EXHIBIT a Financial Consulting Report Related to the Proposed Transfer of Certain Assets from Eastern Connecticut Health Network, Inc
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EXHIBIT A Financial Consulting Report related to the Proposed Transfer of Certain Assets from Eastern Connecticut Health Network, Inc. and its Affiliates to Prospect Medical Holdings, Inc. Presented to Mr. George Jepsen Attorney General State of Connecticut Office of the Attorney General 55 Elm Street, P.O. Box 120 Hartford, CT 06141-0120 Attention: Gary W. Hawes, Assistant Attorney General FINAL May 23, 2016 Presented by Jerry M. Chang, CFA Managing Director Navigant Consulting, Inc. 1180 Peachtree Street NE, Suite 1900 Atlanta, Georgia 30309 404.575.4123 404.575.4213 navigant.com 1180 Peachtree Street, Suite 1900 Atlanta, GA 30309 404.575.4123 main 404.575.4213 fax navigant.com FINAL May 23, 2016 Mr. George Jepsen Attorney General State of Connecticut Office of the Attorney General 55 Elm Street, P.O. Box 120 Hartford, CT 06141-0120 Attention: Gary W. Hawes, Assistant Attorney General Dear Mr. Jepsen: Navigant Consulting, Inc. (“Navigant”) has completed its analysis with respect to the scope of services requested by your office pursuant to §§ 19a-486a to 19a-486h of the Connecticut General Statutes (“Nonprofit Hospital Conversion Act”) and in accordance with the contract with your office effective on June 13, 2013 and including subsequent amendments effective on June 15, 2014 and August 5, 2014 (the “Contract”). Navigant’s analysis and conclusions contained in this report pertain to the proposed transfer of certain assets (the “Proposed Transaction”) from Eastern Connecticut Health Network, Inc. and its affiliates (“ECHN” or the “Health System”) to Prospect Medical Holdings, Inc. (“PMH”). Our analysis was performed as of March 31, 2016 (the “Analysis Date” or the “Valuation Date”). Our compensation for this assignment was not dependent in any way on the substance of our findings or conclusions. Our analysis was based, in part and where indicated, upon information provided by ECHN management and ECHN’s designated legal and financial advisors. We have assumed that the information provided to us is complete and free of material misrepresentations. In addition, we have performed our own independent research and analysis related to the issues outlined by the State of Connecticut Office of the Attorney General (“OAG” or the “Attorney General”) in the Contract. 2 We understand that this report will be part of the public record of the Attorney General’s review pursuant to the Nonprofit Hospital Conversion Act and we reserve the right to respond to and explain our analysis, reasoning, and conclusions. The following report and accompanying appendices provide a detailed explanation of the basis of our analysis and conclusions. Please contact Jerry Chang at 404.602.3462 or [email protected] with any questions. Very truly yours, Navigant Consulting, Inc. FINAL By: Jerry M. Chang, CFA Managing Director 3 TABLE OF CONTENTS INTRODUCTION ............................................................................................................. 1 Summary of Engagement .......................................................................................................................... 1 Summary of Proposed Transaction ........................................................................................................... 2 Description of Prospect Medical Holdings, Inc. ......................................................................................... 3 OVERVIEW AND BACKGROUND OF ECHN ................................................................. 5 ECONOMIC OVERVIEW ................................................................................................ 8 General Economic Conditions ................................................................................................................... 8 United States Economic Outlook ............................................................................................................... 9 Impact on Valuation of ECHN and Related Assets ................................................................................. 10 INDUSTRY OVERVIEW ................................................................................................ 11 Introduction .............................................................................................................................................. 11 General Overview .................................................................................................................................... 11 Impact on Valuation of ECHN and Related Assets ................................................................................. 14 LOCAL MARKET OVERVIEW ...................................................................................... 15 Introduction .............................................................................................................................................. 15 Demographic Overview ........................................................................................................................... 15 Area Hospitals ......................................................................................................................................... 15 Impact on Valuation of ECHN and Related Assets ................................................................................. 17 NAVIGANT VALUATION AND TRANSACTION ANALYSIS ......................................... 18 I. DUE DILIGENCE ANALYSIS ............................................................................................................ 18 II. CONFLICT OF INTEREST ANALYSIS ............................................................................................. 25 III. FAIR MARKET VALUATION OF ASSETS ANALYSIS ..................................................................... 30 IV. FAIR MARKET VALUATION MANIPULATION ANALYSIS .............................................................. 45 V. FINANCING ANALYSIS .................................................................................................................... 45 VI. MANAGEMENT CONTRACT VALUATION ANALYSIS ................................................................... 46 4 APPENDIX A: SOURCES OF INFORMATION ........................................................... 47 APPENDIX B: ASSUMPTIONS AND LIMITING CONDITIONS .................................. 49 APPENDIX C: PERSONAL PROPERTY VALUATION ............................................... 51 Definition of Value ................................................................................................................................... 51 Fair Market Value In-Place ...................................................................................................................... 51 Cost Approach ......................................................................................................................................... 51 Market Approach ..................................................................................................................................... 52 Income Approach .................................................................................................................................... 52 Approaches Utilized ................................................................................................................................. 52 Sources of Information ............................................................................................................................ 53 Assets Valued .......................................................................................................................................... 53 Scope of Services .................................................................................................................................... 54 Valuation Procedures .............................................................................................................................. 55 APPENDIX D: REAL PROPERTY VALUATION ......................................................... 64 Nature of the Assignment ........................................................................................................................ 64 Property Identification .............................................................................................................................. 64 Scope of the Appraisal ............................................................................................................................ 65 Manchester, Vernon and Tolland – Real Estate Description .................................................................. 68 Highest and Best Use Analysis ............................................................................................................... 77 Approaches to Value ............................................................................................................................... 77 Presentation of Analysis .......................................................................................................................... 79 Valuation Conclusion ............................................................................................................................... 82 Certification: Real Property ........................................................................................... 84 Exhibits 5 INTRODUCTION Summary of Engagement Navigant was engaged by the OAG to provide financial consultation and expertise related to the OAG’s review of the proposed transfer of certain assets from ECHN to PMH pursuant