Prospect Medical Holdings before the buyout, 1996–2010

analysisJacob Y. Terner, M.D. was PMH's Chairman, Chief Executive Officer and a director from July 31, 1996. PMH's fiscal-2006 report states that Terner had been Chairman and Chief Executive Officer of Century MediCorp, Inc. from 1988 to 1992 and, after its merger, an executive vice president and director of Foundation Health Corporation until December 1992, and that Terner was a director of Brotman Medical Center, Inc. Until August 8, 2008 Terner was also the sole shareholder, sole director and chief executive of Prospect Medical Group, Inc., and the sole shareholder and a director and officer of Nuestra Familia Medical Group, Inc. Terner left the PMH posts during fiscal 2008 and remained a shareholder. The filing dates the departure only to fiscal 2008; the 2010 annual report states that Samuel S. Lee was appointed chief executive on March 19, 2008 and chairman on May 14, 2008. ^{1 2}

analysisThe fiscal-2006 report also disclosed that on June 30, 1997 Terner consented to a final judgment of permanent injunction in an SEC action arising from an insider-trading investigation into trading in Century MediCorp stock in June and July 1992, before its merger with Foundation Health was announced. Terner consented without admitting or denying the allegations, and the report states that the trading under investigation was by persons other than Dr. Terner. The judgment enjoined Terner from violating Section 10(b) of the Securities Exchange Act and Rule 10b-5 and required a civil penalty of $225,750. ¹

analysisThe executive officers listed in the fiscal-2006 report were Terner; Catherine S. Dickson, President, Chief Operating Officer and a director; Mike Heather, Chief Financial Officer; R. Stewart Kahn, Executive Vice President and Secretary; Linda Hodges, Executive Vice President of Compliance; Michael A. Terner, Vice President of HMO Contracting and Health Plan Relations; and Donna Vigil, Vice President of Finance. Dickson had worked at Prospect Medical Systems since January 1998, where Dickson became President and Chief Executive Officer, was PMH's President and Chief Operating Officer from July 2003 and a director from February 2004, and resigned from all positions with PMH and its subsidiaries effective August 25, 2008; under a December 22, 2008 severance agreement PMH agreed to pay Dickson $67,500. That biography comes from a 2008 company filing as reproduced on a director-data profile, which dates the directorship from the second quarter of 2005 to the third quarter of 2008. Vigil, Chief Financial Officer from July 1998, became Vice President of Finance in April 2004, when Heather, a former Deloitte partner and chief financial officer and co-chief executive of WebVision, Inc., was appointed Chief Financial Officer. PMH reported that Michael Terner, Jacob Terner's son, would assume Kahn's mergers-and-acquisitions and some operating responsibilities when Kahn resigned in July 2007, and signed a severance agreement with PMH dated June 4, 2008. ^{1 3 4 2 5 6}

analysisA business-directory profile compiled from company reports, which are not among the retained records, lists PMH under the ticker PZZ at 400 Corporate Pointe, Culver City, with revenue of $135.8 million and net income of $4.9 million in 2006, against $133.5 million and $4.1 million in 2005. PMH's fiscal-2010 annual report identifies BDO USA, LLP as its principal accountant for fiscal 2009 and 2010. ^{7 2}

analysisOn June 1, 2007 Prospect Medical Group bought the ProMed Entities for $48 million, paid as $41.04 million in cash and 1,543,237 PMH shares. ProMed Health Care Administrators became a wholly owned PMH subsidiary, and Pomona Valley Medical Group and Upland Medical Group became subsidiaries of Prospect Medical Group. Jeereddi A. Prasad, M.D., President of the ProMed companies since 1994 and of Upland since 2002, and since 1991 President and Medical Director of Chaparral Medical Group, Inc., a multi-specialty group that Prasad founded, joined PMH's board the same day. ¹

analysisOn August 8, 2007 PMH bought Alta Healthcare System, Inc., the owner of four community hospitals in Los Angeles County, for about $103 million, paid roughly half in cash and half in stock, and repaid about $41.5 million of Alta's debt. Alta belonged to Samuel S. Lee and the David & Alexa Topper Family Trust; the Federal Trade Commission had granted early termination of the Hart-Scott-Rodino waiting period on June 15, 2007. Alta was merged into a PMH subsidiary that became Alta Hospitals System, LLC. According to Lee's Schedule 13D, Lee received 943,568 PMH common shares (8.3%), 836,440 shares of Series B preferred stock and $25.6 million in cash; the preferred stock carried an 18% cumulative annual dividend, allowed its holders voting as a class to elect two PMH directors and gave them consent rights over specified actions. The sellers agreed to indemnify PMH for specified litigation pending against Alta, Lee and David Topper. PMH arranged $155 million of acquisition financing with Bank of America, N.A. as agent, secured by deeds of trust over the Los Angeles, Hollywood, Norwalk and Van Nuys community hospitals and by shares pledged by Jacob Terner. ^{1 2 3 4}

analysisLee had co-founded Alta in 1998, after it bought seven hospitals from Paracelsus Healthcare Corporation, after serving as a general partner of Kline Hawkes & Co. A 2020 investigative report states that Lee oversaw Kline Hawkes' investment in Alta, that the firm invested $3 million and that it exited in 2001 with $5.3 million, which Alta borrowed to pay; the retained record has no transaction document for this investment. Lee joined PMH's board on August 8, 2007, when Lee also became Alta's chief executive, became PMH's Chief Executive Officer on March 19, 2008 and its Chairman on May 14, 2008, and was an officer of all of PMH's subsidiaries. ^{1 5}

analysisA 2020 investigative report states that soon after the acquisition the auditor Ernst & Young found overstated revenue and profit in Alta's accounts, that PMH could not file its SEC reports on time, was delisted and defaulted on its loans, and that in April 2008 Alta restated its 2006 revenue down by about $4 million; the restated filings themselves are not retained. PMH's own fiscal-2008 annual report describes a suspension rather than a delisting: the American Stock Exchange suspended trading in its shares from January 16, 2008, after the late filing of its fiscal-2007 annual report, until June 18, 2008, and PMH incurred about $1,383,000 in costs for restating Alta's pre-acquisition financial statements and for a special investigation by its audit committee completed in March 2008. According to the same 2020 report, Prospect told the SEC that its investigation had found no “intentional wrongdoing”, and Lee dismissed the significance of the restatement, saying the bigger problem was that Prospect was in far worse shape than Lee had been led to believe. ^{1 2}

analysisIn 2008 PMH and Prospect Medical Group signed forbearance agreements with Bank of America, N.A., as administrative agent, and the lenders under PMH's first- and second-lien credit facilities, dated April 10, 2008 and amended on April 30 and May 14, followed by amendments with waivers and consents on May 15 and June 30, 2008. In connection with Terner's departure PMH agreed to pay the Terner family trust a total of $1,257,000 in monthly instalments running to April 30, 2011, but stopped in September 2009 after deciding that Terner was not entitled to them; Terner sued to restore the payments and a trial began on January 31, 2011. A 2020 investigative report states that Terner won the full amount due, about $1 million, plus legal fees; the court's judgment is not among the retained records. ^{2 3 4 1}

analysisAn August 2008 Schedule 13D amendment reported that David R. Topper, together with Alexa Topper, beneficially owned 5,192,435 PMH shares, 25.5% of the class; the David & Alexa Topper Family Trust is a revocable trust whose settlors and trustees are David and Alexa Topper. PMH's 2010 merger proxy records that in the quarter ended September 30, 2008 Lee and Topper each acquired 4,182,200 PMH shares at $5.00 a share. In May 2010, as a director, more-than-10% owner and chief executive, Lee reported selling PMH shares at $7.00 to $7.11 under a Rule 10b5-1 trading plan adopted on March 17, 2010, after which Lee held 4,976,040 shares directly. ^{1 2 3}

analysisAggregator profiles compiled from public filings add further dates: a securities-data profile lists Lee as chairman of Brotman Medical Center, Inc. from April 21, 2008, and director-data profiles record Lee's PMH directorship from the third quarter of 2007 and Dr. Prasad's from the second quarter of 2007, both to the fourth quarter of 2010. A company-data profile describes Heather as having led PMH's 2005 initial public offering before becoming chief financial officer of Prime Healthcare Services in August 2013. ^{4 5 6 7 8}

analysisPMH bought about 33% of Brotman Medical Center, a hospital in Culver City, on August 31, 2005. Brotman filed for bankruptcy in October 2007; when it emerged on April 14, 2009 a $2.5 million investment raised PMH's stake to about 72%, held through Prospect Hospital Advisory Services, Inc., with Culver Hospital Holdings holding 27% and three other shareholders 1%. Participation of about $3.07 million in a rights offering lifted the stake to about 78% from November 15, 2010, and a further $831,466 in February 2011 to about 78.20%; PMH then described Brotman as a hospital with 420 licensed and 185 staffed beds. Prospect Hospital Advisory Services (formerly Prospect Medical Management, Inc.) charged Brotman $100,000 a month for consulting from August 1, 2005; an amended agreement effective April 14, 2009 replaced the fee with 4.5% of Brotman's net operating revenue each month, payable in cash or shares, and on January 7, 2010 the adviser bought $3.5 million of Brotman's 15% convertible notes. ^{1 2 3}

analysisUnder Brotman's 2009 reorganization plan, Los Angeles Jewish Home for Aging provided financing of up to $22.25 million, secured by personal property and a mortgage on part of the real estate, and Brotman also had an April 14, 2009 credit agreement with Gemino Healthcare Finance, LLC; PMH did not guarantee Brotman's debt. In December 2009 Brotman's chief executive, Von Crockett, notified shareholders of a $5.5 million convertible note offering, part of which was to repay $1,965,949 owed to Prospect Hospital Advisory Services and up to $3 million of unpaid 401(k) contributions. After the rights offering, the minority shareholder Culver Hospital Holdings sued PMH, the adviser, Brotman and members of Brotman's board, with Crockett also a co-defendant, and the trial court barred the conversion of Brotman notes and Prospect debt into shares and the repayment of about $2 million to Prospect from the offering proceeds. On October 24, 2011 the California Court of Appeal, Second Appellate District, reversed that June 25, 2010 preliminary injunction, holding that the plaintiff could not bring direct claims that were derivative in nature, and awarded costs on appeal against it. PMH's March 2011 quarterly report disclosed that Brotman had accrued $13,834,000 for possible Medicare outlier overpayments for its 2005 and 2006 fiscal years, was disputing a $4.8 million obligation under California's hospital fee legislation, from which $65,000 a week was being withheld for 108 weeks from February 14, 2011, and had accrued $973,000 for repayment after a Medi-Cal audit. ^{1 2 3}

analysisAt September 30, 2010 PMH owned and operated five Los Angeles County hospitals with about 759 licensed beds: the Hollywood, Los Angeles, Norwalk and Van Nuys community hospitals acquired with Alta, held through Alta Hollywood Hospitals, Inc. and Alta Los Angeles Hospitals, Inc., and Brotman Medical Center in Culver City. Its fiscal-2010 report lists the hospital real estate it owned or controlled through Alta Hospitals System, LLC and Prospect Hospital Advisory Services, Inc.: Hollywood Community Hospital (100 beds), Los Angeles Community Hospital (130), Norwalk Community Hospital (50), the Van Nuys psychiatric hospital (59) and the Brotman campus (420). The subsidiaries list filed with the 2009 annual report also includes Prospect Medical Systems, Inc., ProMed Health Services Company, ProMed Health Care Administrators and affiliated medical groups. ^{1 2}

analysisOn July 29, 2009 PMH issued $160 million of 12.75% senior secured notes due 2014 at 92.335% of face value, with U.S. Bank National Association as indenture trustee, and opened a three-year $15 million revolving credit facility with Royal Bank of Canada as administrative agent and Jefferies Finance LLC, which was undrawn at the end of fiscal 2010. The notes and the facility were jointly and severally guaranteed by PMH's restricted subsidiaries other than Brotman, Nuestra Familia and certain immaterial subsidiaries, and secured by first-priority liens on substantially all assets. A continuing guaranty of July 29, 2009 in favour of Royal Bank of Canada was given by subsidiaries including the Alta companies, the ProMed companies, Prospect Hospital Advisory Services, Prospect Medical Group and Prospect Medical Systems. ¹