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Executives

Sam Lee – CEO

Mike Heather – CFO

Devin Sullivan – The Equity Group

Analysts

Doug Dieter – Imperial Capital

Miles Highsmith - RBC

Jacques Cornet – Gates Capital

Shaun Park – Ice Canyon

Nelson Obis – Winfield Capital

Prospect Medical Holdings Inc. (PZZ) F4Q09 Earnings Call December 21, 2009 4:15 PM ET

Operator

Welcome to the 2009 fourth quarter and fiscal year-end conference call. (Operator Instructions) I will now turn the conference over to Devin Sullivan. Please go ahead Mr. Sullivan.

Devin Sullivan

Thank you. Good afternoon everyone. Thank you for joining us today for Prospect Medical Holdings’ fourth quarter and year-end financial results conference call. Our speakers today will be Sam Lee, Chairman and Chief Executive Officer of Prospect Medical, and Mike Heather, Chief Financial Officer. Also on the call is Adam Goldston, Prospect’s Senior Vice President.

Before turning things over to Mr. Lee, I would like to remind everyone that statements made during today’s call may contain forward-looking statements which are not historical facts. Investors are cautioned that forward-looking statements including statements regarding anticipated or expected results involve risks and uncertainties which may affect the company’s business and prospects including those outlined in prospects Form 10-K which was filed earlier today and other filings.

Any forward-looking statements made during this call represent management’s estimates only as of the date hereof or as of such earlier dates as are indicated and should not be relied upon as representing estimates as of any subsequent date. While Prospect may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so even if its estimates change.

With that I would now like to turn the call over to Mr. Sam Lee, Chairman, and Chief Executive Officer of Prospect Medical.

Sam Lee

Thanks Devin. Thank you all for joining us today. This morning we reported solid financial results highlighted by double digit increases in revenues, operating income and adjusted EBITDA as we continued to tightly manage expenses and improve the operations of both our hospital and medical group segments as well as fortify our capital structure.

Any successes as operators is predicated on a model driven by three primary factors here at Prospect. First, revenue diversification, meaning providing high quality services and minimizing our revenue volatility by being a peer play driven by the dramatic and sometimes dramatic reimbursement changes reflecting operating focuses and precluding investment in long-term operating discipline and decision making, all driving efficiencies and continued cost effectiveness.

Secondly, a highly data centric or data driven approach to managing costs throughout the organization. Thirdly, driving services revenues by offering quality care in a cost effective manner which is an attractive proposition for patients, payors and physicians. This model has served us well in the past for many years. We are implementing it in all of our operations and we look forward to other acquisition situations where we can apply the same model to create value.

To get a little bit into the details of the operations and the company from the past, three things; First, from a financial perspective Q4 and full year revenues rose by 35% and 22% respectively with the inclusion of Brotman as of mid April of this past year and strong organic revenue growth at our existing Alta Hospitals combined to put us at about $470 million of revenue run rate. Operating income rose 38% and 70% with Q4 and full year respectively, reflecting our ability to organically grow revenues, disciplined revenue cycle management and closely managing medical and operating costs.

Adjusted EBITDA rose 26% and 33% respectively to $14.6 million and $53.4 million up from $11.6 million and $40.1 million for last year’s fourth quarter and fiscal year respectively. Q4 adjusted EBITDA was 14% higher than Q3 with very little by way of adjustments or non-recurring type items in that number. The small net loss for Q4 and fiscal year 2009 included approximately $9.7 million and $14.7 million respectively in non-recurring costs related to exiting our prior debt situation including terminating the related interest rate swaps that were required by the prior financing.

That number is also after the non-cash stock compensation expense of about $1 million for fiscal year 2009 and we now have the strongest balance sheet in our history with nearly $40 million of cash and investments, a $15 million undrawn revolver over 4.5 years until our primary borrowings mature and a net leverage ratio of just 2.6 which is down from 3.0 as of when we closed the high yield back in July of this past year. Of course, underpinnings of these favorable financial results are side by side with a strong host of operating statistics.

Almost all of the hospital census and operating metrics, some of this data can be found in the 10-K and all of it is we think a testament to a sound operating model being well executed and the management and leadership that executed it and most importantly to the high quality of care that is being provided at each of our facilities and medical groups, the leadership of our physicians, nursing and clinical management staff.

Despite a challenging employment picture pressuring commercial enrollment we were nevertheless able to increase our medical group segment profitably by just over $2.6 million this past year. In addition we generated a good number of new senior members as well as hospital admissions through our cost realization efforts, proving that our diversified model is working. As many of you who follow us know, we have devoted significant focus and efforts towards improving the operations of our medical groups. During fiscal 2009 in addition to the strong profitability improvement growth we were able to maintain a 76.8% medical cost ratio. That is an improvement from an already respectable 78.3% in the prior year. This through better reimbursement levels, tight control and appropriate utilization management.

Lastly on this point, even while considerably reducing holding company expenses this year I think we have significantly strengthened our bench providing the human capital necessary to further improve operations as well as to make and integrate successful future acquisitions.

Second, we significantly strengthened our balance sheet. The refinancing of our prior debt this past quarter gave us tremendous covenant flexibility, increased our retained cash by about $12 million a year, lowering our borrowing rate by about 6% a year and eliminated a host of related costs and distractions.

Third, I would like to take a moment to talk about California and why we are excited about doing business in this state. Although many reading the headlines view California as a difficult state in which to operate, we have been able to demonstrate great success here and we continue to do so. If in fact it is a challenging environment then it is actually a competitive advantage for us plus a significant barrier to entry for others.

There are dozens of data driven examples of how our approach translates into quality of care and financial results that are favorable which have been visited on prior calls and some we will do on this call and reportings, we consider this company to be battle tested. We can keep operating and expanding in California but we think we are also well equipped to expand beyond California where we see numerous opportunities developing but we currently view California again as a great opportunity and maybe a window opportunity.

We are also optimistic about the overall healthcare environment both in California and nationally. I won’t repeat what is in our press release but will say this: From a supply/demand perspective, California is under-bedded. With decreasing number of hospitals, hospital beds per capita layered on top of that constructing new hospitals is cost prohibitive. At the same time, demand for hospital services is increasing as the population grows and the age curve plays out.

Then with respect to reimbursement the Governor’s budget for California contemplates $2.4 billion in additional funds for healthcare and social services including a $1.1 billion increase to the Department of Healthcare Services to address high case loads as well as rate adjustments for MediCal. There is also an additional $1.6 billion in additional federal funds that are expected to become available to California in 2010 under Assembly Bill 1383 including additional reimbursement we expect to see coming to Prospect. Medicaid reimbursement per diem’s and disproportionate share funding in California is also significantly below the national average, suggesting these areas can go up significantly over time.

At the federal level I think our operating model positions us very well to capitalize on any version of healthcare reform that ultimately passes including greater access for the uninsured, protection for hospital reimbursement rates and also ultimately favorable positioning for those who are the most cost effective providers of quality healthcare.

So before turning it over to Mike I want to thank all of our physicians, employees, medical personnel and all of our partners and stakeholders for their continued support and participation in any of our 2009 accomplishments. Of course our work is just beginning. We are not close to where we want to be. In 2010 you will see us focusing on generating further improvement in our existing hospital and medical group operations, exploring opportunities to expand organically and pursuing strategic acquisitions within California and other parts of the country.

Mike will provide us an overview of the fourth quarter and full year results.

Mike Heather

Thanks Sam. As usual I will cover a few highlights from the quarter and the year and then be happy to answer any questions you might have during Q&A. Hopefully you have had a chance to review the 10-K we filed earlier this morning.

In summary, as Sam alluded to we had a very good quarter to close out a very good year and a very eventful year as well. In terms of both revenue and EBITDA it was a record quarter and a record year with each of our operating units doing well especially our core Alta Hospitals which drove most of our earnings growth.

Our medical group saw solid profit improvement coming both from the ProMed entities where we installed our new management teams this year as well as from the Prospect Medical Groups where performance was well ahead of last year. Finally, in my summary comments at the corporate and holding company level we have continued to focus on streamlining everything, bringing functions in-house wherever appropriate, tightening controls and ultimately lowering G&A expense by almost $3 million for the year notwithstanding everything we have had going on.

Taking a look at the P&L, consolidated revenues for the quarter rose 35% to $118 million from just under $88 million. That is for the quarter. For the year consolidated revenues increased from $329 million to $402 million and while a lot of that revenue growth came from consolidating Brotman for the first time, 2009 also saw really solid organic revenue growth at the company’s core Alta hospitals which were up 15% through increased admissions in each of our primary categories of Medicare and MediCal plus slightly better Medicare reimbursement rates based on case mix index, etc.

At the medical group segment revenues were up slightly for the fourth quarter reflecting receipt of significantly increased performance incentive revenues. Revenues for the year were down about 3% with lower commercial HMO enrollment given current unemployment levels. Also remember we cancelled several unprofitable MediCal contracts, lowering revenues but increasing profitability. Those cancellations represented about 7,000 enrollees.

While on the segment of enrollment you will see in our 10-K filing we essentially lost no Medicare or senior enrollment this past year. That is a critical statistic since our senior business is by far the biggest contributor to our medical group segment. We have made within that segment senior enrolment a top priority. It is an area where we are seeing the benefits of our combined operating model, especially now during open enrolment season and with a lot of our new senior members coming from our cross-[fertilization] efforts.

Bad debt expense as a percentage of revenue looks like it has jumped, which it has as a percent. However, it is all coming from the inclusion of Brotman’s in that statistic for the first time. Brotman’s payor mix is very different from Alta’s which is a good thing from a diversification standpoint but it does result in a higher bad debt percentage. This is just one of many areas of Brotman where we are trying to implement the Alta way to improve performance.

Consolidated Q4 operating expense increased from $79 million to $107 million with the inclusion of Brotman this year but decreased slightly as a percent of revenue from 91% to 90% and for the full year operating expense rose from $308 million to $364 million including Brotman with on a percentage basis that dropped from 94% to 90% driven by efficiencies at both operating units and the holding company.

As both Sam and I spoke to, holding company G&A expense declined year-over-year from $15.1 million to $12.2 million, a decrease of $2.9 million for the year. With that expense reduction it takes the percentage of revenues from 4.5% last year to 3% for this year due to nothing more than just grinding, discipline and staying on top of things. The combined effect of our operating controls, higher revenues, lower corporate overhead resulted in operating income of $12 million for the fourth quarter. That is a 38% increase over the prior period and $40.3 million for the full year, a 70% increase over the prior year.

At a segment level our medical group segment generated quarterly operating income of $6.3 million. That is up 11% from last year’s fourth quarter. For the full year, medical group operating income was $15.8 million, up 20% from 2008. Q4 2009 hospital operating income was $9.2 million up 52% from Q4 2008 and for the full year operating income of the hospital segment rose 44% from $25.6 million last year to $36.7 million in the current year.

Though both segments are very profitable and working well together you will notice that consistent with our strategic direction the hospital segment is now the larger, fastest growing and most profitable part of our business. We have again provided you with a quarterly adjusted EBITDA table in the back of our earnings release as another tool for you to review our progress.

Q4 2009 adjusted EBITDA was up 26% over prior year at $14.6 million. As I mentioned, a record quarter for us. Trailing 12-month adjusted EBITDA up 33% over prior year to $53.4 million, also a record for us.

Continuing down the P&L interest expense was $7.8 million in Q4 2009. That is up $6.3 million from Q4 2008 with the inclusion of interest on Brotman’s debt as well as the last of the very high rates we are paying on our prior debt facilities. Full year interest expense was $29.2 million compared to $22.3 million in 2008 with the increase partly due to the inclusion of Brotman but mostly due to our prior lender’s successfully ratcheting up the rates on us.

Going forward inclusive of Brotman and assuming minimal revolver borrowings we expect quarterly interest of around $7 million with $6 million of that being cash interest and $1 million approximately being non-cash amortization of deferred financing costs and OID. Of course, if and when the JHA exercises their option to build their facility on the Brotman campus, $16 million of the Brotman debt and related interest will go away.

You will see on the P&L we have recorded a prepayment penalty of $2.6 million related to the July debt refinance as well as $6.9 million interest rate swap termination charge, basically a write off of deferred costs hidden in our balance sheet, together with $5.3 million in pre-termination swap fluctuation. These are all one-time charges related to that prior debt. They won’t repeat. They can’t repeat as our primary debt now is fixed rate and there is no more interest rate swaps to play havoc with our P&L.

One way to look at our bottom line this past year might be to take the $2.4 million you see and factor in the $14.7 million of nonrecurring items. Just remember the bottom line number is after-tax and the non-recurring items are pre-tax. That might give you a better sense of things on a normalized basis in addition to taking a look at the adjusted EBITDA table. Since we started providing quarterly adjusted EBITDA you will see we have gone from a quarterly number of $8.4 million in Q1 2008 to now $14.6 million for Q4 2009.

Turning to the balance sheet for a minute you will see that things look stable. Pretty boring in fact compared to some of the reports prior to taking care of our previous debt situation. The numbers are obviously bigger than last year with the inclusion of Brotman. You will see that in the working capital items, the fixed assets and goodwill debt.

Total debt at year-end was $176 million with all but $4 million of that being long-term and as Sam said the primary debt doesn’t mature for another 4.5 years. Cash and investments at September 30th was $39.8 million. Net debt to adjusted EBITDA ratio was 2.6. We will be making our first interest payment on the high yield notes next month that is just under $10 million which we have set aside. It is very manageable and cash has been growing steadily since year-end.

Turning quickly to the cash flow statement you will see that annual cash flow from operations increased year-over-year from $12.3 million in 2008 to $23.6 million in 2009 and backing out CapEx you will see free cash flow going from $11.2 million last year to $22 million this year. That leaves us with comfortable surpluses over all of our California regulatory requirements including the various cash to claims ratios and tangible net equity, etc.

Finally, for competitive reasons we are not providing numbers or data for any one hospital or medical group but hopefully we have given you enough to know where we are focusing and what is being accomplished.

That concludes my prepared remarks. Of course we would be happy to answer any questions you have during Q&A. So with that I will turn things back to Sam.

Sam Lee

Thanks Mike. I guess at this point we would be happy to answer any questions. Operator let’s open the call up for questions.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Doug Dieter – Imperial Capital.

Doug Dieter – Imperial Capital

My first question is page 62 of the 10-K you reported a Brotman rights offering of $5.5 million, 15% interest. That was a convertible note. Can you explain what that is and what that is used for?

Mike Heather

Nothing more than Brotman. What we would like to do is there are a couple of important constituents of Brotman and we would like to take care of getting them paid up including some of the employees. There was a 401K match. Primarily we would like to take care of that. It is really nothing more than doing that.

Sam Lee

This is from a cash standpoint items that really date back to 2005 as long as 4-5 years back some of the accrued liabilities like the ones that Mike just mentioned that beyond just working through the bankruptcy process we wanted to be a little more responsible than that which all of this has been accrued and disclosed in the past. Of course, a little bit more towards development of working capital towards shoring up and getting to the next level.

Doug Dieter – Imperial Capital

Staying on Brotman I just wanted to find out if you could give us an update on the JHA deal and where that stands and if that is the case when you will potentially start to work on the new ER adjustments there?

Sam Lee

We are in process with that situation. Really again just in planning and the processing phase at this point which would be inclusive in response to your question there.

Doug Dieter – Imperial Capital

The 10-K notes that the California Nursing Association, the [SCIU] contract with Brotman were 80% unionized work force ends on February 28th. Can you give us a little color on where you stand and what you expect the impact in 2010 will be as a result of your finalized negotiations?

Sam Lee

Sure. We are in the middle of evaluating that situation of course. We have not begun the recontracting phase yet. As far as where we will end up it is too early to tell but certainly as you are aware we are in quite a recessionary period. Employment in particular in California and then along with that the hospital that had struggled fiscally for many years so we believe we will on all sides of the table be appropriate.

Doug Dieter – Imperial Capital

I noted that your average length of stay went from 5.5 to 6.2 and your hospital expenses as a percentage of revenues went up about 450 basis points. Obviously that is a result of your acquisition of Brotman. I guess the question I have is where do you see a normalized level of average length of stay moving out the next year or two years? What is your opportunity to bring down that cost as a percentage of revenue line?

Mike Heather

You are right on. The statistics, of course some of the represented financials, reflect the consolidation and of course with the Brotman piece being far less efficient at this point the segue towards on a pro forma basis, it is tough to tell how fast we get there but certainly we expect and we work hard at it to become more efficient and more effective as soon as possible. As far as any specific targets at this point it would be premature to go there.

Operator

The next question comes from the line of Miles Highsmith – RBC.

Miles Highsmith - RBC

Let me apologize for some data questions. I am in a remote location right now. In terms of the EBITDA first, is there any add back to that number for a full year of Brotman or is that already embedded in that 53.4?

Mike Heather

If you are on vacation you can’t call in. Your questions don’t register with us. There absolutely is nothing baked into that for a full year of Brotman. There were in Q3, there was some Brotman nonrecurring add-back items just coming out of the bankruptcy as you can imagine and then in Q4 diminimous you can see that the total is diminimous anyway. This is actually not some type of pro forma that bakes in some full year Brotman contribution. Absolutely not. Was that the question?

Miles Highsmith - RBC

Yes it was. Can we just add back $5 million again for lack of specifics at this point?

Mike Heather

We are not…I think you probably were privy to the road show information and that was then. I don’t think we are giving out any stand alone hospital including Brotman information. Obviously that was the road show number but we are not getting into specifics.

Miles Highsmith - RBC

In terms of Assembly Bill 1383 and other budgetary items, do you care to share any estimates of what the impact to Prospect can be from those?

Mike Heather

Again, sorry we are not…it is sort of speculative at this point. They are out in the public domain. You can go grab them and you will be able to see there the Prospect Hospital numbers and you will be able to see the Brotman number. We don’t want to count any of that money just yet. I guess we will count it when we get it. They are positive and go grab it on the public domain. If you Google it you will find it.

Miles Highsmith - RBC

In terms of Brotman can you give us the current census and lastly you have always talked about construction costs in California versus the national averages. Is there anything you can quantify for us in terms of that in terms of cost per bed or whatever that just might give us something to work with?

Sam Lee

First of all I think the state of California is very busy so it is sometimes more than just a money thing. It is a process thing and we know that very well here alongside other California operators. The last time we evaluated the situation and I think it is pretty state of the art information, it is about $1 million per bed give or take.

Miles Highsmith - RBC

Brotman census?

Sam Lee

Some of the specific hospital data we are making it a practice not to bifurcate or disclose for competitive reasons.

Operator

The next question comes from the line of Jacques Cornet – Gates Capital.

Jacques Cornet – Gates Capital

Can you comment now that Brotman has closed, looking forward what is a normal level of CapEx you expect to spend?

Mike Heather

I think just look to our past is probably a good predictor of the future.

Jacques Cornet – Gates Capital

As a percent of revenue or absolute dollars?

Mike Heather

I would do as a percent of revenue because obviously in absolute dollars it is going to go up. We have only got part of Brotman in there. We had $3-3.5 million was our number when we were on the road talking to people and that is what we think.

Jacques Cornet – Gates Capital

With respect to Brotman in there now can you comment on the seasonality if there is any?

Mike Heather

The hospital business we have our seasons somewhat covered because it is the opposite of the medical group business. Brotman is really not measurably different than the Alta Hospitals in that Q1 for us, the December quarter and Q2, the March quarter those are going to be the strongest hospital quarters. Q3 and Q4 tend to be the stronger managed care or medical group quarters. So no real change than what you are seeing. You will see, that will be the seasonality we will have.

Sam Lee

To answer your question slightly in a different way from less number and more conceptual on seasonality, really throughout the country and certainly in California seasonality on the community based hospitals are as Mike mentioned basically slower in the summer months and slower in some parts of the winter months. Clearly there is somewhat of a correlation on when people or physicians, etc. go on vacation so some of the non-critical or urgent matters are deferred or delayed a bit. Then there are some times during the winter months with some higher [disease] related to disease or flu, infection, etc.

Now Brotman has a bit less of a peak and valley on seasonality because of their other services. Then the medical group side there is a bit of a counter balance which is obviously there is consistency in the process and then open enrollment is in a couple of parts of the year (June, etc.) which is during the summer and we have a pick up to counter balance the community based hospital. Those are summer so to speak.

Then of course during the summer is when the medical groups pick up the performance money so to speak from pay-for performance and ACCs we payors. So both from a P&L and sometimes cash and sometimes just from general value of services there is a bit of a counter balancing between the two segments which is kind of nice for us.

Jacques Cornet – Gates Capital

With Brotman I know you are not giving individual hospitals but can you comment on whether it is profitable on an EBITDA basis?

Mike Heather

Slightly in the black.

Jacques Cornet – Gates Capital

Any commentary you can provide on potential acquisitions that may look towards either California or outside, filling part of the strategy? Any more color you can provide on how that is?

Sam Lee

Can you repeat that question?

Jacques Cornet – Gates Capital

Looking to get a sense on the acquisition side. You alluded to growing in California and outside of California. Is there any more color? Are you actively or are there a lot of transactions out there to vet?

Sam Lee

We are looking proactively. We have been vetting a few. So it is not a lack of desire. It is a lack of the right situation. At the same time, balancing it with our core organic operations which we consider there to be a lot of upside without obviously taking on any balance sheet risk. The short answer to your question is yes we are looking proactively and yes there are opportunities that we are working through vetting.

Operator

The next question comes from the line of Shaun Park – Ice Canyon.

Shaun Park – Ice Canyon

A follow-up on the acquisitions more in terms of a cash balance standpoint. You are sitting on quite a bit of cash. Congratulations also on another good quarter. What is sort of your ideal for cash balance and what sort of valuations are you seeing out there for some of the hospitals you are vetting out?

Mike Heather

We have almost $40 million in cash and that has actually grown a lot in the last few months. Like I mentioned we are going to write a $10 million check next month on the interest payment and we are required regulatorily to maintain certain cash on the medical group business. About $14-15 million of that $40 million number we have to keep on the balance sheet so that is $25 million-ish that is extra. Anyway, factor in we have grown a little bit of cash and we are going to write a $10 million check next month and you probably have $20 million of extra cash we have plus we have the $15 million of untapped revolver we can get to. It is pretty much all available to us. We are looking at situations obviously where we think we can bring our management team and approach to where we can get an underperforming asset that we can turn into a performing asset over a couple of years. What we are seeing is based on their EBITDA multiples we are seeing 7 out in the marketplace and even higher than that on some of the things people are showing to us.

Shaun Park – Ice Canyon

That is seller expectations or deals are getting done at seven?

Sam Lee

It is a tough one. I have been looking at hospital valuations since more or less the mid 90’s here in California. It has been a couple of different reimbursement curves or administrations. It is interesting. They have always kind of gone up and down or normalized somewhere in the 4-8 EBITDA multiple range. However, it is tough because it all depends on the profitability of the hospital. So is it really an active valuation driven? Is it a revenue driven? Is it an opportunity or strategic valuation driven? Certainly it becomes difficult because there are so many hospitals and certainly the willing sellers are generally struggling operators. So it is kind of beauty is in the eye of the beholder multiple, right? So it is a tough one to kind of gauge that because there have been so many different perspectives on value and so I just wanted to give you a little more color to that.

Shaun Park – Ice Canyon

Looking at [half] the market cap right now, just switching from debt to equity is in cash and is trading at a much slower discount than seven times as you are mentioning.

Sam Lee

We are hearing from smart guys like you who are going to take a nice interest from us, and well deserved on your part by the way, that the “normalized” comparable EBITDA multiples are in the seven range and if that is the case I agree. First and foremost. What has kind of happened in California which I actually think it does speak to that in a different way…that is there has been over the last I would say 6-7 years a disproportionate high number of hospitals that have been divested.

I think the leader behind those numbers are when tenants divested so many of the facilities starting in the mid to early I guess this decade before it is shortly over, and many of the facilities on a pro forma basis that they divested were not profitable. So it really took that whole market comp out of the wag in fact half or more than half of the market comparables on trades is based on numbers that really can’t be normalized or are not even profitable. So that has underwritten a lot of the confusion in this area and I am sure it has driven valuation experts and the firms kind of batty.

Operator

The next question comes from the line Nelson Obis – Winfield Capital.

Nelson Obis – Winfield Capital

A little question and congratulations for a good quarter. If you take the $118.4 million that you got in revenue versus the $87.7 million a year ago and then you subtract from the $118.4 million the contribution of Brotman, you find that Alta was relatively flat in the fourth quarter revenue wise despite the fact for the year it was mid teens in terms of top line. Is this a seasonal issue? Has Alta sort of maxed out as far as top line growth is concerned? How do we interpret that?

Sam Lee

Mike can opine further on this, but we have certainly not topped out. In fact, I have high hopes on more to come out of the Alta platform. Certainly I think there is some seasonality as I mentioned earlier…kind of the valley or the nature of the seasonality curve for a community based hospital would be the summer months. So that would be for the Alta platform you referenced inclusive of July, August and September which that is the summer. At least in California.

Nelson Obis – Winfield Capital

You were more profitable. So one of the good characteristics of the company appears to be that you don’t chase revenues that aren’t profitable. It is good to hear you can drive some more profitable top line through Alta though clearly it is a very, very positive facility right now and driving a lot of the EBITDA that is creating the free cash flow. So we will see what more you can do. Thanks.

Sam Lee

You made a poignant comment earlier which is not necessarily we don’t chase unprofitable revenue. You have to be demand driven and provide the services that are required or you need to. One of the characteristics you will see in a lot of operations when the top line is progressively growing is that the operating efficiencies there is often a six month to a year delay in efficiencies catching up. One small example would be if your top line is increasing because you have turned beds into service or added beds to your facility or just driving the top line, several things…let’s say as an example one is registry. If you are not fully staffed with your own nurses then your registry picks up a little bit to fulfill the services on higher growing revenue for the time being until you are able to schedule in, hire and/or schedule in your own nurses and of course everybody is aware the cost of registry is higher than your own nursing core. It is tantamount to a temp workforce. Right?

Nelson Obis – Winfield Capital

Anybody that has ever studied the temp staffing industry clearly sees that factor at work in healthcare.

Operator

At this time I would like to turn the conference back over to Mr. Lee for any closing remarks.

Sam Lee

Okay. Well thank you all for your participation and for your continued interest and investment in Prospect Medical. Happy Holidays and Happy New Year. Thanks everyone. Bye-bye.

Operator

Ladies and gentlemen thank you for participating in today’s conference. You may now disconnect.

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Source: Prospect Medical Holdings Inc. F4Q09 (Qtr End 09/30/09) Earnings Call Transcript
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