Tucker, GA 30084-3802
U.S. Bank National Association 400 City Center Oshkosh, WI 54901
Leasing Associates of Barrington, Inc. 33 West Higgins Road Suite 1030 South Barrington, IL 60010
United California Bank 9001 East Whittier Boulevard Pico Riviera, CA 90660
Case 2:09-bk-34714-BB
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Other Interested Parties California Department of Public Health Licensing and Certification County of Los Angeles District Office 12440 East Imperial Highway, Suite 200 Norwalk, CA 90650 California Department of Public Health Health Facilities Inspection Division Branch Chief: James L. Lawson. Ph.D., RN 12440 East Imperial Highway, Suite 522 Norwalk, CA 90650 Request for Special Notice Parties Counsel for Applecare Medical Group Eric Klein Sheppard Mullin Richter & Hampton LLP 1901 Avenue of the Stars, Suite 1600 Los Angeles, CA 90067
Other Interested Parties State of California - Health and Human Services Agency Medi-Cal Department of Health Care Services 1501 Capital Avenue Sacramento, CA 95814-5005
Centers for Medicare & Medicaid Services 7500 Security Boulevard Baltimore MD 21244-1850
Request for Special Notice Parties Counsel to Blythe Ventures, Inc. dba Windsor Gardens of Long Beach Elsa M. Horowitz Alexander M. Merino Wolf, Rifkin, Shapiro, et al. 11400 W. Olympic Blvd., 9th Fl. Los Angeles, CA 90064-1557 Counsel to Edmund G. Brown, Jr. Office of the Attorney General Wendi A. Horwitz 300 S. Spring St., Suite 1702 Los Angeles, CA 90013 Counsel to Presbyterian Intercommunity Hospital Mark Kadzielski Andrea Valdez Fulbright & Jaworski LLP 555 South Flower Street, Suite 4100 Los Angeles, CA 90071 Counsel to Presbyterian Intercommunity Hospital Michael Parker Fulbright & Jaworski LLP 300 Covent Street, Suite 2200 San Antonio, TX 78205-3792 Counsel to Presbyterian Intercommunity Hospital Kevin Duthoy Bewley Lassleben & Miller 13215 E. Penn Street, Suite 510 Whittier, CA 90602 Office of the Attorney General State of California Registry of Charitable Trusts 1300 I Street, Suite 125 Sacramento, CA 95814-2951
Franchise Tax Board Attention: Bankruptcy P.O. Box 2952 Sacramento, CA 95812-2952
Internal Revenue Service PO Box 21126 Philadelphia, PA 19114
Los Angeles County Tax Assessor 500 W. Temple St. Room 225 Los Angeles, CA 90012-2770
Meyer Christian & Associates Attn Tim Denton 15061 Springdale Street, Suite 113 Huntington Beach, CA 92649
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Auditor BDO Seidman, LLP th 3200 Bristol St., 4 Fl. Costa Mesa, CA 92626
Financial Advisor to OCC Fenix Management LLC 1874 S. Pacific Coast Hwy, #378 Redondo Beach, CA 90277
Special Litigation Counsel to Debtor Allan Jergesen Hanson & Bridgett LLP th 425 Market St., 26 Fl. San Francisco, CA 94105 Patient Care Ombudsman Susan Koenig SAK Management Services, LLC 4055 W. Peterson Avenue, Suite 101 Chicago, IL 60646 Counsel to Suzanne Koenig Patient Care Ombudsman Buchalter Nemer Randy Soref Brian Harvey 1000 Wilshire Boulevard, Suite 1500 Los Angeles, CA 90017 Counsel to The Regents of the University of California Charles F. Robinson and Eric K Behrens University of Southern California Office of the General Counsel 111 Franklin Street, 89th Floor Oakland, CA 94607-5200 Counsel to United PacificCare Karl Block Loeb & Loeb 10100 Santa Monica Blvd., Suite 2200 Los Angeles, CA 90067 Counsel to Cisco Systems Capital Corporation Lawrence M. Schwab Gaye Nell Heck Bialson, Bergen & Schwab 2600 El Camino Real, Suite 300 Palo Alto, CA 94306 Counsel to Stephen Wen & Associates Architects Stephen W. Reed Reed & Brown LLP 35 N. Lake Avenue, Suite 960 Pasadena, CA 91101-1819
Special Litigation Counsel to Debtor David McLeod McLeod, Witham & Flynn LLP 707 Wilshire Blvd., Suite 4125 Los Angeles, CA 90017 Counsel to Health Facilities Financing Authority Jane O'Donnell Deputy Attorney General 1300 I Street, Suite 125 P.O. Box 944255 Sacramento, CA 94244 Counsel to Philips Healthcare Bruce J. Borrus Riddell Williams p.S. 1001 Fourth Avenue, Suite 4500 Seattle, WA 98154
Ricoh Business Solutions c/o Ikon Office Solutions Recovery & Bankruptcy Group 3920 Arkwright Road, Suite 400 Macon, GA 31210

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Case 2:09-bk-34714-BB

15 16 17 18 19 20 21 22 23 24 25 26 _______________________________________ 27 28 Tax I.D. 95-1903935

Effect on Community and Debtors Constituencies: ..................................... 22

Priority Tax Claims ........................................................................................ 26

Cure Payments ............................................................................................... 53 Objections to Assumption............................................................................ 53

Liquidation Analysis .................................................................................................. 60

Emergency Motion to Extend Time for Filing of Schedules and Statement of

Early Case Motions

Motion for Order Establishing Procedures for Interim Compensation and

Sept. 14, 2009 Oct. 2, 2009

Oct. 23, 2009 Oct. 29, 2009

Date Application Filed Oct. 2, 2009

Order Entered Oct. 29, 2009

Oct. 13, 2009

Nov. 12, 2009

Oct. 13, 2009

Nov. 12, 2009

Oct. 14, 2009

Nov. 12, 2009

Knott & Glazier LLP

Oct. 14, 2009

Nov. 12, 2009

Oct. 14, 2009

Nov. 12, 2009

Oct. 14, 2009

Nov. 12, 2009

Nov. 6, 2009 Feb. 1, 2010

Dec. 1, 2009 Mar. 2, 2010

Mar. 16, 2010

Nov. 12, 2009

Fenix Management LLC Oct. 9, 2009

Nov. 12, 2009

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 b) Name of Professional SAK Management Services Buchalter Nemer

Date Application Filed Oct. 21, 2009

Order Entered Nov. 12, 2009

Oct. 21, 2009

Nov. 12, 2009

Motions to Establish Claims Bar Dates

Motion for Entry of an Order Establishing and Implementing Exclusive, Global

Motion of Debtor to Approve Stipulation Between Debtor and Health Net of

The Prime Motion to Terminate Plan Exclusivity

Type of Claim DIP Loan

Estimated Amount $10.2 million

Basis for Claim Outstanding balance on DIP Loan,

Court Approval of Professional Fees Required

Paid in full on Effective Date

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 4. Class 4 -- Convenience Class Claims CLASS # 3 DESCRIPTION IMPAIRED (Y/N) No TREATMENT

Class 7 -- Health Plan Loan Claims

Class 8 -- Capitation Provider Claims (Overlapping with PacifiCare Proof of Claim)

Payments to Class 2 Secured Creditors

Preservation of Restricted Funds for Charitable Purposes

Dated: Los Angeles, California April 20, 2010

EXHIBIT A ASSET PURCHASE AGREEMENT [TO BE FILED]

EXHIBIT B LIQUIDATION ANALYSIS

Estimated Class Description of Class Claims

Estimate of Prime Offer

Commitment to new DRMC

ING Investment Account

500 20,600 2,000

1,000 3,000 4,000 5,600 $ 36,300

Total Estimated Liquidation Value

EXHIBIT C DEBTOR AND PIH FINANCIAL STATEMENTS

DEBTOR FINANCIAL STATEMENTS